Taking America’s Financial Temperature

Fortunately, I’ve used a rectal thermometer because the usual under-the-tongue model is affected by too much open-mouthed jabbering. The actual truth, as in so much American dialogue these days, is both hyped and denied by social media conspiracy theorists.

So, I’ve gone where truth exists, and the sun don’t never shine

Here’s the skinny…

·        Loans to small businesses average $750,000. Lending to those with dodgy collateral was never a good idea, but at zero percent they were just too juicy to pass up. What borrowers failed to realize was, what happens when interest rates jump from zero to 7½-9½ percent? Bankruptcies in that sector soared, currently standing at an unsupportable 30 percent rise, year on year. Total commercial and industrial loans total $2.77 trillion. Several medium-sized banks that supported this nonsense have recently failed—and there will be more.

·        Credit-card payments seemed marginally under control until inflation took its toll and individuals began maxing out multiple cards. The richest 10% experienced the greatest proportional default increase; 54% in relative terms. For the poorest 10%, delinquency rates increased by 41% in relative terms, mostly because the poor don’t have the financial elbow-room of the rich. 22% of Americans now owe between 10 to $20,000 in credit card debt, and 5% owe more than $30,000. Total consumer credit card debt stands at $1.115 trillion.

·        As of the first quarter of 2023, student loan debt in the U.S. stands at a total of over $1.77 trillion.

·        Home mortgage loans total $12,44 trillion, and are under the same pressure from percentage increases as all those ‘variable rate’ mortgages come due.

·        Auto loan debt is the second-largest category behind mortgages. Overall, Americans owe $1.616 trillion in auto loan debt and, in 2023, nearly four percent of auto loan were delinquent by 90+ days in the United States. Cars have become so expensive, some loans extend to 8 years, encouraging buyers to walk away from their last four years of obligation.

·        Total at risk, $20 trillion.

All this at a time when 63% of Americans cannot cover a $500 emergency expense

In 2022, 25.6 million nonelderly individuals were uninsured, most of them in low-income families that are likely to have maximum indebtedness. While that’s an economic tragedy for those families, the national impact arises from an avalanche of default.

Just as an avalanche in mountain country is caused by a small disruption in unstable snow, so do bank failures depend upon a reputation for stability. I would judge that 26 million Americans without minor resources are the economic metaphor for unstable snow.

Warren Buffett has another danger signal for economic troubles ahead

Warren has proven himself over a lifetime to be a voice worth listening to, and here’s what he sees as avalanche country. He keeps a close watch on the total American GDP, as well as the total value of its investment markets. When the two values approach parity, he knows for sure there is an ‘economic adjustment’ coming down the track.

I don’t begin to speak for Warren, he’s way out of my league, but I listen very closely. Taken another way, he seems to be saying that financial markets thrive on the hope that values will continue to rise, while the gross domestic product (GDP) is fact-based. It is what it is. And again, if I judge his meaning correctly, he believes that when hope is confronted by fact, a reckoning is surely in the cards. As of today, the Buffett Indicator (the ratio of total US stock market value divided by GDP) equals 197.4% of the last reported GDP. Close enough to 1 to1.

My personal belief is that we’re ‘whistling past the graveyard’ until the November elections, mostly because markets hate the unknown and don’t know any better than the public who will win. Shortly after that, we’ll see a major correction, if not an avalanche.

My rectal thermometer says it will be so…