Where Does the Global Economy Go From Here?

[mattee2264]

Posted March 12

So where does the global economy go from here? My macro crystal ball is pretty cloudy these days. We have war in Europe - on a scale not seen since WWII - with little near term visibility on how it will resolve. We have inflation running at the highest levels since the 1970’s and all commodities are spiking in price leading some to predict we are in a new super cycle. We have global central banks just beginning to tighten financial conditions (trying to do something about out-of-control inflation). Consumers are starting to get cranky about ever rising prices. Covid remains a factor - global supply chains are still a mess and China is continuing with its zero covid policy.
 

What is an investor to do? Certainly, the extreme market volatility is creating some juicy short term opportunities. Overall, i am getting more cautious; my usual playbook when things get ugly. So I am back up to 65% cash. Why? Buffetts first rule of investing is don’t lose what you got. Second rule is don’t forget the first rule. If i was younger i wouldn’t be 65% cash. I have enough. Don’t need more. Would not be happy if my portfolio fell 20-30% from here. And i am finding as i age out my ability to stomach volatility is changing (diminishing). Moving to a very high cash weighting (for short periods of time) has been a strategy that has worked very well for me over the past 25 years. At the start of the year i was way overweight oil so my total portfolio is up about 8% (was up 12%) so i am happy to largely lock in my YTD performance and sit in the weeds. I will continue to take advantage of all the volatility. But i am going to try and be a little more patient with big decisions. And wait until i get more clarity on some of the questions i ask below. 

1.) How long does the war in Ukraine last? Can it escalate?

- result is flight to safety trade in the short term.

- how do consumers react, especially in Europe?

 

Absolutely no idea. I think most likely the West will prefer to stick with sanctions, Putin once he has achieved his limited objectives in Ukraine will get a favourable peace treaty, China will stay on the sidelines and little changes. 

 

2.) What happens to inflation?
- will US inflation increase from 7.9% in 2H?

- how long will inflation remain elevated?

- how do consumers react to $+100 oil? Do they get cautious?

 

I think a combination of an economic slowdown/recession and easing supply chain issues will bring inflation down to a moderate range. But it will persist to some degree because experiencing inflation leaves scars and results in higher inflation expectations going forward even after the operative factors causing inflation have eased. 

 

3.) Are we in the early innings of a commodity super cycle?

- how high will oil prices go in 2022? How likely is $150 oil? Will high prices persist?

- at what point does high commodity prices affect consumer behaviour (pull back in spending)?

 

Free market forces are broken as there cannot be a significant supply response because of all the obstacles and disincentives to further drilling and replacement energy sources are nowhere near ready to pick up the slack. So demand destruction will be the main corrective mechanism and demand is still very inelastic so prices will have to go pretty high for that to happen. 

 

Fuel costs are not as high a percentage of consumer spending as they were in the 70s. And in real terms oil prices even if they get up to $150 are much lower than in the 70s. And $100 oil was pretty common before the shale supply glut and the economy did just fine. So while a negative I don't think it will be enough to plunge the economy into recession. 

 

4.) How aggressive does the Fed get, starting this week?

- does liquidity matter?

- purchases of bonds has just stopped (no longer adding liquidity).

- how many times will the Fed raise rates in 2022 and 2023?
- how aggressive are they with balance sheet run off?

 

I think QT is the major unknown. It is possible to model the impact of interest rate hikes and the Fed will be very gradual and keep hoping that inflation will ease long before interest rates reach levels that start to cause issues for a debt fuelled economy and markets priced on the basis that TINA to equities. 

 

The bull case is that QT after the GFC did not have a major impact. But the QE during the crisis was different as it mostly went to repairing bank balance sheets. The QE during COVID seemed to go straight into risk assets. So without all this excess liquidity sloshing around you'd imagine they'd be a lot less money at the margin to go into propping up stocks so if sentiment does turn negative (and signs of that already) you'd imagine the bubble would continue to deflate. But I think the Fed also doesn't quite know what will happen so will be very gradual and slow down the process as soon as there is a major market reaction. 

 

5.) What impacts will covid continue to have on the global economy?

- does China continue with zero covid policy?
- how abrupt with consumer shift from goods to services be?

 

I think most countries are at the "we can live with the virus" stage. In emerging markets it will still take a toll but these countries cannot afford lockdowns so the impact will be humanitarian rather than economic. 

 

6.) Have we seen peak globalization? 
- will countries look to have more domestic production of critical inputs/goods? If so, is the inflationary?

- if the war in Ukraine persists will it put a chill on relations between West and China: will we see start of economic decoupling here?

 

 

7.) How does all these different factors fold into financial markets for the next 3-6 months? Next 12-18 months?

 

Next 3-6 months.....probably a sideways market with mild volatility that is eased by profit taking and dip buying. I think there is still confidence that the Fed will bail out markets, inflation while not transitory won't break the economy and will ease over time without requiring drastic policy measures, and earnings reports will still be pretty positive as 2021 benefited from massive fiscal stimulus, release of pent up demand and a bonanza for tech related companies. 

 

Next 12-18 months....not so great. The economy probably can't avoid a slowdown as the effects of massive stimulus wear off, inflation starts to impact consumer and business confidence. Big Tech obviously benefited massively from the pandemic but at their massive size they won't be able to grow that fast in the future and will be more utility like. Still deserving of a premium multiple especially with low interest rates but are pandemic earnings really sustainable and they are so big that if the economy takes a hit their earnings will surely decline as well. Also while the Fed put probably still exists their hands are tied to some extent as the inflation genie is out of the bottle. We also have an entire generation of buyers who think markets only go up and a lot of leverage still being used to buy stocks. So cannot imagine many of them staying the course during a market decline. 

[meiroy]

On 3/13/2022 at 9:10 PM, wabuffo said:

FWIW - no US recession.  

 

1) US economy is ready to boom and will absorb the hits due to commodities. 

2) Russia/Ukraine war will be over in 1-2 weeks -- Russia has already lost, strategically speaking.  

 

You want to be positioned for the rally in equities that is coming and you don't want to be in commodity plays. 

 

Just my 2-cents.

 

Bill

 

Fed tightening into a slowdown can cause a recession. This is without considering any new externalities.

 

Perhaps the war is over in 1-2 weeks. Perhaps Russia uses chemical weapons and then EU sanctions the energy sectors and things escalates. If Russia does take over Ukraine they will control a very large percentage of the global wheat production not to mention other commodities. It's not that simple.

 

Various commodities are doing well because there was a demand > supply even before Putin's war started, it might crash for awhile but the trend will resume.

 

Tech sector as a whole will run up only with a new QE, that is it's enough that the market perceives it will happen and there's sufficient liquidity.

 

There can be rallies in a bear market.

 

 

[wabuffo]

Fed tightening into a slowdown can cause a recession.

 

I may be a voice in the wilderness on this - but I think Fed "tightening" is actually bullish for the US economy.   Most commentators have got this wrong because they don't actually think carefully about what the Fed is doing when it is "tightening".

 

And when I say tightening I mean two things:

1) Fed raising the rate it controls (interest on excess reserves and/or fed funds rate which is basically moribund in a world of excess reserves).

2) Fed shrinking its balance sheet by letting its Treasury securities mature without rolling them over into buying new replacements and/or selling its Treasury securities outright before they mature.

 

Let's take these one at a time.

 

1) Raising rates

At this point, most forecasting models are guessing that the Fed will take short-term rates to 3% by sometime in 2023.   Do we really think the US economy can't handle 3% rates?  The US household sector has never been in better shape from a balance sheet perspective in several decades.  HH Debt to GDP, HH Debt Service to Disposable Personal Income, and Household Net Worth - all best they've been in at least two decades or more.

 

But another fallacy in the raising rates theory is that US households are hurt more due to the rising cost of their liabilities outweighing the interest income on their assets.   So let's take a look at aggregate US household balance sheets from the Fed's quarterly Z1 report.

 

I've highlighted in yellow the important assets & liabilities.  Most households' main asset is their principal residence ($38t).  In addition, households have a total of $17.5t in interest-earning assets (checking deposits, time deposits, & money market funds).  As rates rise, these interest-earning assets will add to household incomes.  Now let's take a look at the liability side of the household balance sheet.  Main liability is the mortgage on the principal residence ($11.7t).  As rates rise, refinancing activity may stop, but payments won't increase.  That leaves consumer credit (credit cards, auto loans, student loans).  Here too, most of this consumer debt is fixed in the short-term.  So rising rates do not directly lead to rising interest expense.

 

Net, net - I reckon, US households have ~$17.5t POSITIVE EXPOSURE to rising rates.   If short-term rates go from zero to 3%, that's an additional $525m in new household interest income!  

 

2) Shrinking the Fed balance sheet:

Here too, if one thinks about what the Fed is actually doing in detail, one can't help but come to the opposite conclusion.  The Fed shrinking its balance sheet is not really "tightening" liquidity -- at the margin, it is actually increasing "liquidity".   When the Fed does QE it is pulling a Treasury security from the private sector and replacing it with a reserve balance.  But as I've said before, reserve balances are frozen at the Fed and pretty useless to the private sector since only banks can hold them.   So to control long-term rates, the Fed is tightening the supply of Treasury securities by reducing the quantity available to the private sector and replacing them with frozen, illiquid assets.   Proof that the Fed went too far is that it had to open the reverse-repo window so that the private sector could borrow $1.6t of US Treasury securities daily lest the lack of interest earning assets for the private sector would cause rates to go below zero.

 

Thus, now as the Fed is shrinking its balance sheet, the supply of US Treasury securities available to the private sector will increase.  This adds liquidity and supply.  The Fed is probably late on this and so its rate hikes are spiking the short-end of the curve upwards while the long end is still low because the Fed won't start adding to the supply of Treasury securities until May.

 

Bottom line - increasing the supply of US Treasuries is a good thing for the US economy.

 

One final comment, in recessions, Federal tax receipts always fall since 80% of all tax receipts come from payroll deductions (income tax, social security, medicare taxes). 

 

Thus tax receipts give one a real-time indicator of employment and employment income.  So how are Federal tax receipts doing (in real-time)?  In a word, they are booming!  This is data I scrape from the US Treasury's Daily Statement (basically a daily cash flow statement for the US govt) and is through yesterday's report.

 

Don't let the talking heads and their discussions about Fed tightening and yield curve inversion confuse you.  I am bullish on the US economy and you should be too.  Consumption was suppressed for two years due to the pandemic and now US households have the balance sheet and the employment income to spend and they will spend.   That's why commodity prices are rising - demand is strong.   One example is housing.  Look at US demographics.

 

 

The fattest part of the US population pyramid is 25-34 year olds.  That is bullish for peak household formation - people marrying, having families, buying houses and filling those houses with stuff.   We are going to set a multi-decade record for housing starts this year (1.7m) and its only going to go higher over the next 5 years.  (That's why lumber is spiking and I am long a lumber saw mill.)

 

Sure - there will be some hits due to commodities, but the US economy will absorb them easily.  Of course, rising rates particularly at the long end will be a headwind for equities since they affect discount rates.  How equities will do will depend on whether profit growth can outpace the depressing effect of a rising discount rate on those earnings.

 

Bill

Edited March 22, 2022 by wabuffo

[gfp]

Great post as always Bill!

[nwoodman]

6 minutes ago, gfp said:

Great post as always Bill!

+1,  @wabuffobrilliant

[meiroy]

Wabuffo,

 

So you're saying the Fed's tightening into a slowdown will most likely not cause a recession? 

 

Personally, I think they can easy fuck this up.

 

As far as models goes, who knows, just now from twitter:

"Bullard praises the 1994 Fed tightening cycle, which scarred a generation of traders and central bankers. "Faster is better. The 94 tightening cycle is the best analogy here..." 

 

"*BULLARD SAYS HE BELIEVES THE FED CAN ACHIEVE A SOFT LANDING"

 

Edit: I think you have provided a decent scenario and lots of details, it's reasonable. Might happen.  Personally I'm long as always. The problem with such predictions is that they are very static.  Is the Fed nimble enough? Have they shown good judgement in the past 5 years? Did they raise when they had the chance and should have? Now, all of a sudden they have the skills and will do the right thing? I doubt it.

 

 

Edited March 22, 2022 by meiroy

[Gregmal]

The idea that higher rates will kill everything is largely academic. There is a reason rates are going up. Simple equation. Because of A and B you get C. But if folks wanna completely ignore A and B and just say C will kill the economy... be my guest. Its working well for me. 

[Spekulatius]

20 minutes ago, Gregmal said:

The idea that higher rates will kill everything is largely academic. There is a reason rates are going up. Simple equation. Because of A and B you get C. But if folks wanna completely ignore A and B and just say C will kill the economy... be my guest. Its working well for me. 

Not to mention that rates stay deeply negative with 7-8% inflation, even if they raise to 2%.

 

Also, Uncle Sam benefits from the inflation like no other - 7% of the debt just got incinerated via inflation while he pays 2% on average ( $0.56T of interest on $28.5T in debt) 

 

[Viking]

58 minutes ago, Spekulatius said:

Also, Uncle Sam benefits from the inflation like no other - 7% of the debt just got incinerated via inflation while he pays 2% on average ( $0.56T of interest on $28.5T in debt) 

I am surprised this angle is not getting more press… High inflation, running hot for a few years, is partially solving the too much government debt problem (in real terms).

[Spekulatius]

36 minutes ago, Viking said:

I am surprised this angle is not getting more press… High inflation, running hot for a few years, is partially solving the too much government debt problem (in real terms).

Well, isn't this the oldest fiscal trick in the world. It's particular beneficial if a lot of debt is held foreign because then it doesn't hurt the own citizens.

 

I think it's laughable that some debt doomsdayers argument that we can's service our debt with higher interest rates, because with my Mickey  Mouse math, up to 7%, Uncle Sam wouldn't pay anything. Of course I don't expect inflation to stay there, but even though the debt relief from the current inflation is quite substantial and the argument is even true, if we have 3% inflation and 3 % interest rates.

 

Just looking at the YTD tax receipt until 3/18 (latest data) gives you a picture - its at $1.804T vs $1.46T in 2021 - that's up 23.5%. Might be a bit distorted due to the 4/15 tax deadline, but still. Uncle Sam is literally swimming in cash and so are many states (CA being one).

 

https://fsapps.fiscal.treasury.gov/dts/issues/2022/2?sortOrder=desc#FY2022Q2

Edited March 22, 2022 by Spekulatius

[Gregmal]

I mean this is pretty much what they’ve been telling us will happen the entire time. When we see the inflation numbers coming out and the Fed keeps saying they’ll do a single digit number of 25-maybe 50 basis point hikes….not sure what math folks as using to get to substantially higher rates.

[Spekulatius]

Rather than predicting what might happen in the future, we might be better off  just looking at the current data sources that are available to us. Taxes seems to be a good real time indicator. To be certain, there are some indicators that are pointing down - like ECRI's leading indicators:

 

So you never really know. I personally would go with the tax data over these guys for now.

 

 

[Munger_Disciple]

Great post as always @wabuffo! 

Here is an FT article on the shape of yield curve that might be interesting to folks: https://www.ft.com/content/40584b18-1b37-4580-b605-26f7aca09c0a

 

The article discusses how (10yr-3mo) rate difference is a better probabilistic predictor of recessions than (10yr-2yr). It also references research where the author discusses how 10yr rate no longer contains term premium due to QE.

Edited March 22, 2022 by Munger_Disciple

[Spekulatius]

interesting article on the situation in 1948 which indeed seems similar to what we have today:

https://www.ft.com/content/f6bf6064-a348-4f37-b784-5b9e7ba05448

 

Looks like back then, the Fed targeted credit expansion rather than interest rates.

https://fraser.stlouisfed.org/title/annual-report-board-governors-federal-reserve-system-117/1948-2405

[Munger_Disciple]

9 hours ago, Spekulatius said:

interesting article on the situation in 1948 which indeed seems similar to what we have today:

https://www.ft.com/content/f6bf6064-a348-4f37-b784-5b9e7ba05448

 

Looks like back then, the Fed targeted credit expansion rather than interest rates.

https://fraser.stlouisfed.org/title/annual-report-board-governors-federal-reserve-system-117/1948-2405

 

Interesting. Thanks @Spekulatius

[mattee2264]

wabuffo: question for me is how healthy the USA economy really is. During the pandemic the fiscal stimulus was unprecedented and via multiplier effects etc has some persistence but is surely by now starting to wear off. How robust will aggregate demand be without the massive assist from government spending? So when you have an economy that is pumped up on steroids and slowly tapering off them it is tough to say what will happen. 

 

Another factor helping the economy run hot is the animal spirits unleashed by the vaccines and re-opening of the economy and the benefits of pent up demand. But again these influences will eventually wear off.  

 

The policy error risk is that:

a) The US backs off on fiscal stimulus fearing it will add more fuel to the inflationary fire and also worrying about the debt load 

b) The Fed feels the economic strength is durable and robust and believes it can be aggressive in taming inflation and faces political pressure to do so 

 

Markets seem untroubled because they have learnt from the pandemic that recessions are a positive because they lead to rate cuts, QE and fiscal spending. But historically recessions are associated with bear markets and when you have inflation raging at the same time there is a lot less leeway for aggressive stimulus measures. 

[wabuffo]

interesting article on the situation in 1948 which indeed seems similar to what we have today:

 

That's what I've been saying as well, that today's situation is more similar to post WWII rather than the 1970s for the same reason - government suppressed consumer demand in both cases (WWII, pandemic).

 

Bill

[Xerxes]

Mike Wilson of Morgan Stanley has been also pounding the table as early last August (I think) that today is more reminiscent of post-WW2 and not 70s. 
 

I have tried looking for that interview but cannot find it. 

[Kupotea]

You have multiple negatives playing out for the global economy at the same time. Significant reduction in fiscal stimulus, higher borrowing costs across the board, the worst inflation we've seen in decades. This is offset to a degree by pent up demand but there's also been a significant loss of wealth occurring. There are major defaults happening right now in China, Russia/Ukraine, and I'm going to guess several European utility cos soon. We're already at the point where governments and CBs would normally come to the rescue but their hands are tied. They know inflation is the bigger threat and they've clearly communicated they intend to break it. The bond market is signalling that rates are running higher but equities aren't adjusting yet to the new cost of capital. Most likely because all of the institutional players are so thoroughly hedged that the path of least resistance is a nice short squeeze.

 

I'm not a pessimist by nature and I'm looking forward to picking up some bargains in the not too distant future. I'd be surprised if things don't get worse before they get better.

[TwoCitiesCapital]

On 3/12/2022 at 5:42 PM, maplevalue said:

ii) Many individuals such as Russell Napier have argued that because government debt loads are so high we are about to enter into an era of financial repression where rates are kept below inflation. While this is completely possible, what is different today is central banks are far more independent from governments than they were in past eras of financial repression, and hence more likely to push back against high inflation.

 

Central Banks can only be so independent since their heads are appointed president/Congress who are not. You might get less repression than you'd otherwise expect from a captured entity - but we will still get repression IMO. Gold is good on repressionary environments. 

 

On 3/15/2022 at 5:14 PM, Viking said:

Calculated Risk is my go to for all things housing and economics. He recently posted on ‘Predicting the next Recession’. Great framework for how to think about the topic and what to watch for. 
 

1.) most common cause of recession? Fed tightening to slow inflation.

2.) “The key will be to watch housing.  Housing is the main transmission mechanism for Fed policy.” 
- “One of my favorite models for business cycle forecasting uses new home sales (also housing starts and residential investment).   I also look at the yield curve, but I've found new home sales is generally more useful.”

3.) “If the Fed tightening cycle will lead to a recession, we should see housing turn down first (new home sales, single family starts, residential investment).  There are other indicators too - such as the yield curve and heavy truck sales - but mostly I'll be watching housing. (I'm not currently on recession watch)”

 

- https://www.calculatedriskblog.com/2022/03/predicting-next-recession.html

 

It's only one month of data so far, but existing home sales fell 7% MoM in February and are -2.4% YoY. Mortgage rates are still climbing, as are home prices due to commodity/labor shortages, so I expect the trend will continue in the short term until rates crater again. 

 

On 3/22/2022 at 9:17 AM, Spekulatius said:

Not to mention that rates stay deeply negative with 7-8% inflation, even if they raise to 2%.

 

Also, Uncle Sam benefits from the inflation like no other - 7% of the debt just got incinerated via inflation while he pays 2% on average ( $0.56T of interest on $28.5T in debt) 

 

 

Probably the reason no one mentions it is because it's only true if we're also not consistently running deficits or have large future liabilities that are unfunded. 

 

So sure, you might be cutting 5% real off the $30 trillion nominal debt load outstanding. But the US has an estimated $60 trillion and $103 trillion (present value) of unfunded obligations for social security and Medicare - spending that will have to increase by 7ish% to meet inflation. . 

 

So -1.5 trillion in 5% real reduction to current debt and +11.5 trillion in future spending increases. Seems like 1 step forward and 5 steps back. And we haven't discussed the impact to current deficits and how they'll grow in response to higher costs and higher interest expense. 

[Dinar]

1 hour ago, TwoCitiesCapital said:

 

Central Banks can only be so independent since their heads are appointed president/Congress who are not. You might get less repression than you'd otherwise expect from a captured entity - but we will still get repression IMO. Gold is good on repressionary environments. 

 

 

It's only one month of data so far, but existing home sales fell 7% MoM in February and are -2.4% YoY. Mortgage rates are still climbing, as are home prices due to commodity/labor shortages, so I expect the trend will continue in the short term until rates crater again. 

 

 

Probably the reason no one mentions it is because it's only true if we're also not consistently running deficits or have large future liabilities that are unfunded. 

 

So sure, you might be cutting 5% real off the $30 trillion nominal debt load outstanding. But the US has an estimated $60 trillion and $103 trillion (present value) of unfunded obligations for social security and Medicare - spending that will have to increase by 7ish% to meet inflation. . 

 

So -1.5 trillion in 5% real reduction to current debt and +11.5 trillion in future spending increases. Seems like 1 step forward and 5 steps back. And we haven't discussed the impact to current deficits and how they'll grow in response to higher costs and higher interest expense. 

I am sorry, but where are you getting the 60 Trillon unfunded obligation for Social Security and $103 Trillion for Medicare?  That seems high to me, given the trust funds?  Also, should you not adjust Social Security deficit for the fact that pay-outs will be taxed?

[TwoCitiesCapital]

2 hours ago, Dinar said:

I am sorry, but where are you getting the 60 Trillon unfunded obligation for Social Security and $103 Trillion for Medicare?  That seems high to me, given the trust funds?  Also, should you not adjust Social Security deficit for the fact that pay-outs will be taxed?

 

Social Security Trustee estimate: https://www.ssa.gov/oact/TR/2021/VI_F_infinite.html

 

Medicare Trustee estimate: https://sgp.fas.org/crs/misc/R43122.pdf (p.10)

 

Haven't checked the methodology, but I'd generally assume that the trustees over each trust are informed well enough to make such estimates. 

 

These estimates also generally align with those I've seen from Debt Clock folks and other headlines using differing methodologies. 

Edited March 23, 2022 by TwoCitiesCapital

[Dinar]

29 minutes ago, TwoCitiesCapital said:

 

Social Security Trustee estimate: https://www.ssa.gov/oact/TR/2021/VI_F_infinite.html

 

Medicare Trustee estimate: https://sgp.fas.org/crs/misc/R43122.pdf (p.10)

 

Haven't checked the methodology, but I'd generally assume that the trustees over each trust are informed well enough to make such estimates. 

 

These estimates also generally align with those I've seen from Debt Clock folks and other headlines using differing methodologies. 

Wow, thank you, I did not realize that it was that bad. 

[Viking]

7 hours ago, Kupotea said:

You have multiple negatives playing out for the global economy at the same time. Significant reduction in fiscal stimulus, higher borrowing costs across the board, the worst inflation we've seen in decades. This is offset to a degree by pent up demand but there's also been a significant loss of wealth occurring. There are major defaults happening right now in China, Russia/Ukraine, and I'm going to guess several European utility cos soon. We're already at the point where governments and CBs would normally come to the rescue but their hands are tied. They know inflation is the bigger threat and they've clearly communicated they intend to break it. The bond market is signalling that rates are running higher but equities aren't adjusting yet to the new cost of capital. Most likely because all of the institutional players are so thoroughly hedged that the path of least resistance is a nice short squeeze.

 

I'm not a pessimist by nature and I'm looking forward to picking up some bargains in the not too distant future. I'd be surprised if things don't get worse before they get better.

I am trying to understand the lower end consumer in the US (bottom 40%). Rent is increasing dramatically. Food is increasing dramatically. Gas/energy is increasing dramatically. This group spends pretty much everything it earns on essentials. Inflation is running 8%… wage increases are running maybe 5%? Now i keep reading about ‘excess savings’…  But every month is this large group not falling further and further behind (in real purchasing power)? Will it not result in lower consumer spending at some point?

 

When i weave it all together: is a large swath of the US economy not in the middle of an economic shit storm? That is getting worse each month? And will continue to get worse the longer inflation continue to rips at 7-8%?

 

Or is the simple answer this group essentially does not matter from an economic perspective - its overall impact on the economy is too small? The other 60% is what really matters?

[Dinar]

1 hour ago, Viking said:

I am trying to understand the lower end consumer in the US (bottom 40%). Rent is increasing dramatically. Food is increasing dramatically. Gas/energy is increasing dramatically. This group spends pretty much everything it earns on essentials. Inflation is running 8%… wage increases are running maybe 5%? Now i keep reading about ‘excess savings’…  But every month is this large group not falling further and further behind (in real purchasing power)? Will it not result in lower consumer spending at some point?

 

When i weave it all together: is a large swath of the US economy not in the middle of an economic shit storm? That is getting worse each month? And will continue to get worse the longer inflation continue to rips at 7-8%?

 

Or is the simple answer this group essentially does not matter from an economic perspective - its overall impact on the economy is too small? The other 60% is what really matters?

You should listen to Dollar General's earnings call.  If I am not mistaken, the 40% that you refer to is their core consumer.  If I am not mistaken, they are optimistic on the health of their customer.  From anecdotal evidence, there are massive wage increases for unskilled labor and craftsmen, and as much overtime as they want.  So may be 5% wage increases for white collar programmers at Moody's or Google but 20%+ for store clerks, cashiers, et all.  Granted, my anecdotal evidence is from NY metropolitan area + Boston + Maui + Florida.