As the S&P 500 and Bitcoin build their downtrends from resistance, there are a few indicators I’m looking at for determining which way the market is headed. We’ll start with very macro-level indicators and work our way down.
Here’s the list:
The dollar currency index has gone parabolic since May 2021 and just when we thought it would slow down, it printed a new uptrend. This index tells us two things: 1) cash is king and 2) other currencies like Bitcoin and the Euro will continue to take a hit.
While inflation went down in July, it’s still ludicrously high. The Consumer Price Index (CPI) also went parabolic after COVID lockdowns. If wages don’t catch up, I expect asset and commodity prices will take a hit to readjust.
Credit Card Delinquencies
Delinquencies are relatively low compared to the Global Financial Crisis (GFC) in 2008/2009, but an uptick on this metric is an indicator of something bad brewing in the market. Delinquencies have gone up 16% since the start of 2022. The direction it goes next quarter will be very telling of where the market is headed.
Consumer Loans have also gone parabolic after COVID lockdowns. This uptick can be attributed to government stimulus checks and consumer price inflation. Loans and credit are how an economy and money supply grows; but what happens when consumer loans surge 22% in 16 months? It’s unprecedented.
So, what happens when people are spending more on credit, things cost more money, and personal savings accounts are at the lowest they’ve been in 14 years? We can see in the chart below that personal savings have gone up since the start of the GFC, spiked after COVID lockdowns but dipped ~3% from the 2008 trendline. While government stimmy checks may have contributed to the abnormal spike in savings, the sharp decline in the months and years after tells us a few things:
- Consumers have forgotten what 2008/2009 was like (or maybe it’s just the younger generation that didn’t live through it?).
- People have gotten used to multiple rounds of stimulus checks so they’re more inclined to spend it knowing more money might be headed their way.
- People are tapping into savings accounts to pay for higher costs driven by inflation.
- As savings go down and credit spending goes up, it’s likely people are living paycheck to paycheck.
If wages cannot keep up with inflation, the average American worker will get squeezed – and we’re starting to see signs of that now with savings going down and consumer loans going up. The chart above shows us that wage growth has gone down ~5% since April 2021.
Although relatively low right now, if unemployment moves into an uptrend from here, it’ll be disastrous for the U.S. economy.
At the rate consumers are increasing spending and reducing savings – coupled with rising costs derived from inflation and decreasing wage growth – I am expecting unemployment and loan delinquencies to go up. With higher unemployment and increased poverty usually comes a reduction in property values and higher crime rates.
Maybe there’s a reason why Michael Burry bought 501,000 shares of GEO Group and sold all of his other stocks.
There are no certainties; only probabilities.
This post isn’t necessarily stating that things will absolutely get worse in the US economy, but it is stating that it’s a probability given the trends of the indicators above. It’s also very possible that the trends reverse given a change in political administrations, new technologies, and a change in culture and attitude towards work. In fact, a reversal in any of the indicators mentioned in this post have the potential to create a “domino effect” and positively impact other indicators. As the old adage goes, “time will tell” – the trick is being able to tell before it’s too late.
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