LAC - Growing Credit Card Debt Suggests U.S. Consumers Are Close To Capitulating

2024-01-24 19:54:21 ET

Summary

• The sharp rise in consumer credit card debt may suggest that household incomes are not able to keep up with their current spending habits and are increasingly resorting to buying on credit.
• Higher interest rates are further squeezing consumers. The credit card debt binge suggests that many consumers may be borrowing just to keep pace with interest costs.
• Neither fiscal nor monetary policies may come through to provide consumer relief because deficits are already unsustainably high, while inflationary pressures could derail Fed plans for lowering rates.
• A potential oil price spike may hit consumers on two ends, as it would add to inflation, keeping interest rates high, while higher direct and indirect energy prices can further squeeze consumers.
• I am currently hoarding cash in anticipation of better buying opportunities, perhaps in the second half of 2024.

Investment thesis: With around two-thirds of the US economy dependent on the consumer, the rate of consumer spending growth tends to be the main determining factor that drives the US economy. There are fiscal as well as monetary policies that can affect consumer spending. For instance, high-interest rates for a prolonged period tend to dampen spending. Government policies such as tax cuts that affect households on a broad scale can also stimulate consumers into higher spending. The most sustainable way to expand consumer spending is for real wage growth to occur. When real wages and other income do not keep up with consumer spending habits, consumers tend to fall back on credit spending....

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