No. of Recommendations: 24
Below were some notes I took from a recent Steve Eisman podcast on the state of the US economy. There certainly seems to be developing challenges, not showing up in the overall picture, due to the AI boom. Berkshire seems to be holding up well and most of that weakness is in smaller parts of the firm.
US shutdown and market goes up.
US economy is not growing if you exclude AI. There are therefore pockets of weakness.
COVID stimulus masked the weakness in the consumer sector. Student loan delinquencies data was not reported to rating agencies. As some point credit card delinquencies also not reported to rating agencies. Buy now pay later carried consumers. There is hidden inflation. Auto service, insurance, property taxes, health insurance. These have skyrocketed since Covid. Now student loan and credit card delinquencies are being reported and this has resulted in a 250bp drop in consumer credit as people are forced to pay student loans. During COVID, stimulus money came in four separate instalments. $800 Billion stimulus cheques. Some used it to pay down debt. Their credit scores went up. Some bought fancy cars. Others flipped houses and speculated on markets. Lots of subprime consumers became artificially prime. But they don’t have the sustainable income to justify prime. The banks bundled the loans into the asset backed securities market, with a prime label. But the loans are actually sub prime. So there are now car loans that people can’t pay.
Currently 1 in 5 new car borrowers pay more than $1,000 per month in their auto loan. There is an 84 month term loan now on auto loans that have been modified. The banks don’t want to repo cars, so they have extended the term when people can’t pay. The interest rate is 22%.
Credit card delinquencies are 90 days. It has doubled since 2021.
2021 cc delinquencies were 3.7%. Not is 7%. Still rising. Banks are suppressing the car loan defaults be modifying the term to what they can pay.
During COVID car prices when up a lot and people were paying above list prices. OEMs increased supply and now people any afford new cars. People are now buying second hand cars which have higher maintenance costs.
Used car seller, Carmax has reported weak results, with increases in bad loan provisions. Carmax is having difficulty selling expensive used cars (less than 5?years old >$30k). Consumer can only afford cars <$9k, > 5 years old. Consumer is on its knees.
Car maintenance cost inflation is very high. Banks don’t want to repo cars and people are just walking away. Small dealers are shutting down.
Car dealers will stop taking new inventory. There will be write downs.
During COVID you didn’t have to pay student loan. You got a big cheque from government.
Now you don’t have a big cheque from government. You have to pay your student loan. Prices have gone up. AI is coming and young people are finding it hard to find entry level jobs.
Pain is not just in auto. It’s in retail. It’s in buy now, pay later.
Only 30% of cars that should be repossessed are actually repossessed. It’s the biggest backdrop for car loan delinquencies since the financial crisis.
Auto is going first. Then there may be further price increases from tariffs. Consumer is headed for trouble.
Consumers has to choose between: feed the family (grocery); car payments or use public transport; pay student loan. If they default on student loan, there credit score gets tarnished and credit drys up.
If you file for BK, your student loan is not written off. Government can extract payments from wages at any time.
69% of US population are living pay cheque to pay cheque earnings $30k to $90k. 25% of this group are putting groceries in buy now, pay later. They will shift down in credit score as they increasingly default on payments.
So 25% of the 69% struggling are using buy now pay later to buy FOOD! The buy now pay later lenders are using AI to see who is not paying student loans or taking out overdrafts I real time. And they are increasingly refusing credit. This is completely unsustainable and as the months pass, credit will dry up, defaults will increase, the AI investment boom will pass peak investment and confidence in the economy will decline.
Consumers do not have the cashflow. The credit card debt has increased 50% Q3 2020 to Q2 2024 which is an additional $400 billion credit card debt. This does not include the new buy now pay later debt. The credit card companies are cutting credit limits based on deteriorating credit scores.
The suppression of the deterioration (extending terms; buy now pay later) has postponed the issue but this lag is now manifesting in a broken consumer. We are going to pay the piper over the next 12 to 18 months unless something unexpected happens.
We are at 11:59. A US recession is coming.
Once the US economy goes into a recession share prices will stop going up and boomers will start to sell equities, which are higher than they have ever been.
