Sources:

https://www.federalreserve.gov/Releases/g19/current/

https://www.newyorkfed.org/medialibrary/Interactives/householdcredit/data/pdf/HHDC_2024Q1.pdf?sc_lang=en

What is consumer credit and why should I care?

Different people use different metrics to determine whether the economy and/or the market is doing well. People use jobs numbers, inflation, the misery index, GDP growth, gas prices, shipping volume, etc. I use consumer credit, specifically the G.19 Consumer Credit Outstanding survey done monthly by the Federal Reserve. The reason is that the entire American economy sans public spending (which is laid out by congressional budgets ahead of time and already factored into total market valuations) eventually trickles down to what the average Joe goes out and buys. Yes, even AI and all the hype around that eventually comes down to "how can we use this to sell people stuff".

Consumer spending drives market growth. Consumers spend beyond their means on a regular basis through the use of credit. This credit can be revolving, like credit cards, or nonrevolving, like home equity lines of credit (HELOC) or auto loans. The pulse of the consumer's financial health is the rate of growth of their revolving credit balance. A typical yearly cycle will see rising and falling credit balances with an average annual growth rate of about 5%. However, since 2020 this cycle has been anything but typical.

In 2020, credit card balances dropped through the floor as Americans made the prudent decision to pay off their credit cards with the money from the government stimulus checks. This was followed by 2021 seeing a rapid increase in credit card spending, which economists were not concerned about as this was a "correction" back to previous debt and spending levels. The issue was that inflation was now beginning to outpace the rising wages people experienced during the pandemic, and in 2022 we saw an eye-watering 15% increase in revolving credit balances year over year. Keep in mind, the average yearly increase is 3-6%. This was primarily driven by inflation, as people were being forced to use credit cards to pay bills or for necessities. In 2023 we saw another 8.8% growth in revolving debt year over year, meaning this was on top of the previous 15% growth in debt from the previous year. This is likely due to the sticky inflation around core expenses like food, cars, housing, etc.

This trend did not appear to be slowing down in Q1 2024 either. In January we saw a 7.5% YoY increase, and February another double-digit 10.7% increase. However, in March, growth of revolving debt is only 1.5%, and for April, the most recent number, revolving debt has actually gone down by -0.4%. What's going on? Did people suddenly stop charging on their credit cards? At first I thought this could be due to people using their tax returns to pay off their debts, but this data is seasonally adjusted, meaning the only way that could be the case is if people did not pay their credit card balances off with last year's tax return but this year they are. That would also imply that people are more financially sound this year than they were in 2023. Personally, I do not believe that is true, and I believe the motor vehicle loans prove this.

What do cars have to do with credit cards?

Motor vehicle loans reflect an American's largest consumer good. Growth in these loans for the past 3 years has been enormous as supply shocks, high interest rates, and lots of consumer demand drove prices of new and used cars up. But if we look at outstanding motor vehicle loans for Q1 2024 we see they've actually gone down compared to Q4 of 2023. What happened? Why would people stop buying cars in Q1, the time of year when people get a big down payment in the form of a tax return? Could people just be paying off their auto loans too?

One thing you have to understand about the mentality of the American consumer is they do not know how to not spend money. The Becky Index illustrates this better than probably anything else. To quote a bible, "No amount of economic or political turmoil will keep women from their fake eyelashes." In 2020, people paid off debt with a windfall from the government because they had nothing to spend it on, they were locked inside their homes. Now, we have vacations to go on, cars to buy, expensive toys to flex, we as a consumer demographic will spend money compulsively, because at the bottom of our terrified souls the thing we fear most is for others to think we are struggling, or worse, poor.

If consumers always spend money, why did they stop spending money?

They didn't.

When a delinquent loan becomes uncollectable, it is passed to a collections agency. The bank that held the loan then considers it a "charge-off" which is no longer a collectable debt, and thus it is removed from the numbers visible in the G.19 statistic. It is my hypothesis that consumers are still spending money on their credit cards and are still buying cars, but we have reached an inflection point where any increase in consumer debt through spending is countered by unpaid debts going to collections somewhere else. Consumers will spend money until they can't and what's happening is they literally can't. They have run out of credit and we are beginning to see the collections outpace new spending on the credit card and motor vehicle loans. Loan forgiveness and/or write-offs are inherently deflationary as they remove money from circulation via a contraction of the money multiplier.

https://preview.redd.it/yi0toxne9p5d1.png?width=1789&format=png&auto=webp&s=be55701812a208c9e3905c0d0ba9b7e737b86c7e

With the exception of Gen Z, credit card delinquency hasn't been this high since the great recession. You may also notice that this balance percentage lines up pretty well with the numbers for January and February revolving debt growth. Other interesting graphs are Transition into Serious Delinquency (90+) for Auto Loans by Age, and Auto Loan Originations by Age. All these signs, in my opinion, point to a tapped out American consumer, and without more consumer spending, growth is off the table.

What's going to happen?

No idea. People love to say that nothing will happen before the election, but we went from 9.8% revolving consumer credit growth to nothing in 1 month. Bear markets tend to happen fast and they tend to happen after a particularly bullish run, especially a bullish run that isn't based on any fundamentals and is highly speculative. I have no solid idea how bad a recession or market crash this is gonna be, or even if it will happen, I mean hell we've kicked the can this long. However, if I gaze into my crystal ball, this is what I see:
Q2 earnings from consumer driven companies will likely be a little tepid. Not catastrophic, remember, people are still spending money, but down-ish. However, earnings reports are mostly about the outlook for the next quarter and remainder of the year. I would expect these companies to begin moving their expected earnings down for Q3 and end of year. Assuming the election theory holds true, the market will probably continue its bull run into November, after which I would expect all hell to break loose in Q1. However, I'm about 60/40 on before or after the election, and my 60% is on the September Bear coming out of its cave particularly hungry. There might be a slight pop around election time as the speculation cools down, but it will be a dead cat bounce. Unfortunately, I'm an amateur economist and not a financial expert, so I don't know the best instruments to capitalize on this information, however I am leaning towards volatility plays moreso than puts, since the market tends to go apeshit before it crashes.

TL;DR

Consumers are defaulting on debt as fast as they're spending and it's stalling out growth. No growth = no higher profits = boom goes the speculation bubble.