"Consumers around the globe are struggling. They have seen massive inflation, tax hikes at national and local level, energy costs rising, and wages failing to keep up. Home prices are beyond the reach of the vast majority of workers – they see little point working in debt slavery to make “the man” richer.There is little in terms of hope being offered by governments, acutely aware of just how much debt they’ve got to service. The outlook is for austerity – which seems never ending. In the west voters are losing confidence in the political systems – pushing them towards populist demagogues. What’s not to like about politicians promising to make it better – even if they deflect blame onto migrants?Most families across the Western Democracies have very limited resources to withstand an economic shock. If a wave of redundancies accompany recession in Europe, the UK or the US – the effect on consumers will be immediate penury for most. The reality is most consumers blew their pandemic savings almost immediately – holidays, consumer treats, and property (moving up or improvements), leaving them asset richer, but massively cash poorer. Economists who believe there are still savings available to fuel recovering are not watching how debt levels have surged.Debt is a blessing and curse. In times of rising rates it becomes the later. Consumers and corporates both believe falling interest rates will save them, but rates will likely remain elevated for longer, putting many struggling economic actors to the debt-sword – which will increasingly be felt. Debt is a lagging cancer – it strikes hardest after the dawn, just when folk were hopeful of recovery. Rising personal and corporate defaults will further impact confidence. Although rates may have peaked there is no reason to disbelieve central banks who deny they are about to fall – real interest rates will be positive, which will mean they remain 3-4%. They are not reverting back to zero!Consumer debt levels – on mortgages, credit cards, store loans, car-loans and buy-now-pay-later scams are unsustainable – and leave the probabilities of a consumer led spending boom implausible. Rising delinquencies (like the numbers crushing payday lenders like Klarna) will further depress sentiment. A US chum recently pointed out how it was impossible to buy a new car during the Pandemic, but today Auto-lenders aren’t bothering with many repossessions because the market is so flooded with desperate sellers.Consumers are one issue. Corporates garner more headlines and have a greater cumulative effect of the economy. Defaults are rising. At the moment the numbers don’t look too bleak – but that will change suddenly and dramatically as the increased cost of debt, and the difficulties of refinancing cheap debt taken on (largely squandered on stock buybacks) hits over the next two years. Corporate defaults were a trickle, now they look like a small stream – next year they could become a mighty river of credit losses and redundancies.If one sector is likely to light the way, so to speak, it will be commercial property. There are only so many old offices that can be repurposed into apartments. New regulations leave many older offices unusable for anything but demolition – but who is set to buy new flats at 11 times average consumer earnings? Real estate from out-of-town shopping to warehouses requires not only leases, but also the infrastructure to enable them – no one is going out of town anymore. Full marks to Ikea for spotting this – moving on to highstreets.. Can’t wait to have meatballs for lunch.The brutal reality for 2024 is no one – absolutely no one – has any money.Consumers are bust and facing life-changing debts and economic hardship.Corporates are about to be hit by a triple whammy of declining consumer demand, higher debt costs and refinancing difficulties at a time when stock markets are badly in need of a reality punch in the face.Governments are as broke as anyone else. Debt servicing costs have risen, tax takes are falling and their ability to do anything more than simply finance basic services will be minimal."
-morning porridge
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