It feels like a tale of two economies right now.
If you ask an economist, chances are you'll hear that the US is doing great, growing faster than its G7 peers, with low unemployment and a stock market back near all-time highs.
But if you ask the average man on the street, you'll likely hear a very different story.
One of hardship, where wages aren't keeping up with the massive spike in cost of living, where companies are reducing hours, freezing hiring or actively laying workers off, and households are increasingly forced to turn to expensive credit cards to fund living essentials.
Which of these is more accurate?
And are things likely to get better or worse from here?
For an expert view, we're lucky today to talk with Stephanie Pomboy, economic and market analyst and proprietor of MacroMavens.com.
Stephanie warns that the Lag Effect is playing out before our eyes at this point, and that increasing struggling companies and households forebode a recession ahead.
Here are my key takeaways from the discussion:
Stephanie predicts significant adverse effects on the economy and the financial sector due to the rapid pace of interest rate hikes. She anticipates a substantial economic slowdown, with consumers and corporations struggling to service their debt, which should lead to broader economic weakening.
Despite optimistic indicators like GDP growth (pre-2024) and low unemployment, she highlights unsustainable consumer behavior. She notes that recent GDP is driven by consumer spending on increasingly expensive essentials for living, which are outpacing income gains and leading to increased credit card debt. Additionally, a shift from full-time to part-time jobs undermines the labor market's strength, suggesting deeper economic problems ahead.
Stephanie describes the diminishing ability of Corporate America to pass on rising costs to consumers. She points out the concentration of earnings growth in a few large S&P 500 companies, while the majority struggle, reflecting a broader economic disparity. This situation is likely to impact corporate profits and consumer spending negatively.
The shift from labor hoarding to labor shedding will affect consumer spending and trigger a vicious cycle of
layoffs and reduced spending. Early signs include weak payroll reports and declining consumer confidence, particularly in the service sector
She strongly agrees with Stanley Druckenmiller's criticism of the Treasury's spending policies, noting that while initial government stimulus allowed companies to pass on costs, the end of direct fiscal stimulus means consumers are reaching their limits. She anticipates sustained inflation primarily as an input cost affecting corporate margins more than consumer prices
Stephanie is concerned about the potential for widespread bailouts across various sectors, including housing, pensions, and corporate America, and the social and economic implications of these bailouts, particularly the risk of creating a moral hazard on Main Street similar to the "Fed put" on Wall Street
There is a worsening situation for pension funds, with many increasing their allocations to risky assets. Stephanie predicts a near-certain likelihood of significant government bailouts for pension funds due to a current underfunding of around $5 trillion and the vulnerability to market downturns
In terms of market outlook and asset selection Stephanie prefers hard assets like gold and some real estate, with a healthy portion in cash. She’s cautious about corporate credit and bearish on consumer credit quality, favoring defensive sectors like energy and certain emerging markets. She also highlights ongoing issues in the banking system, including significant unrealized losses and potential challenges from decreases in bank deposits, so recommends avoiding bank stocks.
For the full interview with Stephanie, watch here:
___________________
For more deep-dive macro interviews like the one above, sign up for our free newsletter at: https://www.youtube.com/@
To schedule a free consultation with one of Thoughtful Money's recommended financial advisors, fill out the short form at: https://thoughtfulmoney.
