S2 E4: Captain Crunch...Are We Headed for Global Credit Crunch?

You have heard me warning about a coming crisis in US Commercial Real-Estate and how it would link to Small Banks, not only here in the US, but around the world. Moreover, I warned in December about Small Bank Balance Sheets, and cited that as the likely REASON WHY the Fed abandoned their hawkish rhetoric at the year-end meeting. 
 
You have heard me warning about a coming Consumer credit problem, particularly as it relates to out of control borrowing via Credit Cards, and how this would link to the global economy in a way that would force the "dovish" hands of Central Banks, particularly the US Fed. 

Please welcome to the stage that infamous pirate..."Captain Crunch", here to lead us into the next big macro-economic phase, a Credit Crunch and Consumer Cocoon, here in the US, in the UK and across much of Europe.

In today's episode Greg will detail the data, explain the dynamic, explore the possible macro-scenarios, and talk end-game as it relates to where specifically to invest your money (including Info-Tech, Healthcare, Uranium, Food Commodities and Bitcoin or Ethereum) in order to stay out of harm's way, and out of the reach of...Captain Crunch!

Transcript

Analyzing ISM Data and Its Quirks

Real Estate Crisis and Price Increases

Investing Strategies and Market Trends

Speaker 1 0:01

Hi, greg Weldon here with another episode of Money Markets and New Age Investing, and today it's about Captain Crunch. And for those of you out there who might not know who, captain Crunch is simply a character created to market a cereal. So Captain Crunch is one of the most delicious cereals out there and, of course, I ate Captain Crunch like mad when I was a kid, so certainly something that's been around with me my entire life. So it's interesting. But it applies here in the terms of the word crunch and in terms of the word credit crunch, and in that vein, we've said all along throughout since we've very started this podcast over a year ago, that a credit crunch would be the Fed's worst case scenario, that Paul Volcker was very specific in his language that we do not want to see a credit contraction. And Jerome Powell, a disciple of Paul Volcker, who's used the Volcker Playbook here throughout his career now as the Fed Chairman, that was the one difference Both him and Jenny Yellen had said. You know, maybe we should see a little bit of a decline in credit. There's too much credit, especially in terms of the consumer, and it's watch what you ask for, you just might get it. And Captain Crunch is on the scene. We're going to start and we got a lot to go through and this is really good stuff, man, I got to tell you, when we talk about, first the stock market, where it is record highs, what is that record high built on? It's built on expectations that the Fed is going to cut rates. It's built on the expectation that the economy is strong. With the economy strong, the Fed is not necessarily going to rush to cut rates. So that's a bit of a conflict right there. But these are the points of optimism, along with AI, that have kind of created a couple of little bubble-licious themes that are driving stocks to record highs. The breadth stinks in the US stock market, the Russell 2000s nowhere near a record high. The divergence is stark and it is a warning sign. We look at the consumer discretionary sector, which all of a sudden has picked up some steam in terms of the stock market and those equities, but relative to the staples it's not breaking out and that ratio is critical and has always been critical to the continuation and sustainability of any rally or decline in the S&P 500. We don't have that. What we have is the NASDAQ, the tech sector, ai and a couple of bubble-licious dynamics going on. We're going to talk more about that in a minute. But we have to work through these things and we're going to start with the presumption that the economy is strong and the presumption that the labor market report that we just got you know first week of February here it is currently February 10th when I'm recording this, so we could go from yesterday Was really strong 350,000 plus new jobs, non-farm payrolls that was making headlines average hourly earnings skyrocket and a year-over-year rate changed volts to 4.5% year-over-year, which is right, where the Fed would love to see it. Against the 2% inflation give you 2.5% real wage gains. This is a strong labor market. But of course, then the question is why would the Fed cut rates? Inflations come down to three-ish, you know. So a 5.5% policy rate is restrictive, enough for sure. Maybe too restrictive if inflation gets a two-handle, but that's likely not to happen at any time soon. It could happen this year, but you know the market's ahead of itself on that. So that's one little bubble, but in the context of the bubble that is the economy and the thought the economy is strong, let me show you where the economy really is. Because when you talk about employment all right, the number of jobs created will. Actually, in the Household Survey, jobs were down 31,000. Within the Household Survey, the labor force dropped 175,000. But the number not in the labor force dropped 275,000. Where do those people go? I mean, this number seems massaged to me and I don't make that claim lightly and I don't usually talk about manipulation of the data. The data is what it is. You understand what it is. You can, you know, use it for what it is. But when you look at other parts of this report U6, the total unemployment rate rose for the second consecutive month and has risen from 6.5 a year ago to 7.2. Check that 6.7. It's up 50 basis points. It's up from 6.7 to 7.2. It's up 50 basis points. They use 6 total unemployment rate. I've already discussed the part time for economic reasons. How about the people working two full time jobs for economic reasons? That is at a high that is equated in the past to just before economic downturns. There's stress out there, you can see it, and these numbers were not as strong as the you know pop media would have you believe. Let's talk about the wage number 4.5 year over year. That's really strong, greg. How can you even dispute that? I'm not disputing it. 4.5 on the hourly rate is good, it's great Hourly hourly wage to me, the minimum wage to be a lot higher than it is you asked me, but that would you know be inflationary Nonetheless. The point is I'm not disputing that. What I'm telling you is that because there were less hours worked, people worked less hours their average weekly earnings fell for the month, fell deflation outright for the month because there were so much less hours worked. So who cares if you make a more per hour? Now it's great in terms of quality of life. It's not great in terms of spending by the consumer and growth in spending which is needed to pay off all this debt Doesn't work. Not only that, the rate of change to look at it's not 4.5 for earnings, it's the average weekly take home pay which fell below three year over year 2.966. So they rounded the three. They say it's three, but it's below 3%, which means again, real wages are deflating, your paychecks worth less the second you cash it. Savings gone, poof spent, all right, thanks to transfers being $4 trillion still have you know, some big, but credit card debt has exploded. What if they cut off credit card debt supply? What if banks get singy? Well, that's what's happening. We're going to talk about that in a minute. But let's talk about the go deeper into the economy. Let's talk deeper in terms of the ISM data, and I love the ISM. The data is great. They're awesome at what they do. The people that are the economists there are highly respected, at least in my office, you know. So you know what I'm about to say is no knock on the ISM. The data is what it is. All right, the ISM. You know how they calculate the data. You look at it, you dig deep enough you'll find the truth. But the headlines don't always tell you the truth. And the case of the ISM is some quirks. In a way that data is calculated to create the indexes where the number reporting the same as last month, has a big influence. Not right, it's not wrong. It is what it is. You look at the data for what it is and this is what it is. But in the case of the manufacturing sector, the report got everyone all jacked up about how strong the economy was because the new orders index has soared. It actually jumped above 50 just this most recent month to 52.5. It's up from 46.2 in the last three months, from deeply negative to a decent positive growth implying number. All right, big deal by the pop media. This was a big reason. Interest rates rose on the day this was released. The problem is the way that the thing is calculated At the end of the day. Versus three months ago and this month in particular, the percent of firms saying new orders rose was lower than the percent saying new orders fell. New orders falling 23.5% of firms. New orders rising 20%. How's that positive? There's 3% more firms saying the new orders fell in the month. It's a quirk of the way the data is collected. Let's take the service sector, ism, because this was a big deal just this past week. Now, what was interesting is one of the economists and these guys are really good, by the way, the two one does the manufacturing, one does the service sector, the service sector that the optimism in the survey results are due to the potential impact of interest rate cuts, in other words, 100 basis points expected from the Fed this year. What if we don't get it? It could be a bit of an issue. All right, um, but then also says that firms are cautious due to continuing inflation. Well, that's what the feds cautious about Fed said we're going to be careful, we're going to be cautious because inflation could be sustained here. We have to wait and see. Um then, when we look at the uh economic activity index, uh, out of the firm, out of the industries, rather, 10 reported growth, 10 service industry firms or service industry uh industries reported growth against seven reported contraction. 10 to seven, that's 58%. That's not like robust, it's barely lie, it's not lopsided, it's barely positive, all right. Now here's where it really gets interesting. The activity index, the headline index that everyone looks at 55.8 was unchanged on the month, and 55.8 is a high number. So the economy's good, right? No, not so fast. Because, frankly, the activity index itself worsened, and yet the index stayed unchanged. The percentage of firms growing went from 25.3 to 20.5. You lost 5%, which is actually 25% of the firms that we're growing are no longer growing. How's that? A positive, all right. The percent of firms saying that activity was that fell went from 18% to 19.8. Almost a 2% rise, all right. And over the last two months, the number that said the economy is the same or activity is the same went from 62.8 to 59.7. While the percent of firms saying activity was worsened, contracted, went from 12.6 to 19.8. That's a 7% increase, and more so. What does this tell you, all these numbers? Let's just simplify it. The percentage of firms saying that activity is shrinking is bigger than any other category and has drawn flow from both those saying that activity was the same last month is now saying it's worsened, and those saying activity grew, went right to worsened, didn't even go to the same, didn't stop. You know, don't pass, go go directly to jail. You know, don't collect $200. But they're slightly concerned with this idea of a high chain exp Stuart ங��Automatically increasing. And it's saying Good job, emily and David are ahead. One very interesting thing about it to me, given the timeline of the hi consideras you were服 the other company in the previous company. But how will we manage to see Isaiah's higher school ranking? You can't. You know, say athletes would still have the highest grades, so doesn't mean they would not go all into college. It's the only index that's above 56. The only index is the price index and it just soared to 64, the highest in the year and a half. All right, not only that, in the single month the percentage of firms saying that inflation is higher rose by 20 full percent. In other words, you know, it went from, like you know, 15 to 35. And it's three and a half to one in terms of the percentage of firms saying price is rising and by industry 15 industries higher prices. One said lower prices. Let's go deeper because it's really good stuff. Stay with me on this. A lot of numbers, but it's really interesting. The number of commodity, because some of these things don't change like this man. These are big changes. In the most recent month, kicking off the year, the commodities reported up in price in the service industry, the overall service sector of the economy, all industries. The commodities up in price was six last month, 17. This month you added 11. And here's some of the numbers. Here's some of the things you added in terms of rising in price. Now again, beef, food, catering, construction contractors, software support, maintenance contracts, power tools all right. Electric components and office equipment. Think of all the businesses affected by these things, let alone consumers, when you start talking about the, the pastoral effect of food price increases, all right. And then let's take it one more step further, because the commodities which you know in the service sector so I'm not talking hardcore commodities, but the things that are in short supply, in other words shortages, three things last month, now seven, including appliances, vehicles, electronic components, construction contractors. Now think about construction contractors. You need new homes. You have a very low supply of homes. The homes sold that haven't been yet started is good. I mean, home builders are great. This is a good business to be in, because you don't have enough supply and when demand starts to rise, when they do cut rates, you're going to have another big boom in housing and in prices. All right, so having a shortage of construction contractors is only another thing that adds to the inflation and the price increases that we're going to see in housing. So, man, everything means something. But we're talking about the US economy that seems strong and the Fed is cautious because inflation is kind of lurking. All right, let's compare it to the European economy. Let's talk about inflation in the EU, because this is about being a race between the US and the EU and it's not about a race between the markets or a race between the central banks. It's about a race between the economies and how quickly it gets the central bank to be easing policy, in this case, the EU CPI. All right, let's compare the last 17 months, by the way. Let's look. Let's just jump right to where CPI. Cpi at its peak in October 2022 was 10.6. Year over year 10.6, double digits. From there it fell 11 of the next 12 months to hit a low at Justice past December at 2.4. It's 40 basis points from the ECB's target rate of two. The US would die for that rate right now. Four months in a row it's been below three. But let's look at this another way to look at it. On average, using the monthly report, on average 17 months up to October of 2022. All right, just after the peak, the average month was 0.75, which means the annualized rate for that 17 months you know every 12 month rate 9% 9. The most recent 17 months the average was 0.11 for an annualized rate of 1.3. So you're actually well below the ECB's target on average over the last 17 months on CPI and over the last four the average is minus 0.18. You're at 3% deflation. So in the last four months, minus three. In the last 17 months 1.3. The ECB could very much be easily justify your rate cut here, although there's a lot of reasons that they could say they couldn't justify rate cut is polarized. But when we get to the German economy obviously the most important in all of Europe the consumer confidence index just released was expected to show improvement. It didn't. It plummeted, all right. And not only that, but you have 23 months now where it's been negative, below minus 20, actually deeply negative, all right. So, from that perspective, when we look at the income expectations when from minus seven to minus 20, the propensity to buy a big item, when from minus eight to minus 15, it doubled its negativity the propensity to save doubled to plus 14, the highest since August of 2008 and what goes hand-in-hand with consumer confidence, this down. Retail sales in Germany have been negative 20 of the last 21 months. The German two years, you know, hovering above 240, whereas the US two years at 440. That rate differential is widening. Okay, that is bullish for the dollar and that's a problem, all right. But the Fed doesn't mind that because they want the dollar to ensure that CPI Comes back to two and right now they don't want to hike rates again. They're afraid that CPI will rise. And even though you have a credit crunch going on, which is why they turned in December, I'm telling you, I told you that already. All right, they're bound. She's still shrinking at 800 billion on a rolling 52 week basis, every single week, all right. M2 remains at minus 453 billion over the last 12 months, still deeply Tight and so very tight in terms of kind of monetary conditions. If the dollar rallies. That's really tight and that would be really bad for stocks and I don't think the Fed minds taking some air out of the stocks. The Fed doesn't want to be easing and you know, in cutting rates when gold's at 2,000, the stock market set record high and then, as the X through the roof, they might have to anyway because the consumer may be in danger. Here's the problem credit conditions. The senior loan officer survey just told us all types of loans are being tightened in terms of standards. I mean meaning you know can you get a loan or not, all right, especially on consumer loans. Not only going up in cost, not only going up an interest rate, not on going up in the minimum, credit is coordinated, but also in terms of slower credit lines, all right. But the report also shows us there's weaker demand for auto and consumer credit or credit card loans. Weak or demand isn't that interesting, because if banks are less willing to lend and consumers less able to borrow, that's a problem, not it out. But they also said they are seeing a deteriorating loan quality across all loan types. We know that defaults, delinquencies. All right, let's look at the banks real quick, because what's happening right now is actually a commercial real estate crisis that we said would happen a couple of months ago. In terms of banks, the loans, the 12 the rolling 52 week change in loans is down below 250 billion every time that's happened, depending recession. Deposits are unchanged for the last two years at 17.4 something trillion 45, 43, 44. It's not moving above 17.5. All right, for two and a half years You're having grown deposits and you're growing loans at one point, a trillion annualized. All right. Small banks they are now borrowing more than their cash level. The only time we ever saw that before was 2006 2007. All right. The bank term funding program, which was put in place in March to help banks experiencing liquidity problems, reached a new high of 167 billion. Banks are tapping in. Small banks are having problems and the problem here is the commercial real estate loan office space in particular. But all of it right. Even the malls, I mean to whatever extent all of these sectors continue to get hit. You know, you built a lot of warehouses and you're gonna have a delivery and all the things that people were never gonna go and shop again during coven, even these sectors and now kind of bloated. All right, the small banks are at issue. They're the ones that are now borrowing more than they have in cash, which is really rare and a sign of trouble, and the ones going to the bank term funding program for, you know, for liquidity, because they may be in some kind of liquidity crunch. All right, small banks those below 250 billion in assets. 80% of commercial real estate loans in this country. 80%, 1.7 trillion CRE loans mature in the next 18 months, 80% of which are held by small banks. Small banks with less than 10 billion, really small banks own A third of those loans. You Not only that, it's global. China, ever grand, was the big property developer to got blown up there, right, and what happens there is. Everyone thought that the government would come in and rescue them. They did allow some delinquencies on the loans and they didn't have to pay off, and so on and so forth. But eventually China decided to let it blow up, which shocked a lot of people, particularly US hedge funds, who had bought these distressed bonds at like 30 to 40 cents on the dollar. They're trading a penny right now. Alright, this is a big deal. Why? Because China's shown they're not gonna bail out everybody, like the US always does. So this is an issue. You have issues now in terms of Chinese builders in the UK, in South America and in terms of the US builders. You know you have these problems around the world because the banks around the world have been involved with the US commercial real estate. You know the office space right now. We know it's dead. I mean, we just know this, but the numbers are still shocking. The US vacancy rate hit 21% in the third quarter. One out of five office buildings is empty. Is what that tells you. In Asia, it went from 10% in 2019 to 15. We've gone from 13% in 2019 to 21. That's more than a 50% increase. Alright, so in that case, you know you're talking about defaults. In New York City, I mean, it's gone crazy. And you still have 100 million square feet of new building projects planned for offices. Alright. Now PBB, german Bank alright. Four and a half billion euro exposure Alright, this is now they went from. Their bonds are crashing, along with Ariel, who has nine billion euro in exposure. Alright. So these two banks between them, that's a lot right for two German banks that are now in big trouble. The stock price in both of these crashing. Okay that the bond price. Pbb is down to 42 cents on the dollar. Ariel is at 76. Ariel is the more in trouble entity too. If you ask me, that's probably the next target. Alright, in terms of the German GFK, that did the consumer sentiment index, although it does a real estate confidence index all time low. German real estate In Japan. Azora Bank 540 billion. Half a trillion dollar bad loans in US office space. The stock went from 3,300 yen a share to 2,000, took a you know, one third haircut in basically two weeks. I mean, this is affecting everywhere in the US. New York Community Bank I warned on New York Community all year. Last year their stock broke from 19 to where it's been hanging out, to 15, and now it's at four, and this is why the Fed went dovish in December. I'm telling you Alright. And now the banks they're going to tighten the standards on consumers, on credit cards in particular. This is where the credit crutch comes, and the numbers we just got literally just got from the Fed on the most recent credit consumer credit numbers are horrible 1.5 billion, which is a tiny number. Alright, it's the third out of the last eight months to be negative or basically zero, which 1.5 billion is basically zero. Believe it or not, hard to say that, but it's true. But here's perspective Alright, since May of this year, so the final eight months of this year, consumer credit 51 billion. The same month, the same eight month period in 2022 to 2023. I got to check that, yeah, in 2022, I should say, was 229 billion. You were 77% decline in consumer credit growth over the last eight months compared to the same eight months period a year ago. Alright, the numbers annualized on the month here 0.4 on total credit growth, down from 5.7. Revolving credit, which is credit which is credit card 16.6, down to 1%. I mean, and here's the most interesting stat of all, out of all these new loans that were that are made, credit unions have been one of the largest contributor to those loans and that's a sign of stress. They've only seen this now, where commercial banks are scaling back, their loans are dropping, whereas credit unions' loan growth is going through the roof. That's a sign of stress. They're a lender of last resort, they're a borrower. Where a borrower would be more desperate, can't get along from the bank goes to a credit union. Gonna be a little more lenient. When's the last time we saw this. I saw this and called this and talked about this in 2007. 2007. You know. So, when you talk about the consumer credit, the rolling year of a year rate of change is now 2.4. Now, that's low. All right, because you've only been below 3% on three other occasions in the 50-year history of credit cards 1991, 2009, and 2020. Biggest recession that we had outside of a crisis 1990, 2009, obviously the financial crisis, 2020, the pandemic, and now and now and All of this Gets you the S&P 500, which is at its peak, had a three month rate of return of 19%, 19%. It's the second largest in the last ten years. You got to go back outside the pandemic. You got to go back to March of 2019 to see a three month rate of return that's 20%. On the back of this, what I just all the, what I just told you, all right. So where do you go? Well, you know we do the portfolio playbook, which is kind of a quantitative technical. You know, really, strategy, macro in terms of allocating, differently than some of these other people. Do you really want to be diversified totally? And in this case, you know we do some of the quant work, for you know Some of the institutions that we have as clients, where they're allocating it to sectors All right. Right now the financial sector is the hottest sector. Infotex actually dropped to number two, consumer discretionary has jumped to number three and health care is in there at fourth. All right. The problem is, you know the for the financials, it's not the banks outside of JP Morgan who's going to eat up all these little banks and be the shark waiting to. You know, get bigger on the. You know on the blood of others, but the turd. You know the dynamic around the financials. It's been all about the insurance companies. The KIE. The insurance sector has led the way. All these aft leg progressive. They've all been at new record highs and now they're coming off. There's some concern about them in commercial real estate too, with some insurance contracts that are out there. All right, doesn't that sound familiar? 2008, holy mackerel. All right, the banks know it's the brokers and the markets themselves that are providing the, the impetus for the financials to rise to number one. Stocks like the Nasdaq stock All right. The Blackstone, s&p, global, cboe, the MSCI, which does all these indexes there, all the the XBD broker broker dealer index is About to make a new all-time high. It's the market itself that's driving the financials, not the banks. Don't trust the banks, don't trust the financials, because it's tied to the market. So you want to be in the market and have a double alpha by being long the market in the market. Well, there you go. I mean. Now, how about the consumer discretionary? Well, it's being driven by a couple of shares. You know, marry out Hilton. I mean it's hotels, its travel, its tourism. But then you look at two stocks in particular, the way up on the quantitative rankings, the big bullish trends that are very robust Autozone and Chipotle. They're $2,800 per share stocks. I, you know, yeah, chipotle deserves it on the back of a 37%, you know, year of earnings growth. The revenue is up 15% to two and a half billion in the fourth quarter. Same store sales up eight and a half, you know. But they open 121 new stores. They're gonna open 315 new stores that we've not seen this in retail before. All right, so it's the growth dynamic here that has these stocks. Auto zone, I mean, correct me if I'm wrong, but this is an auto parts place that trades at 2900 dollars a share. I, you know. That seems to me to be an issue when you talk about, and I'm not saying it doesn't deserve to be there, anything. I'm saying where's the growth? Mathematically, the growth has to be so big. It's not even funny, it really isn't. I mean, it's kind of insane. It's a mathematical conundrum. Now here's the Nasdaq. All right, because I like doing what I own, that me, the XLK, is part of our portfolio in Fortek. You have to have it. Okay, you have to. But when we talk about the, the, the geometry Because I do everything and the geometry using GAN angles per se, you can give an upside target for the Nasdaq of 22,500, and that fits with a recent measured count based on the range You've seen over the last two to three years. So you could say that there's still a lot of upside in the stock market. And certainly on the impact of AI. Well, that's great, that's new technology going to change the world. But you need to sell, you need to package it. You need to figure out a product that can be used. You need to package it, you need to sell it. You need to find a way that consumers can actually pay for it. So I don't know, that's a, that's a longer game, right. So in that context, we're still like healthcare. I like the pharma, I like the biotech right now it's been really depressed. We like the home builders, we love uranium. We, that is. You know, I perform natural gas and crude oil, but I also like energy, also like the food commodities, so you can come check us out on any of that. But what I really like here, what we really pushed for our clients recently crypto, bitcoin and ether both All right, to the extent that you know Bitcoin is going to 70 easy and probably higher, gonna make new highs I think you know it's the ultimate anti dollar play, when the dollar will hurt all these other commodities, including gold. I mean ether is breaking out against the s&p 500 and against gold. That's big to me, I mean. And when you look at the dynamic around the dollar and you look at how global this is where you can't just run out to the bullion dealer and buy gold or do some of these other things. Everyone has a phone, everyone can get an app and almost anyone can kind of buy bitcoin. You know it's not tied to another currency. This is where it really does become what it's supposed to be, which is the anti dollar play, at a time and the dollar is appreciating potentially, and knocking stocks down, knocking commodities down, because that's what the Fed wants, even in terms of risking a credit crunch, that becomes really problematic. And then the feds like, oh my god, look what we asked for, we got it. And then they're really screwed. And then they got to print all kinds of money and that's from gold explodes too, but bitcoin will already be higher, so we still like gold as well. Anyway, you can get more information on the work we do. We actually have the what we call the gold guru product right now, which is crypto as well. We're all over this move in bitcoin, all over this move in ethereum, all over this move in uranium. It's about the metals and foreign exchange, which includes crypto, and it's a good product. It's reasonably inexpensive and you know our clients absolutely love it, and it's a product that's basically designed to make you money. So that's our goal here and just to say thanks for listening, signing off until our next episode of money markets a new age investing. Follow me on twitter at welden live. Follow the podcast at money underscore podcast on twitter.