This Is Not Normal
New signs of trouble in the credit markets... Are U.S. consumers finally 'tapped out?'... This is not normal... Last call for the Bull vs. Bear Summit...
It has been a long time coming...
But now, we see clear warning signs that this massive credit bubble is finally reaching its peak.
Despite continued central bank stimulus, the global economy is now slowing dramatically. Europe and China, in particular, are absolute disasters...
Corporate credit spreads are widening again...
And as of this week, we can now report the U.S. consumer appears to be "tapping out" as well...
Yesterday, the New York Fed released its latest quarterly report on household debt and credit...
And the headline numbers for the fourth quarter of 2018 continued the same trends we've been following for the past several years...
Total household debt rose for the 18th straight quarter – to a new record of $13.54 trillion. It's now $869 billion (or 7%) higher than the previous credit-cycle peak of $12.68 trillion in the third quarter of 2008.
Likewise, consumer debt – which includes student loans, auto loans, and credit-card debt – rose again. Student and auto loans each hit fresh record highs of $1.46 trillion and $1.27 trillion, respectively. And credit-card debt jumped to $870 billion, matching its 2008 peak for the first time.
In short, according to these figures, consumers continued to binge on debt through year-end.
However, beneath the surface, not all the data was so rosy...
The report also noted that the number of credit inquiries within the past six months – which is an indicator of future consumer credit demand – didn't just fall last quarter... It fell to the lowest level ever seen in the 20-year history of this data.
This is concerning... It suggests consumers are becoming unwilling (or unable) to take on even more debt.
And it confirms similar data from the Federal Reserve's quarterly survey of bank loan officers last month, showing a significant slowdown in demand for loans – as well as tightening lending standards – to both households and businesses.
But that's not all...
Longtime Digest readers know we've long predicted that some of the first signs of trouble in the next credit-default cycle were likely to appear in subprime consumer loans... particularly subprime auto loans. And that's exactly what appears to be happening now...
According to the Fed, as of December, more than 7 million Americans were "seriously delinquent" – defined as 90 or more days past due – on these loans. This is the highest level ever reported... And it's roughly 1 million people more than at the end of 2010, the peak of the last default cycle.
As predicted, this trend is being led by the least credit-worthy borrowers... So-called "flow" into serious delinquency among subprime borrowers – that is, the number of loans that were current or less than 90 days late in the previous report that have now become seriously delinquent – is now growing at 8%, which is also the fastest rate since 2010.
It's still early, of course...
But this is exactly how the credit cycle turns... quietly and slowly at first, while most data show everything is fine. The "fireworks" come later. And as usual, the Fed appears completely clueless about what's in store.
In a separate report discussing these trends, New York Fed researchers called the rapid rise in subprime delinquencies "a development that is surprising during a strong economy and labor market."
In other news, the 'buyback backlash' continues to grow...
Last week, we noted that several Democratic politicians have recently spoken out against the massive boom in corporate share repurchases – or "stock buybacks," as they're commonly known.
Now, we aren't in favor of banning buybacks completely as some of these folks have suggested. As we've discussed, when used appropriately – typically when shares are cheap, and a company has the cash to do so – buybacks can be great for investors.
But in recent years, many companies have been buying back shares at expensive valuations – often borrowing heavily to do so – to boost corporate earnings and enrich their executive teams. So we're not surprised to see this become a political issue.
However, it appears it could become even bigger than the partisan debate it initially appeared to be. As financial-news network CNBC reported today...
Florida Sen. Marco Rubio lashed out again Wednesday against Wall Street, vowing to present a bill "soon" that will try to push companies to stop spending so much of their cash on share buybacks.
In a tweetstorm that began in late morning, the former Republican presidential candidate ripped into the culture of shareholder and executive enrichment that goes along with the drive to repurchase shares. His bill, a plan for which was unveiled Tuesday, would change the tax code so that share buybacks and dividends are treated the same way.
While the earlier presentation came from the Small Business Committee, which Rubio chairs, the tweets gave him the opportunity to state his personal views. Rubio's aggressive approach to disincentivize buybacks puts him in line with prominent Democrats who have vowed to come down on the practice.
"No tax advantage for buybacks over dividends. But we're going to give permanent preference to investments that will drive the creation of jobs & increase in wages," he said in one tweet.
Have we reached a 'tipping point?'...
Have the excesses of this easy-money boom become so extreme and obvious that even a "pro-Wall Street" politician like Rubio – who won more support from financial firms than any other candidate during the 2016 presidential election – feels pressured to push back?
We can't say for certain...
But we can tell you that this movement to rein in buybacks – one of the biggest drivers of higher stock prices over the past several years – is gaining strength. And that is anything but bullish for the markets.
Of course, for now, most investors appear blissfully unaware of these risks...
But there are signs that people are slowly starting to realize that things are anything but normal today. As Bloomberg reported on Monday...
From stocks, currencies to commodities, a slew of assets are moving in seemingly erratic ways.
Take the U.S. dollar – it's on a rip higher ever since the Federal Reserve took a dovish pivot. Small-cap stocks are among the best-performing equities out there, even though the only thing everyone seems to agree on is that we're late in the cycle. And industrial metals and miners are surging as the world's biggest consumer slows down.
It all helps to explain the lack of consensus that's been on display across markets this year. "It's very erratic and a clear direction is missing," reckons Georgette Boele, a currency and commodity strategist at ABN Amro Bank NV. "There's a lot of uncertainty with Brexit, trade negotiations, China's economy, the weaker euro zone data and unclear picture about U.S. data – this all makes it a very hard market to trade."
While bulls in credit and emerging markets are on the rampage, government bonds are getting a mammoth bid and outflows are hitting rallying stocks.
No, investing today is not simply 'business as usual'...
And while we've received plenty of criticism for our negative outlook of late, we won't apologize for saying so.
The reality is that we're in the final innings of one of the longest bull markets on record, fueled by the most extreme monetary policies we've ever seen.
Sure, we could see higher prices – potentially much higher prices – before this bull market finally ends. But when it does, one of the most devasting bear markets in history is sure to follow. It's not hyperbole to say that many folks could be completely wiped out.
So whether you're currently leaning bullish or bearish today, you must be prepared for both of these extremes. And one of the best ways to ensure you are is to join our colleague Dr. Richard Smith for his first-ever Bull vs. Bear Summit tonight at 8 p.m. Eastern time.
During the event, you'll not only hear what several highly respected bulls and bears are personally doing with their money today... you'll also learn the one thing Richard says every investor should do right now to protect his or her portfolios in the years ahead.
It's absolutely free to attend. And you'll even get a copy of Richard's special research report – "How to Know the Exact Day to Sell Any Stock You Own" – just for showing up.
Click here to RSVP and tune in to tonight's event.
New 52-week highs (as of 2/12/19): AllianceBernstein (AB), Equity Commonwealth (EQC), Motorola Solutions (MSI), New York Times (NYT), O'Reilly Automotive (ORLY), and Procter & Gamble (PG).
In today's mailbag: Two readers share their perspectives on today's market. Where do you stand? Let us know at feedback@stansberryresearch.com.
"Bull or bear? There are so many ways for things to go wrong; so few for them to go right. It feels like a DJ that keeps putting another song on in hopes that people will keep dancing and not notice how late it is.
"I've got my coat on and am stuffing my pockets with a few hor d'oeuvres for the long drive home." – Paid-up subscriber David H.
"No one knows if the bull market is over, although I strongly suspect it is. Too many dangers in the market are moving into the mainstream ethos. Remember all dangers tend to be ignored in a healthy bull market by most investors. A bear market, in a way, is investor's waking up to already existing risk. Shocks become more likely to emerge in this environment. In general, Moore's law begins to manifest unexpectedly. I have been worried about this debt-induced rally from day one, but I don't matter. Goldman Sacks does. The Federal Reserve does.
"If the December downturn had been an interest rate scare, the Fed alone should have been able to fuel a breakout to new highs with its about face. If the underlying bull market still had conviction it would not lose steam as valuations approach widely watched resistance levels. Investors' emotional IQ is asserting itself, the fear of loss is just too prevalent. If we were sitting around with below trend valuations that would be great news. Alas, we are sitting around in a bubble.
"Fear pricks bubbles, plain and simple. While a part of the investing public is afraid of missing the train up, many are worried for exactly the opposite reason. The point is the risk has been brought to light. The genie has been let out of the bottle, the Fed made a mistake, whatever you want to say, it already happened. Investors are more likely to demand proof to justify their optimism now. If this is true, the bull run has ended.
"If this market moves significantly higher on heavy volume with manageable volatility and decides to take a breather the bull lives. If the consensus from the media, hedge funds, bankers, and other large investors start to align in a positive direction, I will stand corrected. Until that happens, if you are a bull do not look down, the vertigo could make you sick." – Paid-up subscriber R.H.
Regards,
Justin Brill
Baltimore, Maryland
February 13, 2019