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Consumer Pressure: Is There An End In Sight?

By Chris VermeulenMarket OverviewMay 19, 2022 11:32AM ET
www.investing.com/analysis/consumer-pressure-is-there-an-end-in-sight-200624580
Consumer Pressure: Is There An End In Sight?
By Chris Vermeulen   |  May 19, 2022 11:32AM ET
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The US stock market contracted sharply over the past 30+ days while traders attempted to identify the risks behind the US Fed rate increases. Behind the scenes, consumer pressure is building due to higher costs on nearly everything. Gas, food, everyday items, and credit card interest payments cost almost more due to inflation and increasing fuel costs.

In 2007-08 when oil reached levels above $140ppb and the seemingly high costs of everything just before inflation peaked and the markets turned bearish. Back then, much like today, a period of extreme speculation seemed to permeate buyers and investors throughout the US.

What broke this trend was the Global Financial Crisis. When the economy unraveled, excessive credit/debt levels suddenly became unmanageable for nearly everyone. What seemed like a reasonable and manageable amount of debt suddenly became excessive as the US Fed raised the Fed Funds rate from 1.0% to 5.5%–a 450% increase.

Recently, we’ve seen the US Federal Reserve raise rates from 0.25% to 1.0%. The Fed may raise rates again soon, trying to tame inflation. I don’t have a crystal ball, but it is not difficult to understand how inflation, higher consumer costs, and increased debt servicing costs are going to panic many consumers, especially after many years of ZIRP and low inflation.

CONSUMERS BURDENED BY HIGHER COSTS & DWINDLING INCOMES

US consumers are struggling to manage their finances as inflation, and higher cost of living expenses continue to eat away their extra cash. As consumers shift their spending habits, news travels quickly to other consumers about how the economic conditions are threatening their future. Remember, what happens on a consumer/retail level is often the “canary in the coal mine” scenario related to broader economic trends.

The extreme measures taken when COVID-19 hit in February 2020 helped many consumers survive the severe economic contraction. Now that we are beyond extreme measures, prices have risen more than 25% for almost everything over the past 24+ months. Consumers are struggling to manage their monthly expenses while still trying to enjoy their lifestyles.

A recent article highlighting former Federal Reserve Chairman Ben Bernanke suggests the current US Fed waited too long to address inflation issues. The steps now necessary to tame inflation could be very painful going forward. I see this as a clear warning for traders/investors to keep their assets very liquid and reduce their exposure to risk factors.

NEW MORTGAGE DEMAND COLLAPSES AS CONSUMERS ARE PRICED OUT OF BUYING HOMES

The sharp decline in mortgage demand indicates a collapse in consumer confidence and willingness to believe the economy is going to continue to grow. The warnings from the US Fed, as well as signs that international market conditions are deteriorating quickly, have US consumers on edge – watching for the next shoe to drop (again).

U.S. Mortgage Market Index
U.S. Mortgage Market Index

Source: https://www.investing.com/economic-calendar/mortgage-market-index-1427

US FED ON TARGET FOR AN 1100%+ RATE INCREASE OVER 4+ MONTHS – FASTEST IN RECENT HISTORY

The US Federal Reserve has continued to suggest further rate increases are necessary to help tame current inflation trends. By many conservative estimates, the US Fed is targeting levels at or above 2.0%. These extremely aggressive targets would represent the fastest and potentially largest rate increase in recent history on a percentage basis.

If the US Fed next raises interest rates by 0.50%, that would represent a 1100%+ rate increase in just 90 days. Rates moving to 2.0% or higher soon will represent a 1500%+ increase over 4 to 5+ months.

Federal Funds Effective Rate (FRED)
Federal Funds Effective Rate (FRED)

Source: https://fred.stlouisfed.org/series/FEDFUNDS

EXTREME POST-COVID SPECULATIVE WAVE MAY HAVE EXTREME CONSEQUENCES

Inflation and many other economic issues are suddenly front-n-center for central banks and consumers across the globe. News that China’s real estate price levels continue to decline may be a very clear sign that China/Asia has peaked ahead of the US and other global markets. We’ve never seen anything like the sharp rally in global real estate price levels except for a brief period from 2004 to 2008 (see chart below).

Median Sales Price Of Houses In The U.S.
Median Sales Price Of Houses In The U.S.

Source: https://fred.stlouisfed.org/series/MSPUS

That rally ended with the Global Financial Crisis. Home prices declined nearly -20% from the peak in Q1:2007 to the bottom in Q1:2009. If history repeats, US home prices will fall more than -20% to -25% over the next 12+ months.

US EQUITY MARKET MAY NOT FOLLOW ASSET PRICES DOWNWARD AS ECONOMY SHIFTS

I want to urge you to consider how capital works in a shifting global market environment. Capital is always seeking out the best, most opportunistic instruments for future gains and protection again risks. Even when the markets were turning downward in 2009, a bottom set up in the US stock market long before other assets found their bottom in price. This same type of scenario may play out over the next 12 to 24+ months.

Suppose my interpretation of market conditions is correct, and the US Fed attempts to raise rates further to mitigate inflationary trends. In that case, it is likely that various asset classes, ETFs, and individual sectors will unwind risks (as we are now seeing) and will possibly turn into future opportunities. What was overvalued in the past may turn into an incredible opportunity as capital shifts towards sectors/trends showing opportunities for future ROI.

The current market trends will present incredible opportunities for traders/investors that are able to protect capital, see and understand the risks and opportunities unfolding, and time their investments/trades properly in the markets.

Consumer Pressure: Is There An End In Sight?
 

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Consumer Pressure: Is There An End In Sight?

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Comments (2)
Mohd Izhar Muslim
Mohd Izhar Muslim May 20, 2022 4:06AM ET
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Thank you for sharing the article 👍
Jeff Page
Jeff Page May 19, 2022 10:15PM ET
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Good write!
 
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