By Tim Courtney, Chief Investment Officer
It can be fun spending money, but not so much paying back debt. Debt can be especially uncomfortable when you’ve gotten used to easy terms and then terms become more onerous. This is where many borrowers find themselves today.
Government stimulus payments that helped buoy citizens through pandemic-fueled economic uncertainty in 2020 and 2021 have come to an end.1 This has depleted savings account balances for many Americans.
Inflation over the past couple of years has also played a part, with the Consumer Price Index rising 14% between April 2021 and April 2023.2 This has led to steadily rising interest rates, making debt more expensive.3 Despite noticeably elevated prices now for just about anything, Americans continue to spend heavily on entertainment, dining out and vacations.4
Additionally, the collapses of Silicon Valley Bank, Signature Bank and First Republic Bank earlier this year have caused widespread turmoil in the banking sector.5 Many people who feared for the security of their deposits chose to transfer money from smaller regional banks to larger national banks that they believed to be more stable.
Regional banks are primarily lenders to smaller companies, local businesses and individual households. Due to reduced deposits though, many regional banks have now significantly tightened their lending standards.6
Many people or businesses seeking a loan right now will not only find it harder to get one but would have the burden of high interest rates in paying it back. Amid the weakened financial condition of household savings and these various other contributing factors, we’re starting to see default rates creep up, particularly for credit cards and auto loans.7
We’ve discussed the distortions created by government policymakers who flooded the economy with cash and then waited to take corrective action until inflation had already spiked.8 After years of zero or near-zero rates,9 followed by extensive stimulus measures, the market is now trying to regain healthier equilibrium under a higher rate and tighter money environment. Certain banks, debt, and assets are breaking in the process.
M2 money supply has now edged down by about 7% after rising nearly 40% between February 2020 and February 2022.10 This decrease, coupled with high interest rates and tightened lending, will inevitably have a slowing effect on the economy — which is the point to rein in inflation. But there is still a lot of money out there, and spending, wage growth and many economic stats remain positive. As we navigate this phase without historic precedent, we believe remaining diversified and avoiding concentrated positions and large asset moves is the most effective way to manage risk. If you have any questions, please contact your Exencial advisor.
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The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living. The CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.