It’s all going on credit cards

I have seen a lot of people online puzzling about retail sales. Despite inflation being at a 40-year high, consumer spending does seem to be holding up. How can that be? Also, with so many economists and business leaders suggesting that we are headed into a recession, why aren’t people cutting back on spending?

One answer is that all these measurements are nominal (i.e. not adjusted for inflation). So you are naturally going to see larger numbers when prices are higher. It’s the same thing when you hear folks talking about “record profits” – the absolute dollar amount of profits will be higher during an inflationary period, but that does not mean companies are extremely profitable. This is why stock analysts do not talk about profits in those terms, but look at profit margins (the difference between what a company spends on its business operations and revenues over time). That is different than reporting on the percentage change in the absolute dollar amount of profits month-over-month, which is a rather meaningless statistic.

Right now, we are objectively in the middle of a dismal earnings season. All these liberal politicos (Joe Biden, Robert Reich, Elizabeth Warren, etc.) who think inflation has been “caused” by companies being so damn profitable must be super confused by the stock market crash that has been underway, lol. (It’s honestly incredible the degree of financial illiteracy in higher education and government right now. And they advertise it so freely on Twitter for everyone to see.)

Fortunately, the “price-gouging” bill that Democrats were advancing died in committee, as it would have only aggravated price pressures, not reduced them. Corporations are not non-profits, guys. You jack up taxes on them and they will just pass that on to consumers. I cannot think of a dumber response to inflation than that.

Anyway, the real answer, I think, as to why consumer spending is not showing a state of panic so far is that people are making up for higher prices by putting everything on credit cards. Americans built up a huge savings during the lockdown because they were not going out to eat, paying for gas, etc. They’ve blown through that already and now credit card debt outstanding is absolutely exploding.

I don’t see a whole lot of people out there talking about this, but to me, it’s the most worrisome trend there is right now. Credit card debt is not like mortgage or auto debt. Because it is unsecured debt (not backed by a physical asset), it is usually high interest rate debt. And the more you have of it, the more often your interest rates will be reset at higher spreads to benchmark rates. Credit card debt is likewise very sensitive to changes in interest rates. Folks who can reasonably expect to be carrying a balance for a while are going to get a rude awakening on their minimum payments as the Fed starts jacking up interest rates to fight inflation. And then what happens? I daresay that’s when you start to see panic in the numbers.

It is worth noting that business sentiment now is darker than it has been in a very long time. I have followed finance and economics for decades, and I have never observed more bearish sentiment in my life. For someone who is normally inclined to be a contrarian investor, I am finding myself in the herd, unable to make an argument for rosier times. I hope I am wrong.

Businesses are loading up on cash, which is a total fear move. Companies have more cash on hand now than they have had since 9/11. Worse than the pandemic. Worse than the Great Financial Crisis.

I have to say, the most shocking evidence of inflation I have seen lately – the thing that has really made me do a double-take – was when we were in the grocery store this weekend. I really love Shiner Bock beer, which comes from Texas, where my husband and I went to college and remained for a bit thereafter to work at a big investment bank. Our grocery store is now selling a 6-pack of Shiner for $17. I looked around, and most of the other beers had been marked up that high too. Whatever officials are saying about inflation right now, they are certainly underestimating what is going on. This is starting to get pretty frightening.