The Effects of Credit

40 years of credit expansion is not contracting.

Home Depot reported earning yesterday along with Target reporting today. Target met expectation saying that consumers where buying necessities vs things they didn’t need to have. During Home Depots earnings call, CEO indicated that the 1qtr was going well up until February at which time they saw a slowing in consumer spending.

The key to consumer spending in the United States is availability of credit. Over the last 40 years we have been apart of one of the largest credit expansions in the history of the US. Up until 2020 lower Fed Funds rates benefited large corporations and very wealthy people who barrowed that money and invested it.

The pandemic hit in March of 2020 and soon after helicopter check’s hit our bank account of the consumer. Prior to the pandemic, the wealth gap widened due to assets inflation, stocks, real estate, etc.. Those who invested in those assets benefited. Yet most Americans don’t invest in the stock market or real estate or start companies. Rich people and corporations do and they have seen enormous wealth creation. Average American has not.

Pandemic hits and Americans get mailbox checks and the sudden availability of more credit. Instead of investing that money, the consumer goes out and spends it. The Retail sector see a sudden growth spurt. Amazon benefits big early on because of the stay at home movement as does Home Depot, Lowes, Target and other retailers.

Fast forward to today and we see the effects of credit contraction. Cost of borrowing has risen due to the increase in Fed Funds rates. The availability of credit tightens due to the borrowing cost for banks and the sudden risk of bank failure becoming a reality. All of a sudden consumers don’t have the available credit they once had. Consumer inflation, driven by the availability of credit and low inventory levels is now decelerating. Which cause companies like Target, Home Depot as well as high end retailer like Restoration Hardware to see a slowing in revenue growth and EPS growth.

The consumer is now in a phase opposite of the phase they where in in 2020 to 2021 of paying off debt and increase in savings accounts. Consumer Credit Card delinquency have increase 45% year over year.

The moral of the story is that the consumer is weakening because much of their hopes and dreams are built on availability of credit. As the consumer tightens up on spending the retail sector is going to feel the effects more and more as we get further into 2023 and 2024. Along with the consumer seeing wealth contraction, for the first time in a very long time, so is corporate and rich people.

Corporations borrow and invest that money. Today that cost to services that debt has begun to exceed the revenues that once paid for that debt. The pickle that corporations find themselves in is the inability to refinance that debt at a rate that they can afford. At the beginning of the week, 7 companies all filed bankruptcy within 48 hours of each other. Now we will begin to see the contraction of the wealth gap as the next couple of years playout.

When investing, always consider the bigger picture. Like, the last 40 to 50 years of pictures. That would be the panoramic option on your Apple iPhone camera (haha! Funny joke). It always comes down to the availability of money.