Curbing your Enthusiasm

One of the things that has pushed the recession out farther than many of us has expected is the unusual strength of the consumer. Covid stimulus rained free money. So higher consumption is not that unusual in times of economic distress, but it comes to offset other declines, which unlike history, were never really priced in.

Still, what was very unusual is the adoption of YOLO ("You Only Live Once") spending and now, "Doom Spending" where people are so depressed about their future, they conclude the best thing to do is spend all their money now while they can enjoy it. For many Millennials and Gen Y, the American Dream is dead. (in their mind anyway)

Can I blame them? 🤷‍♂️

To give a personal example, I am participating in the boycott on buying a home, because, let's face it, prices are just stupid. I'm refuse to pay it. The fact that a house can rise in value 40+% in just a couple of years? Nah, not doing it.

That is one of several "trends" that have created this "doom" mentality among younger people. Bloomberg recently reported that people have concluded they will never be able to afford a house AND kids a WAY TO expensive. So what's the point? Besides they can put that Louie V bag or new Xbox on Buy Now, Pay Later. 💵

And just back to the YOLO idea, typically half of stimulus money is saved and the other half spent. But with Covid, maybe it was because we all were touched by people literally dying, a similar idea emerged - Hey, we may die next month, so let's buy that boat, build that deck, order those shoes, ... and enjoy them while we can!

The economic consequences of this social morose nihilism was utopia for corporate profits. I actually don't know of a time in history where we had such a sudden and abrupt acceleration in demand. Maybe the 1920s? (If you do, please comment below)

Now inflation and the rise in aggregate prices could be starting to weight heavy. The miss in retail sales last week was pretty big, but you can't argue that the economy has been stronger than expected, maybe that holds up, credit card delinquencies aside.

And certainly earnings have held up better than expected. The "soft" landing, or even more extreme "no" landing, i.e. no recession, thesis is predicated on earnings not just holding up, but accelerating throughout the year. So the attached chart is a little concerning since earnings growth forecasts are falling across the board.

The catch 22 is that Fed rate cuts should help keep things going, but the hot CPI and PPI prints last week are bringing that plan into question. The plausible outcomes are extremely wide and tail risks are elevated, plan accordingly.