More Americans are focused on cutting back their spending to save more

More Americans are focused on cutting back their spending to save more

More than a few times, we here at Tematica have talked about the rising level of consumer debt across student and auto loans as well as credit cards. We’ve also talked about how older Americans are undersaved for retirement and how the upward trajectory in interest rates is going to make debt servicing more costly, crimping disposable income. In thematic speak that’s Middle-Class Squeeze with a helping of Aging of the Population.

But new data suggests consumers are aware of their situation and that is prompting them to cut back on their spending in order to save more. What we’ll have to see in the coming monthly Personal Income & Spending reports is to what degree they are opting to save vs. spend. In recent months, we’ve seen the personal savings rate reported by the Bureau of Economic Analysis slip to 3.6% in August from 6.9% in April, which took a minor bite out of personal spending.

If we see a more pronounced level of spending, it could be a headwind to an economy that is reliant on the consumer to open his or her wallet and spend. The silver lining if that comes about is those companies that we’ve identified as riding our Middle-Class Squeeze investing theme are likely to see a more favorable tailwind.

 

A new Bankrate survey finds that 66 percent of Americans are limiting their spending each month. Among those who are curbing their spending, 36 percent are doing so to save more money (24 percent of all respondents).

With more than 60 percent of Americans unable to cover a $1,000 emergency with savings, it’s good news that some are willing to sacrifice to start building cushions for the future.

Americans aren’t just limiting their spending to save: 24 percent of people who are limiting their spending are doing so because their income hasn’t changed, while 17 percent said they have too much debt. Another 11 percent are worried about the economy, and 5 percent are worried about the economy.

Households with incomes of $50,000 per year or more were more likely to say they needed to limit their spending to save. These households were also more likely to report being frugal, on a budget or having no desire to spend more money. They were less likely to cite stagnant income than households with income under $50,000 per year.

Meanwhile, households with income under $30,000 per year had the highest likelihood (13 percent) of citing their worries about the economy as the top reason for limiting spending.

… older Americans aren’t showing the same dedication to saving. Stagnant income was the top response for baby boomers (34 percent) and the Silent Generation (49 percent).

For a generation that is still working, flat-lining wages brings concern. In 2017, the labor force of Americans ages 55 and up accounted for about 23 percent of the average annual labor force. By 2024, the Bureau of Labor Statistics estimates that percentage will increase to almost 25 percent.

Source: Survey: Two-Thirds Of Americans Are Limiting Their Spending — Here’s Why | Bankrate.com

The growing intersection of the Aging Population and the Middle-Class Squeeze

The growing intersection of the Aging Population and the Middle-Class Squeeze

On their own, each of Tematica’s 10 investing themes is pretty powerful, but when two or more of them come together they form some pretty powerful tailwinds and formidable headwinds. Our Aging of the Population investing theme focuses on the demographic shift that we are undergoing and our Middle-Class Squeeze one addresses the economic pressure that many continue to feel due in part to rising debt levels, rising costs and still less than inflation growing wages. These same factors are pressuring older Americans that are living on fixed budgets, and now it seems even their Social Security payments will be hit by unpaid student debt.

Odds are we will see a growing number of older Americans trading down in what they buy and changing where they buy in order to stretch the spending dollars they do have.

 

The share of bankruptcy filers who are older than 65 is the highest it’s ever been.

As the cost of living outpaces incomes, health care costs rise and debt swells, there’s been more than a two-fold increase in the rate of older Americans filing for bankruptcy, according to a new study. “For an increasing number of older Americans, their golden years are fraught with economic risks,” it reads.

Debt among older Americans is rising fast. In 2016, the average debt in families in which the head of the household is age 75 or older was $36,757. That is up from $30,288 in 2010, according to a recent report by the nonprofit Employee Benefit Research Institute in Washington.

The average monthly Social Security check is $1,404, and more than 40 percent of single adults receive more than 90 percent of their income from that check, according to the government.

Older Americans’ debt can threaten this.

The number of Social Security recipients 65 and older who had their check reduced because of their student loans increased by more than 500 percent between 2002 and 2015, according to the Government Accountability Office.

Source: Debt growing for older Americans and so are bankruptcy filings

$1.5 trillion student loan debt, $1.1 trillion auto loan debt and ~$1 trillion in credit card debt -what could go wrong?

$1.5 trillion student loan debt, $1.1 trillion auto loan debt and ~$1 trillion in credit card debt -what could go wrong?

It’s that time again, an update on the degree of consumer borrowing as tallied by Federal Reserve data. For those of us that have been watching other consumer spending, debt and savings metrics, the results come  as little surprise and serve to confirm not only our Cash-strapped or Middle-Class Squeeze investing theme. The data also lends support to the growing concern over the ability of the consumer to thrust the consumer spending led US economy ahead as the Federal Reserve continues to boost interest rates in the coming quarters.

 

Americans owe $1.5 trillion in student loans

We hit this milestone during the first quarter of 2018, according to Federal Reserve data.

Outstanding student debt currently exceeds auto loan debt ($1.1 trillion) and credit card debt ($977 billion).

42% of people who’ve gone to college took out debt

A majority of them took out student loans, but 30% had some other form of debt, like credit card debt or a home equity line of credit, according to a Federal Reserve report based on a 2017 survey.

Average new grad owes $28,400Among those who finished a bachelor’s degree in 2016 with debt, the average amount was $28,400, according to The College Board. That’s up from $22,100 in 2001 (reported in 2016 dollars).

 

Source: Student loan debt just hit $1.5 trillion. Women hold most of it

40% of Americans can’t cover a $400 emergency expense; 25% have no retirement savings

40% of Americans can’t cover a $400 emergency expense; 25% have no retirement savings

We keep hearing the mainstream media talk about the improving economy and the falling employment rate, but beneath the headlines and talking heads, we’ve seen consumer debt continue to climb.

Why?

Because those who don’t have sufficient funds either have to borrow, the likely option, on in some cases sell something. This has increased borrowing at the expense of saving has tapped out consumers such that four in ten Americans can’t cover an unexpected $400 expense. Also in the report’s findings – 25% of Americans have no retirement savings whatsoever.

These data points have wide implicatons for the consumer led economy and serves as the latest proof point for our Cash-strapped Consumer investing theme.

“The finding that four-in-ten adults couldn’t cover an unexpected $400 expense without selling something or borrowing money is troubling,” said Greg McBride, chief financial analyst at Bankrate.com. “Nothing is more fundamental to achieving financial stability than having savings that can be drawn upon when the unexpected occurs.”

He’s also concerned about another finding in the report: fewer than 40% of adults think their retirement savings are on track.”

The burden is on us as individuals to save for our retirement,” he says. “Take control of your financial destiny by contributing to an employer-sponsored retirement plan such as a 401(k) via payroll deduction, or arrange automatic monthly transfers from your bank account into an IRA.”

More concerning are the 25% of Americans with no retirement savings whatsoever, according to the report.

Some of this may be due to the lack of employer-sponsored retirement plans, as well as people piecing together several part-time jobs, which may not offer benefits.

Source: 40% of Americans can’t cover a $400 emergency expense

Bearish Thoughts on General Motors Shares

Bearish Thoughts on General Motors Shares

While higher interest rates might be a positive for financials, at the margin, however, it comes at a time when credit card debt levels are approaching 2007 levels according to a recent study from NerdWallet. The bump higher in interest rates also means adjustable rate mortgage costs are likely to tick higher as are auto loan costs, especially for subprime auto loans. Even before the rate increase, data published by S&P Global Ratings shows US subprime auto lenders are losing money on car loans at the highest rate since the aftermath of the 2008 financial crisis as more borrowers fall behind on payments. If you’re thinking this means more problems for the Cash-strapped Consumer (one of our key investment themes), you are reading our minds.

In 4Q 2016, the rate of car loan delinquencies rose to its highest level since 4Q 2009, according to credit analysis firm TransUnion (TRU). The auto delinquency rate — or the rate of car buyers who were unable make loan payments on time — rose 13.4 percent year over year to 1.44 percent in 4Q 2016 per TransUnion’s latest Industry Insights Report. That compares to 1.59 percent during the last three months of 2009 when the domestic economy was still feeling the hurt from the recession and financial crisis. And then in January, we saw auto sales from General Motors (GM), Ford (F) and Fiat Chrysler (FCAU) fall despite leaning substantially on incentives.

Over the last six months, shares of General Motors, Ford, and Fiat Chrysler are up 8 percent, -2.4 percent, and more than 70 percent, respectively. A rebound in European car sales, as well as share gains, help explain the strong rise in FCAU shares, but the latest data shows European auto sales growth cooled in February. In the U.S., according to data from motorintelligence.com, while General Motor sales are up 0.3 percent for the first two months of 2017 versus 2016, Ford sales are down 2.5 percent, Chrysler sales are down 10.7 percent and Fiat sales are down 14.3 percent.

In fact, despite reduced pricing and increasingly generous incentives, car sales overall are down in the first two months of 2017 compared to the same time in 2016.

 

So what’s an investor in these auto shares to do, especially if you added GM or FCAU shares in early 2016? The prudent thing would be to take some profits and use the proceeds to invest in companies that are benefitting from multi-year thematic tailwinds such as Applied Materials (AMAT), Universal Display (OLED) and Dycom Industries (DY) that are a part of our Disruptive Technology and Connected Society investing themes.

Currently, GM shares are trading at 5.8x 2017 earnings, which are forecasted to fall to $6.02 per share from $6.12 per share in 2016. Here’s the thing, the shares peaked at 6.2x 2016 earnings and bottomed out at 4.6x 2016 earnings last year, which tells us there is likely more risk than reward to be had at current levels given the economic and consumer backdrop.  Despite soft economic data that shows enthusiasm and optimism for the economy, the harder data, such as rising consumer debt levels paired with a lack of growth in real average weekly hourly earnings in February amid a slowing economy, suggests we are more likely to see GM’s earnings expectations deteriorate further. And yes, winter storm Stella likely did a number of auto sales in March.

Subscribers to Tematica Pro received a short call on GM shares on March 16, 2017

 

 

An Evening with Nassim Taleb

I have the great fortune of traveling extensively for work and was recently lucky enough to be able to spend an evening with Nassim Taleb, sponsored by RBS (Royal Bank of Scotland) in Milan, Italy. His discussion focused on his most recent book, Antifragile, which I highly recommend, but he’s probably most famous for his tome, The Black Swan, which has become a staple of economic discussions. His comments were so intriguing that I thought I’d share a few, with my commentary in italics:

  • Too many decision makers in the world today do not have sufficient skin in the game, which degrades the quality of their decision making. Without skin in the game, decision makers have incentives to hide risks, thus the wisdom of Hammurabi’s the Law of the Builder in which bridge engineers slept under the very bridges they were building: those with the ability to have the most thorough knowledge would take on the greatest risk.
    This is one of the many reasons we prefer fund managers to have a considerable portion of their own wealth invested in the funds they manage.
  • Organic systems that are most likely to survive and thrive need volatility. Removing it slowly kills them. Consider the great lengths that various public entities have gone to in order to reduce volatility in the economy. By the time the financial crisis occurred, almost every bank executive in office had never experienced a financial crisis first-hand, thus their ability to accurately identify emerging risks and manage them was correlated with their lifelong experience in the “Great Moderation”. The Federal Reserve had for years assured them that it would make sure that a crisis was avoided. The consequence of this tempering of previously normal levels of volatility speaks for itself, in our experience with a financial crisis that surpassed any previously experienced.
  • GDP generated by borrowing ignores the future impact of having to repay those funds. In 2006, total US Federal Debt reached $8 trillion. It is now over $16 trillion. The debt incurred in the 230 years from 1776 to 2006, has more than doubled in the past 7 years.