The Damage is Irreparable…
In 2018, the average monthly mortgage payment in the US was $1,250.
Today? It's skyrocketed to $2,200.
But that's not all…
Personal interest payments have nearly 2x, now standing at a staggering $500 billion.
Consumer Defaults: A Worrying Trend
Consumer defaults are rising at the fastest pace since 2007.
Although current default levels remain below the 2007 peak, if this trend continues, they could reach 2008 levels by early 2025.
This indicates a growing number of people defaulting on their debt.
The root cause?
The Fed's aggressive interest rate hikes over the past couple of years.
Historically, defaults tend to spike after periods of Fed tightening
When the Fed raises rates, it triggers a domino effect:
In a credit-based economy, this almost always leads to recessions.
The Great Debate: Rate Cuts and Recession
An increasing number of economists are calling for the Fed to cut rates due to growing economic weakness.
The 2 big questions now:
The Fed's Dual Mandate Under Pressure
The Fed has 2 main mandates:
While inflation concerns have eased, the employment picture is worrying.
U.S. unemployment rate is rising at the fastest pace since 2020 and 2008.
Jerome Powell, Fed Chair, recently stated:
"It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon. We do not seek or welcome further cooling in labor market conditions."
In other words: Weaker labor market = aggressive rate cuts
Just a month ago, markets saw only a 10% chance of a 1% rate cut by year-end.
Today?
That probability has jumped to 40%.
So, can the Fed avoid a recession?
Historical precedent isn't encouraging:
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Stock Market Optimism vs Economic Reality
The stock market seems to believe that a recession is avoided.
It’s showing returns similar to the 1995-1996 period.
We've helped our clients capitalize on this trend:
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The Lag in Monetary Policy
Keep in mind that a strong stock market doesn't guarantee we'll avoid a recession.
Milton Friedman famously said, "Monetary policy has long and variable lags."
Recent research confirms that there’s a 14-18 month lag between policy changes and its economic impact.
High rates today will likely push consumer defaults higher until well into 2025.
Any rate cuts now won't be felt by the economy until late-2025.
The risks of an economic downturn have kept us bullish on Gold.
We sent out a buy alert for Gold Miners ($GDX) back in Nov 2023.
Even after a 50% move, we remain aggressively long on this position.
We currently have 18 Active Trades across 5 asset classes that can be accessed here.
The Stock Market Disconnect
U.S. stocks are at record high prices, but people's feelings about the economy are very low.
In fact, consumer sentiment is at the lowest level since the 2008 financial crisis.
Today’s stock valuations are disconnected from economic reality.
But, we believe the next market shock will likely bring stock prices back in line with what's actually happening in the economy.
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