As Yogi Berra once said: "It's hard to make predictions especially about the future"
I try to avoid predictions but, from my perspective talking with hundreds of business owners from a wide variety of industries every week about their finances combined with my many years of experience financing small businesses, I can make estimates and extrapolate today's facts-on-the-ground into the future. For example, it doesn't take too much thought to understand that when consumers use more credit card debt than normal, their future spending will definitely contract as a result:
"As consumer balance sheets become more saturated with credit card debt, it will become harder to pay off as rates rise. According to the Federal Reserve Bank of New York, the total US household debt swelled by $351 billion in the third quarter to $16.5 trillion. Credit card balances jumped 15%, the fastest annual rate in two decades."
Where we are exactly in this new cycle is unclear but it's abundantly clear that we're near the beginning rather than the end. It may seem as if we've been in a state of flux now for a long time but financial cycles turn slowly. Having said that, historically speaking this is one of the most rapid and aggressive hiking cycles ever in history. Even though mortgage rates have doubled and credit card rates are almost 30% now, there is still a lot of upside potential for rates to go higher:
"International Monetary Fund chief Kristalina Georgieva said on Wednesday that central banks should keep raising interest rates further to fight inflation until they hit a "neutral" level, though in most cases they have not reached this point."
The new "normal" will be one of higher rates, slower growth and supply chain difficulties. Already there are signs that the fragile just-in-time supply line daisy chain is broken. Car parts and many other critical supplies are getting harder to find and rates on shipping are causing massive pain to the whole industry:
"A new low for the transportation prices subindex was set during the month. A 37.4 reading was 4.8 points lower than October and “the sharpest rate of contraction we have read in the history of the LMI,” the report said. Contraction was more pronounced among downstream respondents, or those in the supply chain that are closer to the end consumer. That group returned a 28.1 reading. Expectations for prices one year from now stood at 42.1 as “the transportation market continues to fall from the dizzying heights that had become the norm during 2021.”
I have never talked about the Covid-19 Injections because that subject is fraught with a lot of political baggage and, other than commenting on the mandates which directly affect small businesses (especially when they tried to get OSHA involved), I steer clear of the subject unless it once again affects small business owners. There is new data out which indicates that, according to Life insurance Companies whose actuaries calculate mortality rates, there has been a massive increase in both mortality and disability in working-age people enrolled in Group Life Policies and it has directly contributed to worker shortages and lessened man-hours of work:
"Since May 2021, the overall U.S. population has experienced an 11% increase in disabilities, while the employed — which is about 98 million out of a total population of about 320 million — experienced 26% increased rate of disability. So, something was introduced into the workforce that caused working age people to die"
Could be nothing, could be everything. At this rate it's hard to tell false perception from reality so I'll stick to verifiable facts if I can.
So, where are we on this particular floor plan now? One of the analysts I follow whose predictions regarding political and financial events have been nothing short of spectacular has this to say:
"The 1% excise tax added on top of a 5% Fed funds rate creates a 6% millstone on any money borrowed to finance future buybacks. This cost is going to be far too high and buybacks will falter. Meaning, stock markets will also stop, and drop. It will likely take two or three months before the tax and the rate hikes create a visible effect on markets. This would put our time frame for contraction around March or April of 2023."
So there you have it; contraction by next spring - keep reading this weekly blog & commentary for updates but, based on everything I'm seeing in the marketplace right now that seems like a very good estimate.