The sharp rise in prices and monthly interest payments have left people on the brink of financial disaster, paving the way for an economic crater, says Stephanie Pomboy.
“The consumer is exhausted and borrowed,” the Macro Mavens founder said on the latest episode of the “Thoughtful Money” podcast.
“They spend every dollar they have, and then some, just to meet basic needs.”
Pomboy noted that economic growth in the first quarter was fueled by spending on housing, health care and insurance.
“It’s not about consumers burning out and taking vacations and buying second homes and a new car or anything like that, quite the opposite,” she said.
The economist pointed out that households were dipping into savings and using credit cards only to cover daily expenses, and cutting back on non-essential purchases.
Inflation peaked at more than 9% in 2022, its highest level in 40 years, and has remained at almost 4% in recent months, well above the 2% target. the Federal Reserve.
The U.S. central bank responded by raising interest rates from near zero to more than 5 percent, which increased the monthly amount people owe on their mortgages, credit cards, auto loans and other debts.
Soaring prices and rising borrowing costs have put pressure on households, forcing them to raid their piggy banks, accumulate additional debt, save less each month and significantly reduce their spending.
Pomboy pointed to the National Restaurant Association’s monthly performance index, which recorded an “incredibly weak” reading in January as consumers dined out less, and which remained depressed in March.
She also pointed out that retail sales have barely budged in two years when adjusted for inflation. Additionally, she pointed to recent warnings from Starbucks and McDonald’s about declining consumer demand.
Pomboy worked for more than a decade at ISI – a trading group acquired by Evercore in 2014 – before launching his own investment research firm in 2002.
She pointed out that consumer spending is the engine of the economy and that corporate profits tend to suffer when they falter.
As a result, Pomboy predicted a “real slowdown in economic activity” with “debt servicing issues among consumers and businesses.”
She cited disappointing data on consumer confidence, wage growth and employment gains in recent months as warning signs.
Pomboy also highlighted the risks to underfunded pensions from a broader downturn and increasing pressure on banks as deposits are withdrawn and defaults increase among consumers and commercial real estate firms.
“We have a lot of painful times ahead of us,” she said. “God forbid there’s a mean reversion in the stock market or credit – it’s going to be ugly.”
Pomboy personally bets on hard assets, with gold being his largest holding, followed by real estate and some cash. She “wouldn’t touch corporate credit with a 10-foot pole”, and advised being “very defensive” on stocks as rising interest rates and slowing economic growth threaten to weigh on these last.
The expert researcher has been sounding the alarm for more than a year about consumers running out of money, echoing other gurus, including Michael Burry, of “The Big Short” fame.
Yet the economy has avoided recession, the stock market has reached record highs instead of collapsing, unemployment remains historically low, and corporate profits have mostly held up, meaning Pomboy’s warnings have been erroneous so far.
businessinsider
