Summary
The economy is heading for a recession, often described as a “slow-motion train wreck”, due to various factors such as rising debt, declining consumer spending, high interest rates, and unsustainable deficits.
Economic Indicators and Consumer Trends
Credit card borrowing declined by its second-largest amount since COVID, posting a negative number for the first time since the pandemic, signaling unusual consumer behavior during economic downturns.
The housing market faces dire alternatives: either mortgage rates drop from 6.7% to 4%, or home prices substantially decrease to loosen the market’s vice grip.
The average consumer has been in recession for 4 years, with retail sales stagnant in real terms, while the upper half of the K-shaped economy sustains average statistics.
Debt and Credit Concerns
Student loan delinquency is forecasted to affect 10 million borrowers facing wage garnishment in the coming months, up from 2 million this summer.
The private credit market resembles corporate buy-now-pay-later, with companies constantly piling debt on debt, subordinating new debt, and pushing senior debt holders down the chain.
Buy now pay later transactions are now reported to credit agencies, negatively impacting consumers’ credit scores and borrowing capacity.
Market and Economic Outlook
The 10-year yield has remained above its 3-4 year moving averages for an unprecedented duration, posing a real existential threat to economic growth.
The credit market is a light switch: on or off, with no dimmer, potentially leading to a sudden flip in risk appetite similar to 2008.
The Federal Reserve’s balance sheet now outweighs the Fed funds rate in determining long rates and will likely be used to monetize massive fiscal stimulus in the economic downturn.
Global Economic Shifts
The dollar may pay the price for fiscal spending sins, potentially leading to a change in monetary regime towards a hard asset-backed or commodity-backed currency.
The BRICS coalition is unlikely to be deterred by a potential 10% tariff on member countries due to their long-term focus and investment.
Financial Market Dynamics
Treasury capital flows data reveals foreign central banks unloaded $110 billion worth of US treasuries in the first six weeks of 2025, accelerating sales at four times the previous rate.
The affluent consumer, accounting for 50% of spending, has been cautious since the start of the year, causing consumer spending to go sideways.
A credit bust triggered by a private equity firm, bank, or other entity could precipitate a broader repricing of credit risk, revealing the economy’s true weakness.