The Forked Economy

Well, here we are.

A major market selloff—thanks to investors worried about a US recession…

As I’ve been saying all along—the US economy is in trouble. Now, others are finally seeing the obvious.

The latest numbers are impossible to ignore: Unemployment has ticked up, jobs numbers missed expectations, and both earnings and hours worked dropped.

And so—investors got spooked…

And then the stock market dropped, like a stone.

Now it’s not about a soft landing for the economy—but the potential for a crash landing…

I’ll have more to say about the market selloff later this week… And I’ll have an opportunity to bring you…

But today I want to talk about the Fed’s role in all this…

And I really, really don’t like saying this, but… things are playing out exactly as I feared.

It’s exactly as I’ve been telling Field Notes readers for months.

I’ve been saying for too many months to remember that the Federal Reserve, as is its MO, was going to be late to the rate-cutting party.

And that has now proven to be 100% accurate.

At its late-summer interest-rate meeting last week, the Fed left rates unchanged again, even as the jobs market is falling apart.

And now, investors have finally realized the Fed’s missteps.

It should have cut rates long ago to juice the economy—instead of continuing its misguided, short-sighted focus on bludgeoning inflation.

Last week the stodgy ol’ Bank of England, the Brits’ central bank, cut interest rates by 0.25%.

The BOE is now the fifth major central bank in the world to take local interest rates down a peg. Switzerland, Canada, the Eurozone, and Sweden are the other four in the quintet of rate cutters.

The Fed came into 2024 all but promising three rates cuts for the year. Instead, the Fed has hemmed and hawed and twiddled its thumbs and found all kinds of reasons to delay what clearly needs to be done.

As I’ve said, the Fed is behind the eight ball here… Rate cuts have to come…

The markets have just woken up to the fact that the US economy ain’t “all that and a bag of chips”… But, as I’ve continually pointed out in these dispatches, Main Street America has known that all along…

The US economy has been struggling beneath the surface and is increasingly—and heavily—reliant on debt.

That is particularly troublesome for the middle-class consumer.

They’re so far in hock that it’s no longer about keeping their head above water. It’s about learning to grow gills.

No one in the financial media has really been talking about that. Most have been talking about how strong the Biden economy is because consumer spending continued to hold up…

But as I’ve pointed out, the data show that the economy is unnaturally bifurcated and that those who are keeping up appearances are the upper-rung middle class who have money to spend and the income to pay off their credit card bills.

The lower-rung middle class goes to bed every night hoping their credit cards still work in the morning, otherwise they’ll have no way to fill up the car on their way to work.

I’m not just spit-balling here.

News items last week speak to the financial straits bedeviling so many Americans these days:

• Americans are falling behind on their car payments, and Equifax data show that auto-loan defaults are up 11% in the first half of the year, compared with the same period in 2019, before COVID skewed the data.

• McDonald’s sales fell 0.7% in Q2, precipitated by inflation and fewer customers. That’s Mickey D’s first sour quarter in the post-COVID era.

• Starbucks, Wendy’s, Burger King, and others also reported weaker sales.

A research analyst at Placer.ai, what’s known as a “foot traffic analytics firm,” told CNN that “Consumers are willing to spend, it’s just that they’re not willing to spend on the same old thing [and they are] definitely being more selective with their food purchases.”

He noted that, sure, Ronald McDonald is having a go of it lately, but sales at Texas Roadhouse are up more than 9%, while Chipotle sales are up 11%.

That’s flawed analysis, like a doctor telling you, “Sure I removed your kidney instead of resetting a broken toe, but a medical procedure is a medical procedure! It’s all the same.”

Actually, the analyst’s comment underscores my point about a bifurcated middle class.

McDonald’s and Texas Roadhouse are not remotely equivalent dining options.

Mickey D’s declining sales say that financially strapped Americans are cutting back on eating out. Rising sales at Texas Roadhouse say the well-off middle class has the disposable income to spend on dining out (same with Chipotle, which is about 2x pricier than the home of Grimace and the Hamburgler).

The consumer most assuredly is not “trading up” for a better dining option.

It’s two different consumers reacting two different ways, in two different cost settings, to their economic situation.

And if the low end is struggling so mightily that they’re skipping out on even the value meals at McDonald’s… well, that just tells you the Federal Reserve has undermined much of the middle class with over-aggressive rate hikes.

It’s now clear as day to the markets that the Fed has waited too long to cut rates…

If the Fed doesn’t follow the UK, Sweden, Switzerland, et al. soon, then the recession heading to America is going to be a lot darker than it needs to be.

On the other hand, if the Fed does act and it does cut interest rates multiple times this year—then you’ll want to be prepared.

Owning interest-rate sensitive stocks like those in the Global Intelligence portfolio—REITs, banks, gold miners, some others—is going to pay off nicely.

And there’s another asset, too, that’s going to benefit big-time when those rate cuts arrive… we’re in a perfect “buying moment” for this asset right now…

Stay tuned—I’ll update you later this week.