Trouble With a Capital “T”

Friends, let me tell you: We got trouble, right here in River City. Trouble with a capital “T,” and that rhymes with “P,” and that stands for “poor.” 

With apologies to The Music Man, that re-approximation of the lyrics came to mind when I read a news headline this week:  

 AT&T says more people are paying their phone bills late. It’s another sign that rising wages and pandemic savings are no match for inflation. 

Turns out, Ma’ Bell’s customer base doesn’t appear to have enough cash to pay their bills on time, what with the rising cost of food and gas and rent and whatnot. AT&T shared this news with Wall Street in a conference call to update the investment community on the company’s recent quarterly earnings. 

Per John Stankey, AT&T’s top dog: “We’re seeing an increase in bad debt to slightly higher than pre-pandemic levels, as well as extended cash collection cycles.” 

Slightly higher than pre-pandemic levels…which, I will remind you, was quite the crummy period. 

It’s certainly not a good look for the American consumer, and doesn’t speak well of where we’re likely headed. 

Days later, Walmart told investors to expect weaker earnings this year from the Godzilla of retailing. The culprit, of course, was inflation and the cost pressures that puts on Walmart’s spending. But there was also this: Walmart said it needs to cut prices to pare its inventories.  

Which raises the fundamental question: Why is inventory piling up? 

Because consumers are not spending. 

Which is because consumers don’t have money to spend. 

Which is because consumers are having to spend more of their thin paychecks on debt-servicing costs. 

Which is because the Federal Reserve has gone street-rat crazy in rushing interest rates up at a ridiculous pace. 

Which is because the Fed’s band of inflation-fearing musketeers did such a bang-up job of managing the economy pre- and post-pandemic. 

And now here we are.  

Consumers can’t keep up with the payments on their AT&T family plan, and they can’t shop as they normally do at Walmart. So, stocks are flagging once again and consumer confidence is sliding into the doldrums. 

This seems to put the Fed squarely in a box with Pandora…and there are only two exits. 

Option A: Keep going with the street-rat crazy skit of raising interest rates and hope inflation cools.  

The problem with this strategy is that it will absolutely destroy the American household, which is already a troubled cohort. Depending on whose statistic is closest to right, somewhere between 64% and 70% of Americans live paycheck-to-paycheck. By the way, that includes families earning well into the six figures. 

As Walmart pointed out, this path is not good for business because consumers will have increasingly less money to spend on gadgets and widgets…which just serves to push the economy over a cliff, given that about 70% of America’s economy is dependent on consumer spending.  

Option B: Stop with this whole “do what it takes to tackle inflation” nonsense and watch inflation burn down the house. 

I mean, neither option is ideal. But this is what you’re left with when you willy-nilly print money over many decades and run up the national debt for political (i.e. idiotic) purposes. And when you’ve built an aspirational consumer class that has relied on debt to build their outwardly rich, financially poor lifestyle. 

Turns out that debts and deficits really do matter. Hmm—who’d a’thunk it? 

My point here near the end is that the Fed has now raised rates from basically nothing to more than 2%. And it has imposed that pain in the span of just five months. That’s like going to the doctor to have a hangnail removed on a Tuesday, only to have both feet amputated on Saturday. 

Consumers and the economy cannot process this much change this quickly…which is exactly the story AT&T and Walmart are telling us.  

More companies will be telling us the same story soon. 

When it raised interest rates by 0.75 percentage points on Wednesday, the Fed promised more rate hikes to come. 

I have a different view… 

Now, I sound like a record skipping, but my bet is that the Fed will have to stop with this street-rat crazy act. It’s going to have to curtail the rate hikes, otherwise it’s going to kill the consumer. 

Yes, inflation is going to kill the consumer too. But consumers can better adjust to inflation by making different purchasing choices…which in turn will force businesses to adjust their manufacturing to meet consumers’ new spending priorities…which would actually have a dampening effect on inflation naturally. 

Consumers cannot adjust as easily to ever-rising interest rates because the rates are what the rates are. Households don’t have an alternative choice like they do with daily spending. 

Ultimately, we’re in a terrible spot as an economy and a consumption-based society. We’ve got trouble with a capital “T” because we’ve got a lot of increasingly capital “P” poor Americans as a result of the Fed’s interest-rate euphoria. 

We will face a crisis one way or another. 

So ultimately, the Fed will have to choose the path that doesn’t kill the consumer, the markets, and the economy.