We Need to Talk About Xmas…in August (Please Forgive Me!)

Welcome to August. Let’s talk about Christmas. 

Quite likely to be un-merry. Non-festive. Light on the spending. 

Not trying to be a misanthropic curmudgeon here in the middle of the week. Just being real after reading and thinking about a headline that recently popped up. Actually, this is just one of many similar headlines making the rounds in the last few weeks: 

Poor Americans have just six months before their savings run out, top economist Mark Zandi says. 

I used to call on Zandi all the time in my previous life at The Wall Street Journal. Good guy. Smart. Don’t always agree with him. But I respect his thinking and big-picture analysis. And here’s what he told Fortune: “With each passing month things are getting tighter and tighter, but they have managed through reasonably well.”  

“They” refers to lower-income American households, and by Zandi’s estimates they have about six months’ worth of COVID cash left to spend before the light fades. 

To refresh memories, American consumers, with little more to do than order pizza and binge Netflix, built up quite the war chest during the pandemic.  

By some estimates, Americans squirreled away some $2.7 trillion between early 2020 and the beginning of 2022. Last summer, the savings rate in the U.S. was 12.4%. It was like America’s notoriously spend-happy aspirants had become Scrooge-like penny-pinchers overnight.  

Not anymore. 

With inflation burning down the house, and with incomes rising far less quickly than the escalating cost of goods, American households are now ripping through that war chest at a fevered pace.  

Michael Burry, the hedge-fund investor who correctly called the 2007 housing collapse when everyone else thought he was a moron, recently posted a now-deleted tweet in which he wrote that based on the “the last 12mos’ rate of depletion of savings” the cash reserves American consumers collected could run out “between September and December this year.” 

Which bring us neatly back ‘round to my pre-yuletide gloom. 

The well’s running dry. The cupboard is increasingly bare. The ant that saved for winter is looking a lot more like the grasshopper. 

All of which ultimately gets to my bigger, albeit buried point: The Fed has to tread carefully from here on out. 

Those heady days of raising interest rates aren’t long for this world.  

Every nudge higher is another arrow in the back of a consumer now dying under the slings of inflation pushing toward 10%. Mortgage rates are higher. Car loan rates are higher. Credit-card interest rates are higher, which is possibly the greatest pain point right now. 

Credit card repayments are sucking up more and more family income that would otherwise go to cover the cost of higher food and gas…which perversely is forcing more and more families to put more and more of their expenses on their credit card…which is taking more and more of their income.  

It’s a nasty little circle of financial Armageddon. 

And it’s already happening.  

The Federal Reserve Bank of New York reports that credit-card balances rose to $841 billion in the first three months of 2022, and a senior analyst at CreditCards.com told CNBC last month that the rate of credit-card usage could see balances soon hit record levels. 

This is why I’m feeling Grinch-y toward Xmas. Will consumers have the cash to go big on their spending? Or will this year go down as Christmas lite? 

There are two clear paths forward: 

1. The Fed stops with the rate hikes. 

That could potentially save the consumer. Inflation will remain a burden, but as I’ve noted in a previous column, consumers are very good at shifting their spending to cheaper alternatives or doing without—an option they do not have when it comes to debt repayment. 

2. The Fed refuses to remove its blinkers. 

In that scenario, the Fed keeps on raising rates, focused singularly (and wrongly) on inflation, and misses/ignores the pain ripping through the American household.  

Consumer spending would collapse. Corporate profits would wither. The economy would downshift markedly. Jobs would vanish. Unemployment would rise. Housing prices would dive, taking household wealth with it. 

A mild recession would devolve into a substantial recession.  

I want to believe the Fed isn’t that myopic. 

I am not so sure, however, that my belief system is warranted. 

Merry Christmas, in August.