Power Up Wealth podcast – Living in the Vibecession – Episode 72 transcript:
Sharla Jessop 0:00
Economic reports tell us the economy is doing well. So why do so many of us feel that we are living in a separate world? I’m Sharla Jessop, President of Smedley Financial. Today, James Derrick will shed some light on the differences between economic reports and the household finances of the average American.
Welcome to the SFS Power Up Wealth podcast where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
James Derrick, Chief Investment Strategist for Smedley Financial, holds an MBA and a Chartered Financial Analyst designation. James, thanks for joining me today.
James Derrick 0:58
Happy to be here.
Sharla Jessop 0:59
In talking with family and friends and clients, I can see that many of us are struggling to make our money stretch. Then we hear the reports about the economy and how well it’s doing. What’s up with that?
James Derrick 1:10
Well, it’s been dubbed the vibecession, which was a term coined by Kyla Scanlon. She’s like a Tiktok phenomenon who goes on and explains economics in 30 or 60 seconds, and it’s basically the disconnect between the economy and people’s perception. People feel terrible. And no matter how hard the politicians try to convince us that things are good, we don’t feel good.
Sharla Jessop 1:33
Understandably, it’s hard to feel good when you feel like you’re you know, when you’re making decisions as to what you’re going to cut out of your budget on a monthly basis.
James Derrick 1:41
Yeah. So it’s a really interesting time, because jobs are still plentiful. The job market’s not as strong as it was a year ago. It’s definitely not as strong as it was three years ago. The unemployment rate is 4% that’s pretty good. It’s come up from 3.4 so the momentum is not good. There is some slowing going on, but jobs are still good. I think the real problem is not the economy, but it is inflation still.
Sharla Jessop 2:10
And inflation hits every individual pocketbook, maybe differently than we would see it as reported in CPI.
James Derrick 2:18
Yeah exactly. I mean, in a recession, a certain number of people lose their jobs, a percentage, you know. The unemployment could go from 4% to 6% and so there’s 2% of people that lost their jobs, and that’s really painful to them. Inflation is different because it hits everybody, and the personal inflation rate that listeners are dealing with could be wildly different from the official numbers. You could have medical bills, and so the change in medical expenses would change your inflation rate more than other items. It could be that you have a child turn 16, and they need a car to get to and from places, well, suddenly your expenses just went up, and it’s certainly not captured in inflation. And so people are dealing with all kinds of issues. And on top of that, the very things that have been going up the most in inflation recently are the necessities. Homes are still expensive. Insurance is the number one driver of inflation right now. Auto Insurance specifically, is 20% I think we’ve talked about it many times. Well, if you have a car, you’re required by law to have auto insurance, so it’s a necessity, and if it goes up 20% well, your insurance costs just went up 20% too. Oh, and by the way, your quality of life has not changed at all. It’s not like you have better insurance, it’s the same insurance, it just costs 20% more. So now you have less money, the same quality of life. But getting back to the economy. The economy is actually growing because that 20% increase in insurance shows up as higher GDP. And so perhaps this is a limitation or a weakness in the way that we measure things, but it’s a fantastic example of how the economy is growing, but it doesn’t feel good.
Sharla Jessop 4:06
We can see how that’s happening and the change. You look at some of the people who are dealing with inflation, individuals in their homes, and those who were making it before, and some of these expenses have gone up, and when inflation comes down. That doesn’t mean that the prices drop necessarily. It just means they stop going up. So people are still caught in that level of higher prices for so many things, and people who have very limited discretionary money available to spend are being hit very hard. And I think we’re starting to see credit cards change. Does that have an impact?
James Derrick 4:38
Oh, for sure. I mean, people start getting stretched little by little. That’s why we call inflation the silent killer, because it moves up so gradually, sometimes you don’t even notice, and then suddenly you may look at your bank account and be like, Oh my gosh. Like, I don’t feel like I’m spending more than I used to. I’m just buying the same groceries I always did. We’re not eating out more than we used to eat out, but our dollars are just not stretching as much and so very subtly the expenses increase. And for all Americans, credit card balances are up to record highs. Of course, the interest rates are also record highs, and the number of individuals in default or delinquency are moving up significantly. I think it’s doubled in the last year. So it’s not that everyone is in trouble. It’s just that there is a percentage of the population that’s struggling greatly, but I think everybody is feeling it.
Sharla Jessop 5:31
Because of that would you say then that consumer spending has maybe stopped? Where we’re spending on necessities, but what about the extras? Has that?
James Derrick 5:40
So what we see in consumer spending, this is a great question, because it’s, you know, when we talk about employment, it’s kind of a lagging thing, and the employment numbers are slow to change, but consumer spending leads the economy, and consumer spending is flatlined. By some measurements, it’s down, by others it’s just at zero. So if we’re spending 20% more on insurance, for example, and then we cut back that same dollar amount somewhere else, then consumer spending would be zero. And that’s exactly what we’re seeing at this point in time. It’s actually something to really watch for those who are are curious and want to stay in touch with what’s going on. Consumer spending is a really smart number to watch right now.
Sharla Jessop 6:24
As that slows, that can be very recessionary.
James Derrick 6:27
Yeah, it doesn’t take much. I mean, it’s not like a massive number. If, if there were a 2% decrease in spending by consumers, that would be significant. It might not sound like much, but that is significant. And because consumers represent the current numbers, 67% of the economy.
Sharla Jessop 6:47
That’s huge.
James Derrick 6:48
Yeah. So even a small pullback is enough to make a big difference. And so, I mean, I think it’s something to watch pretty closely. It really has plateaued and and I’ll be really curious over the coming months to see if it rolls over into the negatives or if it bounces right back into the green.
Sharla Jessop 7:06
So knowing that, what kind of tools does the Fed have and the government to help manage or monitor what’s happening in that area.
James Derrick 7:14
Yeah, so the Fed has basically one tool that they use, and it’s very blunt, and we all know they raise and lower short term interest rates. At this point in time, they’re not worried about consumer spending. They’re not worried about the delinquencies on the credit cards. They are focused on inflation. They’ve promised us 2% inflation, and it’s been about four years, and they still haven’t delivered it. I guess it’s been three years since it it moved above their targets, so we’re still waiting on that. And I think what’s happening is, is that they’ve been more afraid of a of a recession than they have been of inflation. So they’ve been fighting inflation all along, but worried that they might cause a recession, and so they just paused before they’ve actually beaten inflation down all the way. So inflation’s currently three and a half percent. That’s not terrible, but it’s not 2% which is their target, and it’s hard to say if they’re going to get there this year or not.
Sharla Jessop 8:09
You know, it was just a year ago, maybe towards the end of last year, when they had announced rate cuts for this year, three rate cuts. And of course, immediately the market built in more than that, a very positive outlook, but here we are in the end of June, when this is being recorded, and no rate cuts.
James Derrick 8:30
Yeah, we, according to projections, at the end of December last year, we should have had three or four rate cuts by now, because investors had moved interest rates in a way that priced in seven rate cuts, and the Fed has done zero, and they’ll, I think that they probably will lower rates, but, but maybe just one or two times, and it’s no guarantee. It really would take a slowdown of inflation and or a slowdown in the economy, and we’re just not there yet. And I think waiting as they’re doing is the right thing to do. I mean, they’ve been smart about it. The one of the things that’s made it more complicated is the federal government, because the federal government has been spending a lot of money. So here we have the Fed, who’s incredibly powerful. They’re raising interest rates, trying to slow the economy, slow demand, slow borrowing, and bring inflation down. But then we have the federal government spending, spending, spending, spending, spending. I mean, they’ve been spending like we’re in a recession since 2018 and it just continues to get bigger and bigger and bigger. Just recently, they announced that the deficit for the year wasn’t going to be one and a half trillion dollars. It was going to be closer to $2 trillion and it’s just like what? Like that is so much even for the government, to put that in perspective, even for the government that is a lot of money, like, a lot of money. While the Fed is trying to fight inflation, this other arm of the federal government is not fighting inflation at all. I mean, I would love to see them balance the budget when inflation goes to 4 or 5%. They see that as the Fed’s job, and the Fed can only do so much as powerful as they are. So it’s pretty fascinating to watch it all play out. I imagine that by next year, there will be a reduction in spending by the federal government. Probably not significant, but something. But we’ll see. I have no way of knowing for sure.
Sharla Jessop 10:22
We’ve been waiting for that for years.
James Derrick 10:24
Yeah, I mean.
Sharla Jessop 10:24
It’s like such a simple fix when you’re sitting on the outside looking in.
James Derrick 10:28
Yes, well, we’ve got, I mean, we’ve got forgiveness of student loans, we’ve got higher interest payments on the debt, and we’re funding wars all over the world. So there’s a lot of extra expenses that were not in the budget. Those are three not in the budget. So, you know, it’s, it’s pretty out of control, and I think at some point it’s going to be an emergency. But people have been talking about that for 50 years. Who knows?
Sharla Jessop 10:53
Definitely been talking about it my entire career.
James Derrick 10:55
Yeah, for sure. A couple other things we get to talk about here, I think it’s worth touching on the this idea that higher prices will be their own remedy, where the Fed and the federal government are canceling each other out. We’ve got something else going on that I think is going to be even more powerful than both of those, and that gets back to the consumer. So we alluded to the fact that if I’m paying 20% more on insurance, I may eat out less. I may switch products at the grocery store. Warren Buffett is famous for looking at what’s called the underwear index, and he’s basically saying that a when times are tough, men will buy less underwear because nobody sees it anyway. And so if you could just keep an eye on that, you would know how the economy is really doing. And so the point is is like people are looking for ways to cut back. It’s already happening. Retailers have seen consumers changing their behavior, and now they’re reacting. So I’ve read stories about Walmart, Target, Amazon all cutting prices on 1000s and 1000s of items, which is remarkable. It’s amazing when if Amazon can come out and say, hey, we’re cutting prices on 6000 items. I mean, that’s amazing, and they can still make a profit, apparently, by doing that, which tells you things were marked up more than you might think. So Walmart’s doing the same thing, and Target’s doing the same thing. McDonald’s announced about a month ago that consumers were hurting and that their food was no longer for anyone except the middle class and up. And I think within a week, the CEO may have regretted saying that, and they were like, we’ve got to do something. And so just in the last few days, from the time we’re recording this, so this is late June, McDonald’s has come out with a $5 menu. It sounds so obvious like, well, why didn’t they always have one? But they but the prices have just gone up, up, up. And now that they see consumers cutting back, they are reacting. And so this is how high prices become their own remedy. Prices go up, consumers cut, retailers notice it. They cut the prices, and inflation comes down. So hopefully we’ll see that take place, and hopefully we’ll feel it in our own pocketbooks.
Sharla Jessop 13:10
Yeah even just seeing it with a few of the retailers, would be nice to see that spread to many other retailers.
James Derrick 13:15
Oh yeah, So I think it’s the beginning of what could be a really good trend, something we want to see more of, for sure, and then hopefully we can bring this whole vibecession to an end. If the economy is good, we’ll feel good, you know. And if it, if it’s not so good, well maybe we’ll still feel not so good. But it would be nice to just bring things into harmony again. I think the world would feel a little bit more logical. So that’s what we’re aiming for. I think it’s just a matter of time.
Sharla Jessop 13:42
James, thank you so much for that insight.
James Derrick 13:44
Yeah. Thank you, Sharla.
Shane Thomas 13:50
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Osaic Wealth, Inc., member FINRA/SIPC. Investment advisory services offered through Smedley Financial Services, Inc.® Osaic Wealth is separately owned, and other entities and/or marketing names, products, or services referenced here are independent of Osaic Wealth.
Living in the Vibecession
