Debt and Deficit Spending

From the Kobeissi letter, a publication on global capital markets: 

“The real issue with deficit spending: Short-term and long-term incentives in the US political and fiscal system are misaligned. Over the near-term, Congress is incentivized to spend MORE and CUT taxes to appeal to constituents for re-election. However, over the long-term, this creates a financial conflict of interest, which we are now dealing with as US debt is up +$13 TRILLION in 5 years. In other words, to reduce deficit spending you must either raise taxes or cut spending, both of which are wildly unpopular for re-election. Over a long enough timeframe, this situation results in bankruptcy 100% of the time, which explains ‘s Elon Musk’s outrage yesterday. The future of America will be determined by this sole issue.”

https://x.com/KobeissiLetter/status/1930244338786742535

NFP #

The Non-Farm Payroll # was released today and did not disappoint with respect to the Bloomberg survey estimate.

If you dig into that 139k number though a bit, there might be reason for some concern related to its composition.

Of the 139k, 78k was Healthcare and 48k was Leisure/Hospitality, or in other words 91% of the number is, arguably, directly tied to demographics. The intuitive argument makes sense, the baby boomer generation is getting older, thus more healthcare required and more retirees spending on leisure. As for the rest of the constituents in this metric, it’s hard to point out any bright points. What happens to the metric as this generation begins to dwindle and trends reverse?


Tightening Credit

Are present interest rate levels finally starting to be felt by the consumer? The “hard” data related to consumer spending continues to suggest the consumer is not wavering, and that assertion is backed up by the commentary from the likes of JPM, V, MA, and COF. The “soft” surveys, such as University of Michigan sentiment ones, point to a more concerned consumer.

We are finally seeing one of the Federal reserve branches, the St Louis Fed, chime in on this topic.

“Summing Up the Trend in U.S. Credit Card Delinquency”

“Our blog post investigated several measures of delinquency and found that, overall, the trend of rising credit card delinquency is widespread and continuing, even though the pace of growth has slowed since the beginning of 2024. The present share of credit card debt in delinquency is reaching levels seen in the 2008 global financial crisis, and the share of people in delinquency has surpassed levels from that time. This is surprising, given that the labor market is significantly stronger than it was during the financial crisis.”

https://www.stlouisfed.org/on-the-economy/2025/may/broad-continuing-rise-delinquent-us-credit-card-debt-revisited?utm_source=twitter&utm_medium=SM&utm_content=stlouisfed&utm_campaign=7df3fe92-a7ca-408d-bfa9-626b3e9f7eb0

Couple of charts from the article on both 30- and 90-day delinquencies.

All the above charts distinctly show that delinquencies are headed in the wrong direction with respect to credit cards, we think a major contributing factor to that is the following chart.

More Americans are carrying higher mortgage rates: 20% of mortgages in the US now have rates greater than 6%, the highest share in 11 years. This percentage has increased FIVEFOLD over the last 3 years. At the same time, the share of mortgages with rates less than 3% has declined 10 percentage points, to 24%, the lowest in 4 years. This comes as more homeowners let go of low-rate pandemic-era mortgages.

Increased monthly mortgage payments, resuming student loan payments, and higher credit card interest rates are all piling on the consumer at the same time, and that is leading to higher usage of BNPL, buy now pay later services.

https://x.com/rcwhalen/status/1929895359775449550

“Nearly a quarter of consumers using buy now, pay later loans finance groceries, up from 14 percent a year ago, according to a recent LendingTree survey. And it’s not just groceries; more Americans are using these loans to pay for recurring monthly bills, such as electricity, heat, internet and streaming services like Hulu.”     https://t.co/eMd5H9XI9d 

Conclusion, its hard to think the consumer is as well off as the Credit card companies might have you think.

ISM New Orders

On Wednesday June 4th, the ISM Service numbers was released. Mixed bag might be a fair description, Services dipped ever so slightly below expansion level by coming in at 49.9, Prices paid rose even further to 68.7 vs the 65.1 estimate, and Employment pushed back over 50 to 50.7 despite the 49.0 estimate. The metric we would like to focus on is New Orders, this metric came in at 46.4, well below the 51.6 estimate. We wanted to take a deeper look at this number from an historical perspective. What we noticed is there is either a causational or coincidental relationship between this metric and both CPI down drafts as well as GDP slowdowns when this metric goes south of 45.

ADP & Unemployment Claims

Also released Wednesday was the ADP Employment Change as well as the Initial Jobless Claims 4-week moving average. No commentary needed; we think the trends in both speak for themselves.

Final Random Thoughts

Does something have to give?

Should we be concerned about the Bureau of labor Statistics credibility going forward?

https://x.com/NickTimiraos/status/1930351058099839449


Have a great weekend!

Best,

Meraki trading team