Moody's Talks - Inside Economics - Consumers Hang Tough and Confidence Off Bottom

Episode Date: August 26, 2022

Mark and Cris welcome back Wayne Best, Chief Economist of Visa, to give the latest American Consumer outlook, including the topics of excess savings, spending behavior and categories, credit trends, and interest rates. They also discuss President Biden's student loan proposal.Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis @MiddleWayEcon for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I'm joined today by one of my co-host, Chris, Chris, Chris Duretis. Good to see you, Chris. Hi, Mark, you're stuck with me. Yeah, a good person to be stuck with. I saw you just took a shot of, what, espresso right before the... A little coffee right beforehand, you know, to get going here.

Yeah, you know. Got to keep up with you. Yeah, well, and I had my 20 ounces of Wawa coffee this morning, so I'm raring to go. There you go. There you go. And there's, there's, there's, uh, Wayne best. Wayne, Wayne is the chief economist of Visa. Glad to have you back, uh, on inside economics. Thank you for joining.

Yeah, great to be back, uh, and look forward to, uh, chatting today. Yeah, you were back by popular demand, very popular guest. Uh, I can't remember. Was that, how long ago was that? Was, I don't remember either. It's been a while. Once or, yeah, at least a few months. Yeah. Hard to believe we've been doing this podcast for more than a year now. So, uh, time is flying. But we got Wayne back because we want to talk about the health of the American consumer. Obviously, the consumer is key to the economic outlook, the firewall, as we've been saying, between continued growth and recession. So we want to see how strong that firewall is from your prison, Wayne.

Before we do that, though, today, this is Friday, August 26th, J-PAL, Chair of the Fed, gave a talk, a very brief talk at Jackson, whole, the confab of central bankers every year. And I thought maybe we could start with that. Wayne, you said you listened into the speech. What was your reaction to what he had to say? Well, I think it was, first time, as you said, surprisingly, it was very short. I mean, usually his speeches at Jackson Hole are quite robust. But it was pretty much more the same, You know, obviously continuing to fight inflation. We're not seeing a lot of results from that just yet. Very clear that I think he's looking for pretty healthy moves in the next meeting.

So a 75 basis point increase is probably much, much more likely. But also the words use that, you know, this is going to create pain for households and businesses. For us to really get inflation under control, you know, we're going to have to rise rate. and to, you know, well beyond the neutral rate of two and a quarter to two and a half, which he basically talked about as being that neutral rate in this call. And then also to a much higher level is to actually break this back of inflation. So I think the words of paying and to households and businesses are certainly being revealed in the stock market today with the stock market down pretty substantially.

So not a whole lot of new news. I think people were hoping to see some shining light that, you know, inflation's magically dropping. And although it is, you know, probably of pete, especially with gas prices having come down, it still remains very elevated. So I think that's going to be quite a challenge for the Fed yet to go. Yeah. The one takeaway I had, and maybe this is why the market, the equity market is down, is his message that rates are going to going to go up and they're not coming back down for a while.

I think markets, if you look at futures for Fed funds before today, markets were anticipating the Fed would raise rates going into next year and then start cutting them by the end of next year. And I think he dispelled that view pretty aggressively today. He said, no, look, if history is in a guide, we're going to be at these higher rates for an extended period until inflation gets back down. And I think that may be why the equity market is selling off a bit here. One thing I'm a little confused by, though, is the bond market hasn't sold off.

The 10-year treasury yield is about where it was yesterday. So I'm not sure what to make of all of that. But I'm sure investors are taking his words of caution into those declining equity prices. Chris, did you have anything to add on that on what J-PAL had to say? No, it sounds like I learned a lesson in terms of short, keeping remarks short, don't say too much from what Wayne mentioned. I was taking a look at what the market is implying for rate height next month. It's now 58% chance of 75 basis points. So it was up, it was like 50% yesterday, I think so.

Yeah. And these things move around, though, a lot. day to day. So nothing, you know, you don't want to read too much into that, but at least the market is suggesting that, you know, they're going to be aggressive. Yeah, the other thing he said was, of course, data, I think he used the word data dependent again, or the words data dependent. So we've got another inflation number coming out, CPI between now and the next meeting in September. We've got another employment report, so we'll see how those things go. And speaking of the data, we got a lot of data this week. We don't have Ryan here.

here, he's the data maven to kind of guide us through. So we're a little bit rudderless, but I thought I, Chris, turn to you. Did you see any, like we got the GDP revisions to the second quarter. We got gross domestic income in that release. That's always lagged a month after GDP. We got spending data on spending and inflation from the consumer expenditure deflator saving rate. So got a whole raft of data.

What do you make of what the data? Oh, and the University of Michigan survey came out, too, going back to the consumer, that survey of consumer sentiment. So in its totality, what do you think the data said about what's going on in the economy this week? So by and large, I think it's consistent with what the Fed wants or the movement towards a slowing of the economy, but hopefully not a breaking of it. The GDP revisions kind of as expected. The second quarter didn't shrink quite as much as what the first print suggested.

So still negative, right? So still that two quarters of consecutive negative growth, but not quite as negative by this print. Perhaps more interesting was the GDI, gross domestic income, the other way we can measure output. And that was positive and I won't say strong, but certainly much higher than the negative. than the negative GDP print. So a little bit of a discrepancy still between that GDP, GDI, those two measures does suggest that we may very well see some additional revisions to GDP, the first half of 22's GDP going forward. So I think that's consistent, what we've said in the past. We don't want to read too much into those negative prints. Clearly, the economy is slowing,

but not in recession yet or wasn't at least in recession as of the first half of the year. We may very well get into recession soon, but the evidence is not supportive of that conclusion quite yet. What else? The income, personal incomes, were a bit weaker, right, which is, again, in terms of their growth rate, which again is consistent with the Fed's objective of slowing the economy. Yeah, what else? Just to circle back for a second on GDI, gross domestic income, just to make it clear to the listener, conceptually GDI is the same as GDP. It's just the value of all the things that we produce.

It's calculated based on different source data on personal incomes and corporate profits and on the income side of the accounts as economists say. And conceptually, they should add up to the same thing, but because of the different source data, they don't. Often they, they're with subsequent revisions today as the government gets more information, they, those, those differences narrow. But, but for right now, they're saying some, they're saying similar, but different things, similar in that they're saying growth is slowing, but the GDI says growth is positive. The GDP says growth is negative. So somebody, somebody's wrong.

Right. You know, the question is which. My sense, and I think you were intimating this, is that the GDP, will be revised higher to be more consistent with the GDI. So, you know, probably not, maybe still end after the revision's negative, but not nearly so, or may even turn out to be positive, who knows. But Wayne, let me turn it back to you. I know you were a careful purveyor. That's the right word, right? Pervair. Yeah, that's a good word, actually. Pervair. Pervair of cheese or something, wasn't it? Well, you're, I know you're a pervair of fine food

in dining. A lot of great stories about that. Actually, the two of us had a wonderful meal. I don't know if you remember, but I definitely remember in Las Vegas. It was like, oh my God, you knew exactly where to go and what to get. It was like, I even told you what to order. And you ordered. Yeah, exactly. No, no, you're not ordering that. I think I changed your order while we were there. You did indeed. Thank God. Yeah, yeah, you did. You don't want that. You don't want that. So wait. Here's another word, and I hope I pronounce it correctly. You're, you're, an Epicurean. Is that? I would say that. Yeah, a foodie. That's a better, that's a popular way of saying it. You're definitely a foodie. Yep. Yeah. You're well known for cooking meals for your banking clients,

as I recall. You've never cooked me a meal, Wayne. No. Well, we haven't, yeah, we haven't done that yet, but maybe it will put that on the list. Yeah. I'll bring you your favorite cilantro or something. There you know. Well, anyway, Back to the data, what is your characterization of the data we got this week? Similar to Chris or something different? Or how do you? Well, yeah, I think that I think the big thing is that, you know, there's two quarters of negative GDP growth really has a lot of people hung up.

You know, that's what you learned in school, net two negative quarters, recession, etc. But, you know, you have to look at what a recession really is. it's a significant decline in economic activity. It's got to be spread across the economy. And it has to meet kind of the three D's, as they call it, need to be met. Depth, diffusion, and duration. The issues that we had in the first part of this year, in terms of being spread across the economy, well, frankly, was spread pretty much around inventories and in trade. The consumer continued to spend throughout that period of time. And when the consumer's two-thirds of the economy,

it's pretty hard to call a recession when they're spending at the levels that they're spending. We all know that the spending that they did over the summer was pretty momentous. Everybody was out traveling. And I'm not saying necessarily international travel, but people traveled in their cars and everything else, even despite the high gas prices.

Travel and vacation was super pent up, and people did it. And so we saw, lot of that type of activity leading up to the summer and then all the way through the summer. And if people are still in the air or traveling still, they're still fighting some of the challenges and battles, especially, you know, down in the Florida region with some of the challenges of so many planes going into that region at the same time. So we saw a lot of different challenges that, but boy, people got out. And for many cases, obviously, many cases, people hadn't had a in two years. So it's pretty hard to call a recession when the consumer is so darn strong.

And I think that that's really what I continue to follow one look at in terms of what the potential indicators. Now, Chris mentioned also the University of Michigan up a little bit, certainly positive. And I'm not surprised given the fact that, you know, gasoline has come down so much. You know, oils down from just June to now. Oil prices are down 30 percent. Gasoline, obviously a little bit more of the sensitive one to the consumer itself down over 20%. So I was hoping to play the magic statistic game because I had a good one for that. But we're playing that. Don't worry. Okay, we'll keep it.

Well, I've already given it away. But Ryan is the one that usually outguesses all of these. So I don't think Chris would get it. Oh, gosh. Oh, wow. Not a streak. Oh, man, that's a, that's a zinger. Yeah, that stinks.

But true, but true. No, no, no, just joking. Chris can hang on the data for sure, yeah. I was going to ask you, oh, I did notice the saving rate that also came out with this raft of data, 5%. So that's a tad below the 7% that prevailed prior to the pandemic. So that would suggest that consumers are still drawing down ever so slightly, but drawing down all that excess saving, extra saving they did during the pandemic. Did you notice that?

Yeah, I think that it's not surprising. Again, a lot of it probably used for some of that vacation travel. And, of course, in many cases, depending on the income level of the consumer, really used to offset some of these higher gas prices. While everyone's excited, you know, even Ryan said something about hearing about lower gas prices. And I think his in-laws were all excited where he's vacationing. But it has become a big news story. You're seeing it a lot. Oh, I'm really feeling great because gas is down to, you know, $4 a gallon or whatever

when it was six. And here in California, seven. So it has come down substantially, but still elevated, but down a lot less. And so I think that helps in terms of the consumer. I mean, that's just in your face all of the time, right? You go to the gas pump once a week. It's not like trying to remember what beef prices. were two months ago when you bought stakes and now that oil and that gasoline price really is just front and center.

And so I think it's providing some relief and probably some of the reason for optimism that we're seeing. And hopefully that plays out in some of the other optimism surveys. Yeah. I mean, certainly, I mean, still sentiment is still very, very low. But I think a month ago or the month before, when gas prices hit their peak nationwide in June, I think it was $5 a game. gallon on the nose, that's when sentiment hit an all-time low, I believe it, as measured by the University of Michigan. So we still got a long way to come back from that low point, but we're making our way back. I do want to ask you from your perch as Chief Economist of Visa because I know you

look at lots of data based on transactions over the visa system. What are you seeing currently? What's the state of the consumer? Are they still outspending? Any sign of pullback? Any kind of weakness out there that you're observing? So what we have developed, and just to refresh the listeners on what we have developed, we've developed something called the Spending Momentum Index, where we leverage our Visa data, but we go through a series of manipulations to remove all of the specific things that are particular to the payments business, new portfolio flips or new areas to use your cards, migration from cash and check, et cetera. So it's called the Spending Momentum Index, and just as a reference, again, if a consumer spends more than they did for this month versus the same month last year,

then we score them 200. If they spent the same, we score them 100. And if we spent less, we score them at zero. So it creates a classic diffusion index. So one of the key elements of this spending momentum index is that we're able to look at the number of people that are actually participating in spending. And from work that we've done with Stanford and other areas, we find that 80% of the growth in retail sales generally is related to more people showing up as opposed to people necessarily spending more. And that's exactly what the spending momentum index is intended to do.

So the latest reading for August, I should say, for July specifically, is it is coming down. It's below 100. It's down four and a half points. It's at 95 specifically on a seasonally adjusted basis. And it's now recorded on a month, month, month of a month decline in really five of the last seven months in 2022. So the trend is clear. Consumers are spending less. But if you look at the headline retail sales number, we see that, of course, growing.

And it is continued quite strong. So what the data really shows is that we're just seeing less people participating. And very likely it's the affluent because we are indeed seeing those retail sales. So those are the ones that are actually in there. So, you know, no surprise that the lower and middle income households continue to be stressed by high food prices and by high energy prices, et cetera. So they may not be participating as much as they did previously. And the only way to make this up is to have the affluent spending.

And we've talked in the past about the strength of the affluent and levels of savings and pent up demand in terms of savings where, in many cases, they hadn't spent much in the last two years, partly in travel because they weren't able to travel. So I think those are tall-tail indicators that, you know, clearly seeing a little bit of a pullback, but it's still showing up in terms of strong retail sales. And I think that's a trend will probably continue into the fall, but it's something we're going to have to keep a close eye on. Okay. So just to summarize, based on the data you're constructing, the momentum index, and based on the overall spending data that we get from the census, your conclusion is that consumers are still spending, there's still positive growth in spending, which is key to obviously keeping the economy together, but that the rate of growth is definitely slowing, and there's some weakness, and that weakness is likely among lower middle-income households, that the folks at the top, part of the distribution of income, they're still doing their thing. They've got the cash and no problem, but folks at the bottom, they're starting

to struggle a bit. That's kind of sort of what you're concluding. Good summary. Yes. Absolutely. Interesting. I know the index, you also look at it across regions. You know, you've got very detailed regional data. Are you observing any differences in that softening regionally or is it pretty much coast to coast? It's coast to coast. I mean, And on a regional basis, you know, the numbers declined across all four regions of the country. Both the Midwest and the South moved back into contraction territory where they were slightly positive the previous month. Interestingly, though, if we look out throughout the last two years, the spending momentum in the Northeast has been much more volatile than the other regions. In 2022 has really been no different.

We think a lot of the reasons behind that is, you know, the larger share of households cutting back on spending in general relative to other parts of the U.S. The SMI for the West was firmly in negative territory, but was actually a little less negative than all the other regions except the South. And this was really partially a result of the summer travel surge with destinations like Hawaii and Las Vegas benefiting from travel and tourism spending over these summer. months. If I look across all of the metro areas that we track, over 877, about 835 of them lost some level of momentum in July compared to the previous months, really just 35 cities or so that are gaining momentum and some that didn't see a meaningful change. So, you know, a little bit more of a broad-based contraction in consumer momentum across many of these metro areas in July, which, you know, kind of is a sobering reminder that consumers and nearly

all locations are facing the challenges and reducing their expenditures accordingly. Interesting. Yeah, just for context, I believe there's a little, there's over 400 metropolitan areas across the country, and you're saying about 10% of those, only 10, less than 10% of those had positive momentum. The rest had negative momentum in the month of July. So that is broad-based. I might be stretching you too far here, but I'll ask anyway, because I know we've

talked about spending across different spending categories. types of spending in the past. Any insight there in the data that you're observing? You know, discretionary spending still, all of the metrics, we look at both discretionary and non-discretionary. And to be specific, we do not include gas and restaurants in those. And as I've described before, gas is either discretionary and non-discretionary, depending if you're going on a summer travel vacation or if you're commuting to work. And restaurants, you know, we generally look at quick service, restaurants as being kind of non-discretionary, but fine dining being discretionary.

So pulling those two out and just looking at everything else, the numbers are all below 100, non-discretionary at 95.9 and discretionary at 94.5. And I think some of the reasons behind that is, you know, when you start thinking about travel and travel-related spending, that spending often happens. You know, if you're going to book a trip for the summer, you're often doing that in the peak spending months of March and April. Those are generally the months that people start to think about and then book, you know, either paying for airfare or hotels or resort packages or cruises far enough in advanced.

And those numbers indeed were north of 100 back in those time periods. So we've seen a bit of a slowing in both of those broad discretionary, non-discretionary categories. Okay. So but in general, broadly, there's loss of momentum, a slowing in momentum, them pretty much across all categories. All categories, yeah. Obviously not in terms of what we would see with gas, given the gas prices, et cetera. Those things are important, but it also important to think about the fact and why the heck can the census retail sales numbers be growing at the levels they're growing, which frankly

was quite robust back in that in July. And again, it just really gets down to much more of a concentrated set of consumers. and frankly, it's likely the out front. You know, you couple that with the fact that everybody's generally working, we still have very, very low unemployment rates, three and a half percent, you know, twice the number of jobs available. People that are getting laid off, it's almost, you know, you're hearing the stories, well, great, I'm glad I got laid off

and maybe I can squeeze in a couple week vacation before I start my next job because they're getting jobs just like that being picked up quite rapidly. Boy, that surely doesn't sound like being in the midst of a resuscary. you would never have that number of job openings. And I think you've seen the data on job openings relative to a number of people looking for work at about 1.8, you know, pre-recession, 0.7. So, I mean, you know, there's just a lot of jobs that are still out there and a lot of opportunities does still occur.

It just gets back to the concerns of inflation. It's in your face. You know, you're paying more for things. And until that starts to ebb, you're going to really see consumers be much more cautious. I believe as we go forward. Yeah, just to provide broader context, because there are a lot of cross currents here, and just to understand where you're landing, because I know you do explicit forecast for the broader economy, can I ask, maybe this is unfair, but roughly speaking, if you look at overall

consumer spending and say real consumer spending after inflation, what kind of growth rate do you have for 2022 and 2023? You know, we're just ballpark, we're kind of around 2%-ish kind of growth on consumers. We're at 2.3 this year and 2.1 next year. Okay. In terms of real spending, very similar to years. Similar. Yeah, very similar.

Okay. And that's non-recessionary. You do not have a recession built into your forecast. At this point, no, we do not. Yeah, okay. We'll come back to that because we always end these recently, these conversations, these podcasts around people's probabilities of recession. and I want to get that from you, but we'll come back to that.

I promise we're going to get to the game, the statistics game, and just, there's one more area, topical area I want to cover before we go there, and that is on credit use. I mean, there's been a very, if you look at the Federal Reserve data, I haven't looked at the visa data per se, maybe you can give us some insight, but on the Fed data, you look at the growth in consumer credit. That's people borrowing on their cards and auto. loans and student loans, that kind of thing.

It's increased quite significantly. The growth rates are quite large over the last six, nine, even 12 months. And there's been kind of growing angst kind of out there in the economics community, in the policy community, that this is a sign of stress. This indicates that consumers are under stress. And I think Chris is actually a supporter of this perspective. perspective to some degree. Well, some consumers, certainly.

Some of that growth is higher-end consumers getting back to the travel that Wayne mentioned. Wayne, do you see how defensive he is? He wouldn't even, he immediately had a, yeah, immediately put, look, he made him gun-shy with that, that snarky comment you made back early. But I do want to ask before we get Chris to comment about that. Yeah, I want to go back to V's, you know, how you're, how you're, how you're, how you're, how you're, you were looking at the data. Did I characterize the data correctly? And how do you view it? Is it a sign of stress or something else? Yeah. So we just, my team and I just literally went through in exhaustive detail. And for some, this is probably going to sound like, oh, my gosh, a snoozer.

The entire Credit Bureau files for the second quarter. Oh, are you kidding me? I'm so excited. Yeah. I'm not sure. Edge of my seat. And Chris is like, yeah, let's have lunch and talk. Especially if you're cooking. Yeah, yeah, exactly. I'll talk about it while I'm cooking. So we went through an exhaustive detail yesterday, as we do every quarter, is to try to get a better understanding what's happening in these credit markets.

And so let me give you some headline numbers that we saw that I thought was really quite interesting. First off, the overall credit score for the country just went down one point. and is basically nearly the highest levels that we've ever seen. Credit scores of consumers at the highest levels we've ever seen. I mean, wow. I mean, that really says a lot. And then we've been talking with our clients for quite a while about some of the reasons why that credit score has been high, and some of it is actually score migration.

Think about the situation where you're stuck at home, lockdowns, et cetera. The only thing that you could really use was a credit or a debit card. to order things online and have them sent to your house, whether it was food or groceries or restaurants or anything else for that matter. And throughout the entire period, we definitely saw delinquency levels or levels of concern of delinquencies really fall to levels that, I don't know, Chris could mention if we've ever seen them these low. I mean, as low as they have ever been in terms of bank cards, specifically, I should say. And so what's happening, what's happening is, happened is, is that we went through a period of time with a lot of loan accommodations,

whether they be, don't have to pay your credit cards for a few months back in 2020, to not paying your mortgage, to not paying your utility bill, and many other types of categories. And those things have played out so that people, in many cases, kept their cards current because they were a very key vehicle, especially in credit cards, for them to continue to contract, transact online. So at this point, we ended up, you know, if you're not paying your student loan and you're using some of those monies to keep your card current, in many cases we saw score migration actually start to occur on people's credit score. So people that were near prime, for example, have turned into prime and prime into prime plus, et cetera. And I think this has all led to partly talking about why this credit score number was at frankly the highest levels that we've seen. So that's a very, very key point. In the second quarter data, we saw just, I mean, one point is just rounding there in terms of the drop. I think the number is at 725 right now in terms of the annual score.

The average score is 725. Yeah, that's the average right now, which, you know, is up from, you know, 700-ish, you know, pre-pandemic. Right. But we think there might be a bit of a migration pause starting to happen because some of these accommodations are now starting to finish and roll off. We only have about 1% of mortgages that are under accommodation still. And the other area that we talked about, I think, in our last call, a lot of people didn't pay their utility bills during that period of time of accommodation. And now those are starting to show up.

I think the recent estimates show $16, $18 billion of utility bills that are now being asked to be paid. So that could create some additional stress as I look at, you know, the card-centric side of this as we go forward. but it's certainly not showing up in the data as it stands now. Delinquency is still very low, loss is low, people keeping cards current, all of those things really point to a very favorable condition for the consumer at this point. Okay, so but this improvement in the general score, the average score across the population, is in part due to, well, lots of reasons.

I mean, the excess saving, perhaps, the strong job market likely. But you're saying also the loan accommodations that were provided during the pandemic. There was mortgage loan accommodations by Fannie Freddie FHA, the bank card banks, they provided some loan accommodations. Obviously, student loan borrowers, they've not had to pay on their debt and doesn't look like earliest that will be, will be the start of next year. That definitely has helped. That's also helped in this improvement in scores.

So do you think the recent surge in outstandings, bank card outstandings, and also we've seen a surge in outstandingings of consumer finance companies, kind of the fintech companies, small but still pretty large increase. Do you see that as a sign of stress or do you think that's related to just increased transaction use, the higher rates of inflation? How do you, what do you think about that? Is that, how do you view that? Yeah, okay. So, yeah, I think the second quarter results showed bank card outstanding's growing about 14, 14.2 percent to be precise. So, I mean, very robust levels of growth, pretty much on a par with what we were anticipating also,

which is great. I mean, you know, we, we have a huge drop in outstandings as those outstandingings were paid down. Right. through, you know, some of the stimulus, even. People use some of those stimulus dollars to pay down their debt, and bank cards would be definitely one of those areas that we saw some of that contraction. We're probably in the third quarter going to get back to the pre-pandemic level of

outstandings that we had on bank cards in the third quarter. So it is kind of just going back to normal or back to where we were in 2019, if you will. You know, a lot of the talk of the large increase in consumer credit, you know, some of that being people rushing to get houses before interest rates rose started to rise. And we saw that really the mortgage side of that do pretty well, pretty much through at least early part of summer until the rates got so high that that really had to be shut down and slowed substantially. Autos we all know about are certainly still being challenged because of the lack of availability.

But, you know, when you look at bank cards and fintechs and, you know, the buy now, pay later, which haven't fully been disaggregated. It'd be interesting to hear if Chris has seen any data on that. Doing robust levels, but frankly, consistent with the spending that's going on right now. Again, one of the things we'll be watching in the fall, and we're certainly watching now is what's happening in terms of delinquency levels. And they really haven't budged a bit. It's got up a couple of basis points.

But also in the data that we saw in the second quarter, there was a pretty traumatic increase in the number of subprime players, subprime acquisitions, I should say. So financial institutions taking on subprime types of customers because they're all working and everything else, maybe rebuilding credit, et cetera. So, you know, we may see some additional delinquency challenges in that in due time. Okay.

But if I'm just to summarize again, it feels like what you're saying is, yeah, it's picked up but no big deal, you know, what really is, happened is bank card were paid down pretty aggressive, very aggressively in the pandemic, and we've just rebuilt that. And as you point out, the outstandings today are just back to or barely back to, or not even quite back to pre-pandemic levels. That makes sense. Chris, what's your take on all this? Now, don't be defensive. No, no. We're all friends here. We're all friends here. We're all friends here. But what's your view of all this? On the consumer

credit side, I'm particularly interested. Yeah, I would agree in aggregate. I'm not particularly concerned about the consumer credit trends at this point. As Wayne mentioned, a lot of this is just normalization. We went through this period of great accommodation in terms of a lot of stimulus, as well as moratoriums on all sorts of loans.

As that unwinds, naturally, you'd expect to see things increase. So that shouldn't worry us. What does worry me is when I look at disaggregated data, and a little bit deeper. For example, in the bank card, I see that some of the fastest growth rates- This is based on the Equifax credit files that we get every month. Okay. That's right. So it is very granular data and it's all the files in the country. Yeah, that's right. It's a census of their...

Census of the... Of their reports. Right. I'm seeing some of the fastest growth rates in term, year-over-year growth rates in terms of bank card and personal loans in the lowest credit score bands. And what makes me particularly worried about that is, is that is that, is precisely the credit score inflation that Wayne mentions, right? So with everyone in general seeing their credit scores rising, those borrowers who are still subprime in this environment, right, with all the stimulus and everything that's gone on, while they may actually be even worse than we would have attributed to their score.

So to see that group rising at a very rapid rate, now it's a small portion in absolute terms. So it's not a macroeconomic risk, right? If they go from $100 billion to $200 billion, it's a lot, but in a $20 trillion economy, not so much. But it does point to some weakness in that particular demographic. And when I marry that with data on savings, data on cash balances, broken out by incomes, you do see a lot of stress in that lower end of the distribution. So I'm particularly worried about what's going on there. And when I do see those delinquencies or when I see the growth rates rising, it also cautions

me on the delinquency rates. Yeah, we haven't seen anything yet, but that's also because the balances have been growing, right? That can artificially push down the delinquency rate. So I am worried that we are going to start to see some acceleration here in this particular segment of the market over the next couple of months, especially as inflation remains quite high. Well, it seems consistent with what Wayne is saying. I mean, Wayne was saying in his, in the visa date,

data, we are observing loss of momentum, some softening, particularly among lower, low middle income households. And that would be consistent with what you're saying about the Equifax credit file data, right? That's where you're seeing the balance is growing more quickly because presumably those households are under stress and need that balance to help them kind of navigate through financially. Yeah. Yeah.

I guess I'm worried that there's a shoot-a-drop here, right? Right now we're in this zone where the data still does. doesn't fully reflect, perhaps, the stress that folks are under. But maybe not a macroeconomic shoe. No, no, not a, not a... Because too small. It feels like it. I'm not talking about this causing a recession. But certainly if we were to go into recession, this group is going to be even more exposed.

Right. Especially when we can couple that with, you know, higher inflation. I mean, again, I think the good news here is that different than other economic cycles that we've seen, you know, you look at wage growth by income for low and middle income households, pretty close to 7% right now. We're the highest. Strongest growth is. So, you know, it's still in many cases not able to offset some of the inflationary pressures, but that'll be an important element to watch for. As if we look at the wage growth relative to inflation levels, and if inflation follows a path that we think will actually occur, with it starting to slow and slow quite

dramatically as we get into early part of next year, then real incomes will actually, real disposable incomes will actually look to be quite positive and actually provide some relief relative these inflationary pressures, again, with the big if if inflation falls at these levels. Yeah. Well, you know, one thing people don't understand most people, you guys understand, but most people don't understand, is that when you're looking at the bank card data, the outstanding, how much bank card outstandings are out there, that can increase because people are using it as a debt vehicle. I'm borrowing on the card, and I'm going to have to pay an interest rate on it every month. But it also reflects increasing transactions, right?

Because if I'm out traveling or going to restaurants or going to ball games and using that card more, that's going to show up as an increase in the balance on the card. Do you have any sense of this acceleration in bank card outstandingings that we've seen? How much of that is related to the use as a debt vehicle and how much of it is transaction related? Is there any way to gauge that? Well, I think the, and I look at, I guess, is the outstandingings that are revolving. And typically 85, I think we're probably around 85, let's say 85 to 88 percent of the outstandingings on bank cards are incurring some kind of finance charge.

Oh, is it that high? I didn't really. It's always been that number. It will get closer to 90% if we were to go into an economic cycle with, you know, obviously the desire or need for consumers to have to revolve in terms of their financial conditions. So it's always been that kind of a number of different, you know, portfolios will be different than that if they're much more, as you say, paying off their balance every month, if that's

the type of consumers that they're going after. but that's a typical number. And so if you look at their most recent trends, obviously, with the affluent outspending in such a big way, I think a lot of that is related to just actual spending behavior and some of which was being paid off. Now, one other thing that we did find in the latest review of the Credit Bureau file is that there's a tremendous amount of consolidation going on.

I mean, let's think about an interest. And this is not at typical at this stage of an, economic cycle when we start to see rising interest rates. You see financial institutions that are offering very attractive balance transfer offers at very low interest rates just at the time that interest rates are starting to climb. And as a consumer, if you see that your minimum payment is going up because of the fact that the interest rate's going up, it's also right in your face. And so you start looking potentially for those additional opportunities to consolidate. In fact, the data showed that consolidation and the amount of consolidation really hit, I think, the highest level that we've

seen since we've been following it in 2016. So highest level of consolidation. So that's a lot of the activity also. And that may be, more likely than not, people figuring out other debt that they have and consolidating it in terms of a card program. You know, the question is, what is the interest rate on that? Is it enough to cover the level of risk that's associated with it? Often those offers are very, very low in terms of the interest rates. So, but I think it is a combination of the two right now and both will have to be looked at closely as we go forward. Can I just to clarify or make sure I got it right, are you saying that the, this

unprecedented level of consolidation is also adding to the growth rates and the outstanding that we're observing? Yeah, if you think about it, if I have other types of debt instruments, whether it be a retail store card or something. else and now I'm consolidating that onto a bank card that is creating more consolidation and those are all outstanding and conceivably revolving outstandings. And to that point, if you look at the Equifax data, it is broken out by bank card and retail card.

Retail card is down quite a bit. And they're not big numbers again, but, you know, if you add them into the bank card, if that's what's going on, which that sounds reasonable, that would be adding to the growth rate. Yeah, for sure. But the personal loans are up, right? And when you say personal loans, that's at the consumer finance companies, yeah, yeah, that is up. But it's still small too, right?

I mean, in my mind's eye, tell me if I got the data wrong. But before the pandemic, 100 billion in outstanding that consumer finance companies, now we're at 140 billion. Something. I think it's a little higher now. I think more like 160 almost. Oh, is it 160? Yeah. It has risen.

And included in that, of course, is buy and now pay later, which has been a new avenue or new area that we've seen a lot of growth in, too. So, you know, let's think about it. I mean, if you look at the big ticket items, whether they be exercise bicycles or new mattresses, I mean, consumers bought those during these downturns and took on levels of debt. Sometimes those had interest rates that are not as attractive as maybe a financial institution as offering them in terms of a balance transfer. And so, you know, you want to consolidate those.

Yeah. It's a natural thing to occur. Got it. Okay. let's play the game and then after the game just to make sure everyone knows where we're headed I do want to talk about student lending you know that obviously was big in the news this past week the president president buying came out with a plan for the student loan program and Chris you've done a lot of work in this area so I'm going to turn back to you but before we go let's play the game the

game the statistics game is simple we each come forward with a statistic or two the rest of us try to figure that out with questions and clues and deductive reasoning the best question the best statistic is one that's not so easy that we get immediately not so hard that we never get it. And if it's relevant to the topic of a hand, bonus question. I will preface all this by saying my statistic may be on the hard side, so just preparing you. But I'll go later. I'll go last. Chris, I'll turn to you first. Oh, and I should also say, I don't know, Chris, if you have a cowbell, generally it's Ryan who brings the cowbell. I don't have the cowbell. Oh, there we go. Okay, we're ready. We're ready to go. Wayne, you can aspire to that cowbell then.

All right. Let's go with Chris, what's your statistic of the week? Okay, I was going to go with an easy one, right? Oh, but now you're not? But now, you know, he's upset. He's upset. Oh, no. I'll go with $9.30. It's still pretty easy, but $9.38. I think I know what that is. Go for it. That's natural gas prices. It is. Oh, there you go. Yeah, natural gas. That's the price of per million BTU, right?

$9.30 per million BTU. Million metric BTUs. Million metric BTUs, right. I always get that. Oh, you got to get that right. Yeah, yeah. Yeah. Oh, so I get a half a cowbell.

But come on, that was pretty impressive. Yeah. Yeah. Why did you pick that statistic? I'm curious. So as you were talking about gasoline, you know, the other gas we should be paying attention to is this natural gas. And so that's the highest $9.38 is the highest level since, I think, 2008, right, in the U.S.

Much higher is certainly in Europe, right? These are crazy levels. I mean, you think about it pre-pandemic. We were at 230, 250, something like that. Yeah, very low. That's going to be an impact for consumers and heating their homes. And of course, we know that the amplified effect, I think that number is closer to 30, 40 in Europe. This is a big challenge.

This is something that's coming up that's going to be quite problematic. Now, I've seen some recent data that maybe Germany has been stockpiling a little bit to be able to save or have available during the winter months. But in general, this is going to be quite problematic for the entire Eurozone in terms of the cost of heating their homes. Yeah, Chris, do you want to explain more succinctly why prices have gone up here to such a degree? I mean, we've got a lot of gas, you know, we've got all the fracking, gas everywhere, but why have prices gone up here? Yeah, so why the U.S., which has plenty of gas, certainly relative to Europe, because it is a global market, right? Increasingly. Increasingly.

And with the Russian invasion of Ukraine, the Europeans are searching for other sources of gas, including liquefied gas. from the U.S. So a boon for producers in the U.S. They have another market that they can sell into. But Asia also has been a big consumer, continues to be a big consumer of U.S. liquefied gas. So that's just putting even more pressure on gas prices globally. And so therefore, as a consequence, even U.S. consumers are going to be facing higher gas prices. Now, certainly as we go into the winter, maybe not facing as quite an increase as they are facing in Europe, but this is going away on consumers balance sheets. And as we're talking about debts and ability to pay, utility bills are going to be front and center in terms of their concerns.

Including propane. You know, propane's going to follow even worse trends than that. So that could be also a big challenge for those that heat their homes with propane. Absolutely. I mean, one thing to point out is there's a constraint on how much natural gas from the U.S. can be liquefied and shipped overseas. That's so-called LNG facilities, Equified natural gas facilities have a, there's a capacity constraint. So that limits the price increases that would likely occur here. I know likely you can't, you just can't ship it. It's going to stay here in the United States because you just can't ship it over there.

But wouldn't there be some impact there too from the demand for that as the demand for that liquefied natural gas goes overseas and the price of it starts to increase that could have some ripple effects in the United States? Yeah, I mean, in the near term, there's physically, I just can't ship anymore overseas. But you're right. I mean, there's a lot of investment going on now because of that arbitrage. I mean, if I can get 30, 40 bucks over in Europe, I'm going to build LNG facilities here and try to ship it over. But that takes time. That's not going to happen this winter. That happens over two, three, four, five years, given how complex that is. But that's a good point. So to that point, it could be here for a while, these elevated prices.

Oh, yeah. I don't expect to see any relief anytime soon. Well, of course, the high natural gas prices in Europe are the reason. why you're if we don't think we'll go into recession here or the well we'll just get to the back that in the second obviously the risks are very high but in europe it feels like they're going into recession by because because these energy prices these natural gas prices are over did you just see the british have a cap on energy spending and uh they just that just jump threefold it's going to jump threefold in october i think from in october right pounds thousand pounds like three thousand pounds That's crazy.

It's incredible. People paying $1,400, $1,400 to hit their home. It's going to be $4,500. I mean, these are astronomical numbers. It's scary. Impossible. I don't know how they navigate. I don't see how they navigate through that.

Although the new prime minister there is going to come forward with some kind of fiscal package to try to provide some relief. We'll see how that works out. Yeah. Okay. Okay. That was a good one, particularly because I got it so fast and that was a hard one. Whoa.

Okay. Okay. Very good. Very good. Okay, Wayne, you're up. All right. The number I have is 3.9. 3.9. A number that came out this week. Yes.

Okay. You said that slowly, though. Yeah. I think about that. That's interesting. Okay. Is it a price? Yes.

Oh. Is it a commodity price? well yes it's like 50 questions or something I mean yeah yeah yeah that's the way we play this game that's how this works yeah three so three dollars and 90 gasoline I don't know the gas gasoline

no that's that's at oh it is gasoline yeah it's gasoline the cost of a bagel of gasoline very good but on what day of the week oh geez come on you know it would It was probably yesterday, AAA price was $3.89. Yeah, it was actually on Monday. Oh, it was Monday.

Okay. Well, you know, all these days blur into, you know. I think we'll give you half a Cal Belfth. Very, very good. Well, that's a big deal. So we went from five bucks in mid-June to $3.90 today. Yeah, for consumers, as you were pointing out earlier, that's a huge deal. Yeah, if you look at the spending by low and middle income households on kind of core needs, food, housing, transportation, of which gas is a large portion of it, that's, you know, three quarters, two-thirds to three-quarters of the monies that they spend.

So this number coming down is going to have some very positive impacts on consumers. And again, I would not be surprised if we start seeing it, if it continues to fall in this manner, have very positive. positive impacts on consumer confidence also. Yeah. I mean, just the rule of thumb, and this is just a rule of thumb, every penny decline in the cost of a gallon of gasoline saves the American consumer $1.2 billion over the subsequent year. So if you do the arithmetic, $5 to $390, that would save them what, $160-ish. yeah yeah 50 50 billion that's a that's a lot of money that's a lot of money that's a lot of money that's a lot of

money i mean just they need it they need it for higher food prices or higher housing or in this case higher heating bills or to pay their heating bills but um yeah that's a very positive move if we can stay in that kind of a pathway yeah that's a good one okay i i have a hard one uh all right this is hard uh but i'm uh i'm going to do it anyway uh and i will help you out here if it's too hard. Okay, I'm going to give you three numbers, three statistics. They're all related, obviously. The first is 22.4, and it's a percent, 22.4%.

You can write this down. The second one is 16.1%. You can write that down. And the third one is 5.2%. And I will give you a hint right away very much in line with the conversation we were having just a few minutes ago about consumer credit. So what are those three numbers? And, you know, came out this week. Well, another long pause.

Another long time. That's a no. Well, it's very timely. I did it come out this week, but it's the other crisis. criteria here is apropos to the conversation that we're having. And this is definitely apropos to that. This is from the Equifax Consumer Credit data report. These are annual growth rates. Year over year growth rates. Year over year. Yeah. Yeah. Over year growth rates for bank card. Which one's bank card? 22%. No. No. It would be 161, if anything. Exactly. That's

the 16.2. 24 probably is the year over your rate of personal loans. Exactly. Consumer finance. Consumer finance. And $5.2. Is that mortgage now? No, that's retail card. It has bounced back a little bit over the – it fell sharply during the pandemic. It hasn't made its way back, but it's 5.2% of your ear. And this kind – here's what blew my mind.

And this is why this data is so cool and why I envy Wayne because he has so much data. He has so much data. Bank card – this is maybe a test of you, Wayne. how in billions of dollars how much bank card debt or outstanding is delinquent in billions of dollars and this is as of july just take there's almost 800 billion in outstandingings what do you think is actually delinquent chris you want to take it one point four percent of it that's very good yeah according to our day 11 billion dollars well ours says 18 billion billion and you know what it was in February of 2020 the month before the pandemic hit

27 billion yes yes so you know Chris was making this point about delinquencies could be low because the denominator of the delinquency rate the outstanding is growing quickly but not not really it's low because it's low there's just not many bank cards that are delinquent here's a really cool statistic this is across all household debt, all household liabilities, auto, mortgage, student loan, although that's an asterisk. Cards, in July, there was 15.6 trillion outstanding, 15.6 trillion outstanding. Get your mind around that for a second. $197 billion of that was delinquent. Only $197 billion was delinquent. And as of February 2020,

$345 billion and that was even low compared by historical. That is my and then okay you say okay well what about student loans? Well student loans, you know, because they go to Z they went to zero. There's no delinquency because people don't have to pay at $60 billion. So even to add that back in, the amount that's delinquent is nothing compared to history. I mean that just goes just an amazing, amazing statistic. You know, there's just no delinquent. to show you the health of the consumer.

Yeah. I mean, they're in really a different spot. Yeah. Because of all of these programs and stimulus and everything else that's happened over this time period. And that's going to start to fade over time, notwithstanding what Chris has said. I think we have to really watch what's happening with those loss rates and delinquencies as time goes on because those programs aren't in place anymore. Yeah. So, Chris, what do you make of that, those numbers I mean?

Just given, no, no, no, it all makes sense. Oh, it makes sense. So from the macro, the broad picture, things feel pretty good. It's just the blemish or the stress point is those lower income households that are now accumulating debt. Yeah, quickly. That's the group I'm worried about. And especially, and especially, watch for this for a segue if we go into a recession. Yeah, yeah, absolutely. Before we get to that, and we're almost there. Yeah, well, wait a minute. Wait a minute. I mean, I think we got your answers to your numbers. So we should get full cowbell for that, Chris. All right. Yeah, yeah. Yeah. Yeah. Yeah. Hey. Yeah. Yeah. Okay. Well, I'm in control of the Cal Bell.

Yeah. Exactly. Exactly. No, absolutely. That was well done. Well done. Well done. Ryan would not have gotten that, by the way. Just a not a chance. Not a chance. Not a chance. Yeah. That's in your wheelhouse, Chris. Guys on the beach. He's in a different frame of mind there. He's having his Maita or whatever. What was I going to say? Oh, student loan program. Let's just quickly talk about that.

Chris, you want to give us a thumbnail? What did the president do? And then what did you think of what he did? Okay. Tough to be quick here, but I'll do my best. So student loan debt forgiveness program was announced on Wednesday by the president. $10,000 of forgiveness for bar. borrowers with earning less than $125,000 a year, couples less than $250,000 a year.

That goes up to $20,000 in forgiveness for Pell Grant recipients. So the idea was to provide even more relief for that group. I guess very quickly, in terms of cost, cost estimates on this plan vary. There's a lot of details yet to be written. The latest I've seen is something close to half a trillion or more. It really depends on some of the take-up of the plan because it goes beyond just the debt forgiveness piece. It's also proposing caps on the income-based repayment plans that some borrowers are on.

So instead of having a maximum 10% of your income being paid to student loans, that would be lower to 5%. And it would also shorten the term over which you'd have to pay from 20 years to 10 years. So that combination of lower cap and lower shortened term could actually increase the cost of this plan substantially. It could get up to a trillion if we see a lot of take up in the plan. But lots of moving parts here. I think the big question is not scored it yet, have they? CBO has not scored.

Yeah. And Warren has. Right. That's right. Yeah. Sorry. So some, there have been others who have scored it. Again, we're making a lot of assumptions here because the president is the key year.

Yeah, the president made the announcement, but there's a lot of details that have to go through. There's lots of white space to be filled in between now and when these actual forgiveness actually occurs. There are also potentially lawsuits going on at the moment to see if the president's plan can actually move forward. Most likely it will, but that's going to complicate things. One other key point is that the moratorium has been extended through end of the year in terms of payments. So none of this actually really matters, if you want, from a GDP or economic perspective until we get to that point. Lots of discussion, lots of questioning in terms of the impact of this forgiveness on the economy, on the macro economy. So what's going to mean for GDP, what's going to mean particularly for inflation at this time?

In our previous podcast, we've talked a lot about deficit spending at a time when you have high inflation. It's only going to contribute to inflation. And that is certainly the case here in terms of just the debt forgiveness piece of this. We estimate that inflation would go up by about eight basis points over the next year in 2023. So not a huge impact that we're talking about here. There would be some positive impact to GDP and a little reduction on. on unemployment rate. In terms of the,

much of that, though, is going to be offset by the fact that as the moratorium ends at the end of the year, people are going to have to start paying back. So, yeah, some people are getting relief here. They won't have to pay as much or anything if all their debt is forgiven. But a very large group, a larger group actually is going to have to start making payments again. So that will have the opposite effect in terms of directing some of the money that they might be spending on other goods. towards these student loan payments. And so that would actually work counter to inflation, counter to the GDP growth,

and lead to potentially a little bit of increase in unemployment rate. Again, this is all on the margin. We're talking basis points here. So net net, we don't foresee a significant increase in inflation due to this plan, at least not in the short run. So people hate this thing, this plan. people love this plan, but you shouldn't hit or love it based on the macroeconomic impact, at least not in the near term.

Yeah, I agree with that. It's a wash. Yeah. In terms of the inflation arguments around this, I don't think that's the crux of the issue here. Based on our calculations, based on the calculations of many others, including the Penn-Warton model, including other researchers, are not seeing much of an impact. Once you combine two, both factors together, it washes out. It kind of washes out. I don't know if anyone actually loves it.

I've heard people are okay with it, but there's one group that actually won't want more. No one really loves it because either they want more debt forgiveness. Yeah. They didn't get enough debt forgiveness or they don't like debt forgiveness at all. At all. Or perhaps somewhere in between. Yeah. I want to hear if Wayne has a view on this, but what's your view on?

Do you have a sense of that? I mean, where do you land? And I know you also thought deeply about if you're really, a king for the day or a week, how you would kind of fix this problem. Yeah, it's obviously a problem. I've been thinking about this for a while. I've put out a plan years ago and trying to influence debate. I'm not, I will say my biggest issue with it and what can get into the fairness issues,

which I think are very important. My biggest issue is that there's no reform attached to this plan. So I think we are, this is just a recipe for, um, uh, uh, further problems down the line, right? We've created this huge moral hazard here, meaning that people are going to come to expect that there will be more debt forgiveness in the future, and they're going to change their behavior around that. We're not reforming the cost of education. So some of this debt forgiveness or this assumption of future death of forgiveness is going to be captured by colleges and universities. They're not feeling the real pressure to bring in tuitions or reform

the system. So that probably isn't going to benefit students in the long run. And again, my biggest concern is that we're kicking the can down the road here. And we might say, oh, well, this is a one-time debt forgiveness. You know, it's a one-time spend of 500 or more billions of dollars. But in all likelihood, there will be another round or continuous ask for additional debt forgiveness down the line. So, That's my biggest issue with this is that just throwing money at the problem without actually reforming the system isn't going to cure anything and actually could open us up for bigger economic problems down the line.

There could be really serious inflationary effects as we go along. It may not be in the short term, but the plan doesn't really address those issues. Wayne, I don't mean to put you on the spot and you don't necessarily have to have a view, but do you have any perspective on this program? No, I think Chris outlined it. I mean, it's still something being digested at this point. I think he outlined it incredibly well. And I think everything that he said is something to be watching for.

Yeah. And Chris, so if you're working for the day, what would or week, maybe you need a month for this one. You know, what would you do? Yeah. So to my mind, there are two issues here. One is the existing book, right? All the out loans that have already been originated and then there's the future, right? And we have to tackle those problems in two different ways.

For the existing portfolio, I would forgive loans to folks who have relatively low balances, so folks with less than $10,000 in debt, many of those didn't complete their degree programs. They don't have the income to actually justify the loan. They've been struggling with these loans for years. There's a very high default rate in that lower income, lower balance. These guys haven't graduated, so their incomes are not going to be able to support the debt. anyway. Exactly. I don't think there would be any real resistance to writing off the debt for that group. So we're talking about 15 million borrowers in that with less than $10,000.

I think it's 20 million. Or no, no, that's if you include the 20, the Pell Grant. Yeah, sorry. Yeah, yeah, right. Something around that. I don't think there would be a much grousing around that. I think that does address an issue that we have in our bankruptcy system that makes it very difficult to discharge student debt. It's not in the borrower's interest, certainly. It's not in the taxpayers' interest really to continuously go after these people for 20, 30, 40 years into Social Security, into their retirement, trying to get this debt paid back that, quite frankly, will never be paid back. They just, the economics just don't work for them. So writing off that debt, I think, is sensible. I don't think that there's a whole lot of resistance to that, to that group.

And if anything, there could be some real benefits. You wipe the slate clean for these people and they are able to perhaps restart without having this continuous burden on them. For the rest of the group, though, I would make it, I would institute something more that is income-based repayment. So just make the entire system of income-based repayment schedules, right? That's going to address a lot of the issues that people have in terms of the affordability of the debt, while still favoring or enforcing the contract that has been made, right? The social contract, the actual monetary contract that has been made. So that's what I would do for the existing portfolio.

For the new loans, right, that's where I think the government, we have to take a serious look at our program. Clearly, it's not working. I would put more caps on it. I would reduce the government's role. I don't think that the government needs to fund a lot of graduate school. loans, for example, or they can do that in a much more targeted fashion. So I would actually leave that more to the private market, which has shown that there's ample capital out there. It's more expensive, certainly. But I think that actually does a better job of sending the signals to students around the

value of the educations that they may be receiving relative to the debts that they're incurring. And I think that's where we have a real imbalance today. People making decisions, not fully informed perhaps by their future income prospects being sold in some cases a bill of goods in terms of what the value of the education that they are embarking on really what the value of that really is. So I would scale back the government's program dramatically on all fronts, right? Both on the undergraduate side, we should have some lower caps here and certainly on the graduate side. I think there's much more scaling back the program that could be done.

And a lot of the headlines that we talk about with people having hundreds of thousands of dollars of debt, well, they do tend to be these graduate programs or their lawyers or doctors, people who do have some higher income capacity. So for them, they have some other avenues that the government isn't really serving a need in terms of a market failure, perhaps. It is really just caught up in some long run scheme or momentum that we've had. So I think we need those types of more decisive reforms. Well, I'll tell you what, we certainly should do a podcast on this because there's a lot to talk about here. But, you know, I would nominate you for King for the, not a month. King for the day, all right. Wait, I would not let him be King for a month, but maybe for a day.

Maybe for a day. I'm not sure. All right. We're going to end the podcast with our assessments of the probabilities of recession risks that we've been doing this now for the past, at least a couple, three months, given the high level of risk that exists. Chris, you want to go first? What's your probability of recession in the next? Well, you pick your horizon.

Which horizon do you want to talk about? And what's your probability of recession? You want to go through the end of 2023? Okay, we can do that. You know, a calendar date. Yeah, so 18 months, really, effectively. Okay. So what's your probability recession over the next 18 months?

It hasn't really changed. 60%. It's where I've been. I stick with that, largely because of the yield curve, still sending this signal here. But go ahead. That is, you can't ignore it. Yeah.

But then I am increasingly concerned about these other issues, particularly in Europe. And if Europe goes down into recession, I think that does complicate things much more for the U.S. So I think we have quite a bit of exposure there. 60%. Wayne, what do you think? We think it's around 50%. 50%, so not terribly far off. But as a point of reference, our model has had a lot of false signals at 50%.

So we see that the number's got to be a little bit higher than 60% for us to be concerned about that. Before you would change your forecast, your actual forecast to a recession. We'd have to see this tick up. Now, if I look at the factors that drove up this number from 30 to 50 over the last, month, you know, a big part of this is related to confidence level of consumers. So the consumer expectation for business conditions specifically. And I have to believe in the last, in the next, in these 30 days since that last number came out, that we might see some improvement there with gasoline prices having come down. And I think we could see that. And that could actually

pull this back down. So we could have a couple of false starts or whatever. Again, just frankly, back to the old oil picture again. So if we see that pull back, if I look at the various factors, those that are in kind of neutral category, the conference sports leading indicators, corporate profit margins, financial conditions. But we follow the three-month 10-year spread,

and that's certainly still expansionary in this cycle. So I think it's a little bit of a mixed bag yet. That number has risen, but I would not be surprised to see maybe a trail off a little bit, assuming gas prices stay where they're at. Yeah. Does Powell's speech influence you at all? I think we'll end up, you know, I think we were already counting on a 50 or 75 basis point, really looking at the end of the year, numbered around three and a half, three and a quarter

three and a half. So I don't think that's changed substantially in our outlook. So I just feel, like I said in early on, I think he's just what he said was pretty much on a par with what he has been describing. they're going to be pretty aggressive. Well, I, you know, I had been saying close to even odds for recession, you know, between now and the end of 2023. I won't change that yet.

I'll still say close to even odds. But what I will nuance is I actually think the odds of recession in the more immediate near term or lower over the next six months, six, nine months. they feel lower to me. The labor market is just too resilient. And you're creating jobs, people spend, and to Wayne's point, if gas prices are down, that should help in terms of income, real income, and confidence. And that should keep the economy moving forward. And I actually would have reduced my probability of recession to say 45%. The only thing that's keeping me from doing that is that damn yield curve. The way we look at it, Wayne, is the 10-year,

two-year, and that is firmly inverted. I mean, I look before we got on today, it's negative 40 basis points. You know, the two-year is 40.4 percentage points above the 10-year. That's a pretty strong historical, you know, signal. And, Wayne, to your point about the 10-3-month, you know, if they go 75 basis points or 50, even 50 basis points, three-month is going to be above the 10-year, you know, when they actually make that move. So that's the only thing that's keeping me from lowering my odds of recession. So I'd say close to even odds, not quite there yet. And probably, you know, closer to one third probability over the next six months.

Yeah, but importantly, I think, you know, we're not talking a 2008 global crisis type recession and mild if it all, you know, if at all, it would be very likely mild. I mean, again, companies are not really laying off. I mean, they may be taking off some of the, you know, some certain types of employees, et cetera. But they're getting picked up. The demand is still very, very strong and pretty hard to do when you have, you know, this level of employment. Yeah, Chris, Chris makes a great point, Wayne. And I'll not letting you say it, Chris, because I want to say it my way.

I mean, you can tell me if I've got a lot of great points. I'm wondering which one. Yeah, no, it's a great point. It's a great point. Look, he's saying, look, we are in a very fragile spot. You know, no doubt about it. We're in a very fragile confidence is weak. Yeah, it's improved a little bit, but it's weak.

Growth is slowing. The Fed's on the war path. If anything else happens that isn't to script, you know, we go in. And between now and the end of 2023, that feels like a long time for things to go off the rails. That is a very legitimate, I think, kind of perspective. Did I get that right, Chris? You did. Yeah.

Beautiful. I'm going to write that down. Write that down. Write that down. So, you know, I get it. I get it. Well, we had a great conversation. We covered a lot of ground.

Is there any ground we missed, Wayne, that you'd like to cover? Or do you feel pretty good about the conversation? No, I think we hit some of the main points. I just, again, the health of the consumer cannot be underestimated. Yeah. They're all working. They've lowered their level of indebtedness. They're spending out there, you know, pretty, very positive.

all the way around. And obviously, inflationary pressures are impacting different income groups, et cetera. But certainly hope to see some of these inflationary pressures start to come down. Certainly you've seen in gas already and hopefully in other categories very soon. I think that will play very strongly as we look at the balance of this year. Chris, did you notice what he did? You should take a lesson from this. And that is, end on a high note. Always works. Always works. hopeless optimist there you go thanks wayne it was an honor and a pleasure to have you join again hopefully we'll get you back again soon i'd love to join you again this is a lot of fun excellent even without ryan even without ryan it was a lot of fun i'll have to say that we're

missing a little something without ryan i don't know what it is but yeah a little sarcasm oh that's what it is it's the sarcasm we need that sarcasm and the pessimism right oh and we need the pessimism we need the sarcasm and the pessimism we need the sarcasm and the pessimism we need the sarcasm and the present of the bull. He'll be back. With that, dear listener, talk to you next week. Take care now.