O.B.E.
Submitted by Atlas Indicators Investment Advisors on May 27th, 2022Markets continued their turbulent ways this week. One might put the blame on three retail companies which announced earnings that were all weaker than expected. This matters because they are bellwethers of consumption and therefore the economy, an economy which Atlas believes is becoming Overtaken By Events.
It is not just current consumer spending which is troubled. Their ability to pay for previous purchases is showing some difficulties emerging. According to this article from Reuters, bankruptcies filed in March jumped 33.5 percent over the prior month. The trend of such filings is down on a year-over-year basis, but government aid is diminishing along with savings rates. At 6.2 percent, the savings rate hasn’t been this low since December 2013. Lower-earning consumers are running out of room in their monthly budgets, so it’s not inconceivable that a rising trend is on the horizon.
Inflation is hitting the economy hard, and rising interest rates are changing borrowing terms for businesses with less-than-stellar credit histories. Reverberations of the global supply chain shock continue resonating throughout the economy, causing shortages and thus higher prices. Interest rates on loans to companies with credit ratings below investment grade (aka junk bonds) are rising relatively quickly. Meanwhile, a new form of bankruptcy available to small businesses reached its highest weekly volume ever at the end of March as a temporary increase in the debt-limit was about to expire. Since then, the level has remained steady, suggesting ongoing difficulties for companies with lower levels of debt that didn’t need to take advantage of the deadline imposed by expiry.
This is all happening against a less-than-supportive backdrop. Our Federal Reserve is actively trying to squash inflation by making financial conditions tighter. This is likely to help on the inflation front by hurting demand. And there’s a major global conflict happening which many believe could turn into an even larger humanitarian crisis as it exacerbates global food shortages. For weather-related reasons, India has already banned the export of wheat, an important food staple offering proteins to many unable to access animal sources of the amino acid chains.
At some point, the cycle will turn. It will turn into a virtuous one which lifts many boats. Given the dour nature of this note, one might argue it is near because as Florence + the Machine reminds us here, it is darkest before the dawn. Shake It Out is a great song and offers hope, but Atlas will wait for Objectively Better Evidence.