The $3 Trillion AI Panic with Eric Fry … July retail sales … the clock is ticking for the U.S. consumer … why Luke Lango doesn’t want more disinflation … watch out for student loan payments

 

…There will be a stark line drawn between those who heeded the warnings before the AI panic hits its crescendo on Aug. 23 – and those who did not.

That rather foreboding comment comes from our macro expert, Eric Fry.

If you know Eric or have read his market analysis, you know that such a comment is unusual. Eric doesn’t make such hard predictions often. And when he does, an enormous amount of research and analysis goes into it. That’s why it caught my eye.

So, what “warning” is Eric referencing? And what’s the significance of August 23rd?

Back to Eric:

…What’s building right now in the artificial intelligence (AI) space is pointing toward a $3-trillion panic that will erupt later this month on August 23rd.

We’ve all heard “better late than never” before.

That is exactly what’s happening now in the artificial intelligence space.

If you’re late to the AI party, you very well could miss out on the best investment opportunities out there. The longer you wait, the more popular – and expensive – the most lucrative AI plays will become… and before long, it will be too late.

This is the “stark line” Eric referenced a moment ago. It’s the division between AI investors who act early, and the latecomers who don’t “heed the warnings.”

Tomorrow night at 8 PM ET, Eric is hosting an event called The Coming $3 Trillion AI Panic in which he’ll cover all the details of this panic and explain the significance of August 23rd.

To be clear, this “panic” isn’t all bad. According to Eric, there’s tremendous upside potential too. Here he is with more:

…While the magnitude of this situation is of epic proportions… I’d rather not sound like someone who only spells doom and gloom. I want to “be real” with you for a moment.

What’s coming in this $3-trillion AI panic should not be looked at as a bad thing… but rather, it should be considered the first step on what could be your journey to 1,000%+ profit potential.

So, to prepare, go ahead and sign up for The Coming $3 Trillion AI Panic event, which goes live on Wednesday, Aug. 16, at 8:00 p.m.

You don’t want to miss it.

Meanwhile, this morning’s July retail sales report showed the U.S. consumer keeps spending

Let’s go straight to CNBC for the details:

Consumer spending held up well in July as inflation slowed, with retail sales turning in a stronger than expected showing for the month…

The advanced retail sales report showed a seasonally adjusted increase of 0.7% for the month, better than the 0.4% Dow Jones estimate. Excluding autos, sales rose a robust 1%, also against a 0.4% forecast. Both readings were the best monthly gains since January.

We’re wary of the deteriorating financial health of the U.S. consumer. However, the data continue to show that the consumer keeps spending – though a great deal of this spending is coming from leftover pandemic savings and growing debt.

Here in the Digest, we’ve spilled plenty of ink detailing the statistics behind record credit card debt levels, increasing loan delinquency rates, accelerating “paycheck to paycheck” living for many Americans, and so on. Yet, in the face of all that, consumers continue opening their wallets. The key question is “for how long?”

In the same way you might watch James Bond racing to disarm a bomb counting down toward zero, we’re watching a similar countdown between the declining health of the U.S. consumer and whenever the Fed will eventually cut rates, relieving the financial pressure.

Will consumer spending flatline first, resulting in emergency Fed rate-cuts? Or will the Fed cut rates first, saving the consumer and the economy before things get that bad?

The CME Group’s FedWatch Tool shows that December is the first month in which any traders believe the Fed might cut rates (though those odds come in at just 6.6% as I write). We don’t see the probability become significant until March, when the odds of cuts clock in at roughly 46%.

Can the U.S. consumer prop up the economy until next March?

I’ve been skeptical, but according to Bank of America, the median deposit balance today is roughly 30% higher than its 2019 average. This is a reminder of how much money the government pumped into the economy.

On that note, my friend Lance Goldberg at The Partners Fund just highlighted how corporations are now paying new hires not to work (delay their start dates). Companies don’t want to lose their pipeline of new talent. So, as Bloomberg reports:

…Top firms had offered MBA graduates stipends in exchange for a delayed start date including $40,000 to work at a nonprofit, $30,000 to learn a new language, and $20,000 to become a yoga instructor.

Here’s Lance’s take:

…Are you kidding me? $40,000 for a 6–8-month delayed start date… to work at a nonprofit?! …

This goes to show you how much money is still in the system. It is 100% inflationary. 

This is the money the Fed has been (and still is) attempting to drain out of the system. It’s also the money that the U.S. consumer has been happy to spend.

So, can the U.S. consumer outlast the Fed as this money swirls down the drain?

Well, potentially yes. My fellow-Digest writer Luis Hernandez made a great point – it’s hard to bet against the consumer with unemployment so low and the labor market so tight.

Yes, credit card debt and loan delinquencies are rising fast, but just about everyone who wants a job still has one. Of course, the longer that the Fed holds interest rates at elevated levels, the greater the risk that the dam eventually breaks and we see a significant rise in unemployment.

So, the Fed’s interest rate policy will play a huge role in the outcome here.

Looking for policy clues, there’s no Fed meeting in August. However, Federal Reserve Chairman Jerome Powell will speak at the Jackson Hole Economic Policy Symposium on August 24-26.

If history is any guide, be ready for his comments on inflation and rate policy to move the markets (though I suspect he’d prefer to avoid that).

Speaking of inflation, Luke Lango says we need inflation to stop falling

At first glance, this appears completely opposite of what we want.

After all, high inflation is the reason why the U.S. consumer has felt so much economic pain over the last 12 months. Why would we want it to stop falling?

Here’s Luke:

…In reality, if we want stocks to go higher, we need inflation rates to stop falling and start stabilizing.

Indeed, do you know what’s worse than inflation? 

Deflation. 

Deflation creates a vicious cycle wherein consumers delay purchases because they are anticipating lower prices, which leads to lower economic activity, more price cuts, and more delayed spending. 

To illustrate the economic havoc resulting from a “deflationary spiral,” Luke points toward the Japanese economy throughout the 1990s and 2000s, as well as America’s darkest economic period: the Great Depression. I’ll add that the 2009 Great Recession brought deflation as well.

Back to Luke:

Point being: We don’t want deflation. It is actually much worse than inflation. 

And if inflation rates keep declining, we’ll fall into deflation.

So, despite CPI and PPI data highlighting a month of higher inflation, that’s actually bullish!

But circling back to the U.S. consumer, higher inflation will continue to weigh down the spending power of lower- and some middle-income Americans.

As you can see, this is a complex, dynamic issue with domino effects extending far out into the economy.

One final story that highlights the interconnected nature of the Fed, rate hikes, inflation, and the health of the U.S. consumer

After a three-and-a-half-year break, interest on student loan repayments will resume on September 1. At the end of March, nearly 44 million Americans were on the hook for these payments with the student loans valued at more than $1.6 trillion.

For many of those borrowers, this resumption of payments is going to be a big problem.

From CNBC:

…Over half of borrowers (56%) say they will be forced to choose between making their loan payment or covering necessities, like rent and groceries, when the pandemic forbearance ends, according to a new survey from Credit Karma…

Cutting back on nonessential spending will be the most typical way borrowers will adjust to make their student loan payments, according to Credit Karma. But there are only so many expenses you can eliminate…

Unsurprisingly, 68% of borrowers with household incomes under $50,000 say they’ll have to choose between keeping up with their loan payments and buying necessities, Credit Karma finds.

But a large portion of high earners also expect to struggle — 45% of borrowers with household incomes of $100,000 or more say they’ll be forced to make those hard choices.

And so, the race continues…

Can the U.S. consumer ride it out until rate cuts eventually arrive, taking pressure off family budgets?

Or will a slow-to-act Fed and its higher-for-longer rate hike campaign outlast the U.S. consumer, resulting in the recession that so many economists now say we’ll avoid?

We’ll keep you updated.

In the meantime, one last reminder to join Eric this Wednesday for The Coming $3 Trillion AI Panic. If you’re trying to add AI to your portfolio today, this is a must-attend.

Have a good evening,

Jeff Remsburg