Key Points:

• Rising consumer debt, especially in credit cards and car loans, signals financial strain.
• Persistent inflation adds pressure on already stretched consumers.
• Overextended consumer spending could lead to a recession, with early warnings from companies like Ally Financial.
• As good as Costco is, it’s not as good as “the Next Nvidia”. Click here now to see what the hype is all about.

Doug and Lee discuss growing concerns about the U.S. consumer’s financial health, particularly in relation to high levels of credit card debt and long-term car loans made during a period of easy money. They note that while inflation has decreased, many consumers are still struggling with essentials like housing and insurance costs. The potential for widespread financial trouble is highlighted, with the possibility that an overextended consumer could trigger a recession. They suggest keeping an eye on consumer-facing companies for early signs of financial distress, with Ally Financial’s (NYSE: ALLY) recent issues possibly being just the beginning.

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Edited Video Transcript:

I would be worried if I was a holder of a stock in a company that had made a lot of consumer loans over the last two or three years.

You made the loans when the market, it was a wash in cash.

The government sent everybody a check.

People spent money, but they haven’t stopped spending money.

They ran out of the money the government gave them.

But if you look at the total credit card debt in the United States, it’s now at a record level.

And if you look at car loans going back over the last two or three years, there are a lot of sixty and seventy two month car loans.

Right.

Relatively high interest rates, five, six, seven.

Yeah.

One of the things that happens in the car industry is, is that, OK, I have a seventy two month loan.

But my car is worth way less than the loan after like four years.

There are a lot of people who don’t necessarily have a big incentive to pay those loans.

No.

And you know, the old adage about cars is you could buy one, drive it around the block and bring it back and they’ll give you less for it.

So, I mean, it’s not an appreciating assets unless it’s a custom car from the sixties, you know?

And yeah, I think and you know, like we discussed with the dollar stores and everything else, things getting tight out there.

Things are getting really tight.

And when people start to default on loans or get sixty or ninety days on car loans, uh-oh, uh-oh.

And you know where all that’s going.

Like you said, one point five trillion on credit cards and things of that nature.

Well, what if they start defaulting on those, you know?

Because if you default on your credit card, you ostensibly wipe out your credit rating.

You wipe out your credit rating.

Here’s what worries me.

Inflation has come down quite a bit.

When people start to have problems paying their bills and start defaulting and inflation isn’t high, that tells me it’s a big problem.

If inflation people, you know, people may not have money because their discretionary income is being eaten up by inflation, but that’s not happening right now.

Well, and you know, we’ve seen over the last year of restaurant closures or, you know, big chains like Red Lobster and things like that, you know, shutting a hundred down or something of that nature.

And that, that doesn’t bode well for the future.

And I think that, you know, Jamie Dimon warned about a little bit, you know, this week.

And you get the sense that it may be worse.

It may be a little bit worse than they’re indicating now, but boy, we’ll see by the end of this year.

Yeah, I don’t like it all.

And I’m very worried about the consumer’s ability to spend anything more.

I think the consumer right now in the United States is stretched.

It’s like a rubber band.

It’s close to breaking.

If you said to me, what do I think could trigger a financial problem in the United States and a recession?

It would be an overextended consumer.

Yeah.

And, you know, it was interesting, you know, in the, you know, Yeah, inflation has certainly dropped from that nine point one percent of a couple of years ago, but it is held steady at three and a half percent.

And, you know, the three and a half percent, you know, despite the decline in energy costs, you have insurance going up everywhere, especially in the home insurance in the Gulf Coast and in that area of twenty, thirty percent and just housing itself.

Whether it be apartments or condos or things of that nature, that’s going up drastically.

And yeah, they’re going to get to the point where many consumers, all they can afford are the necessities.

Yeah.

So I think what we should do is we probably come back to this the first time we get a warning from one of the companies that’s heavily consumer facing or heavily consumer credit facing.

If there’s some bad news out of one of those big companies, let’s jump back into this and see, see if we think it’s going to be, if it’s going to spread like a wildfire.

Well, the Ally Financial, it could be just the tip of the iceberg.

Yeah.

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