Weekly Reflection for April 28, 2023

The Week - An Update in Charts

Earnings reports from Thursday and Friday really saved the week for the overall averages. However, in some ways it seems like we have returned to an uncomfortable normal with the biggest largest stocks, as measured by market capitalization, taking responsibility for 60% of the S&P 500's returns this year. Companies like Apple, Amazon, Microsoft and Google are overshadowing the hundreds of other companies that not doing so well. Investors will be vulnerable if the market, especially tech, stumbles again.

Earnings per share of the companies in the S&P 500 are expected to fall, as a group, some 8% this quarter, with Q1 2023 anticipated to be as bad as it gets for the next two years.

The quarterly Gross Domestic Product (GDP) grew just 1.1.% annually as of last quarter, less than the 1.9% economists had expected.

Gains were seen in consumer spending, net exports and federal spending. Declines came from private inventory investment and residential fixed investment.

That downward trajectory is good for consumers. At 4.6%, the core personal consumption index is making its way slowly down to the Federal Reserve target of 2%. (Note that this index excludes food and energy prices.)

First Republic Bank is in no-man's land. No other bank has stepped up to buy it, the Federal Reserve is not feeling compelled to bail it out (yet) and its ultra high net worth depositors are fleeing. The stink is coming from the bank's $4.8 billion in losses on bonds (Treasuries primarily) and its loan portfolio. The bank was known for offering low-interest loans to its clientele with terms that did not require principal payments for years.

The rate of new marriages in a year, per 1,000 people, has been falling steadily since the 1970s. People are still partnering up, but choosing to co-habitat without getting married. Researchers expect changes in gender equality, financial independence and education have something to do with fewer couples getting to the altar.

The Repo Man is Back

Earlier this month the annual North American Repossessors Summit took place in Orlando. The “summit” first made its debut in 2009, a year whenthere were a record 1.77 million repossessions amid the ugly recession. The “repo” business itself dates back to the 1920s when GM and Ford began financing auto loans and realized that they needed a solution to track down non-paying drivers. Financiers recover some $1.7 billion in assets annually from getting back cars, trucks, boats and even airplanes, from borrowers who are delinquent on their loan. For the repossessor, who most commonly recover cars, payment can be $100-400, depending on the vehicle's value.

Sky high auto prices during the pandemic are a big part of the repo market’s recent resurgence. As vehicle costs hit record highs and consumers were unfussy, or unable to negotiate price, plenty of buyers financed. A new car loan averaged 6% interest in 2022 but for used cars, the rate was over 10%. For a subprime borrower (those with credit scores below 619) the rates ranged from 15-20% through loans with financing companies and car dealerships offering “buy here pay here” loan offerings.

In March, the percentage of subprime owners who were at least 60 days late on their bills was 5.3%, higher than in 2009 per data from Fitch Ratings. Not all subprime borrowers currently in arrears are in immediate risk of having their ride disappear overnight, but the clouds are forming.

These same borrowers are likely dealing with other debt too. Per the Federal Reserve Bank of New York, credit card balances are the highest they have ever been, a total of $986 billion at the end of 2022. And most people have not been paying their total amount due each month. “Revolvers” who carry a balance, which increases each month with interest, are more common than “transactors”, who pay off balances each month, avoiding interest. Delinquencies here are notching up, too.

The repo market has everything going for it, other than workers. There are shortages as many left the business during the pandemic, often finding higher paying, less risky and steadier jobs. The average pay for a "repo man" is reportedly $45,000 a year. If the salary does not help spur interested applicants, the repo businesses can try to market the thrill of the job or pump the numerous reality shows based on the profession. The enthusiastic summit in Orlando felt confident enough to go with the tag line, "putting the magic back in repossessions” next to a picture of Cinderella's Castle.

An Update on Your Retirement Funds

In 2022, Social Security Income averaged $1,600 a month for 57 million retirees and $1,300 in disability income per month for the 9 million disabled and their dependents, per the latest Social Security trustees report.

Funded by payroll taxes, the employee rate has been held steady at 6.2% for up to $160,200 in income in 2023. Employers match the employee tax, paying another 6.2% up to the limit. The income limit rises every year but actuaries for the program lament the falling “taxable ratio.” This ratio measures how much of an employee’s income is taxed. More and more earners are making above the maximum income and the Social Security Administration (SSA) would like to be taking a cut of those dollars, too.

The SSA received roughly $950 billion in retirement and another $161 billion in disability tax revenue in 2022. Between the two, the programs ended the year with $2.8 trillion in reserves, most of that left over from years when revenue was higher than expenses. As we have been warned, the Social Security Income retirement reserves will probably empty out in 2033; the disability insurance fund will be solvent for another 75 years.

What may help the retirement bucket is that people are claiming their retirement benefits later. Less than 20% of men aged 62 are filing for Social Security Income (SSI) now, compared to 40% in 1995. It is the same for women – 20% of 62-year olds are taking SSI versus 50% back then.

Besides falling revenues and growing expenses, the complicated life expectancy data are causing headaches for the actuaries trying to figure out how to solve the shortage problem. The Covid pandemic caused a sharp increase in the death rate over the last several years, but actuaries do not yet know if that will be a blip on the chart or a continued increase in deaths - which means fewer income recipients. But younger people are dying too, the very ones who are meant to support and pay into the entitlement programs. Due to deaths from drug overdoses and gun and other violence, America’s life expectancy is falling, lagging many others in the developed world.

As Congress and the White House bicker back and forth over the debt ceiling, both sides have agreed that cuts to the Social Security payment program are not on the negotiating table. But, as a 1996 law outlined, money in the Social Security bucket is to be used for benefits, nothing else and nothing more, meaning it cannot be tampered with to pay other debts.