💰 5 Fact Friday: The U.S. Runs On Credit

Hey Money Maniacs,

Welcome back to 5 Fact Friday, your weekly roundup of the most important financial news.

Every day I read, research, and rummage through the economic landscape... so you don't have to.

Here's what's caught my attention this week:

1. The U.S. consumer is stubborn resilient

Retail sales exceeded expectations in December. Department stores, car dealerships, and online shops all led the way, indicating that American consumers did not hold back last month.

But, maybe they should have…

The Fed’s latest Consumer Credit report reveals a worrying trend. Credit card and “Buy Now Pay Later” services usage soared during the holidays, pushing credit balances over $5 trillion for the first time.

Now, as the bills come due, delinquencies are picking up.

The percentage of borrowers who are 1, 2, or 3 months late on payments has surpassed pre-pandemic levels. And the percentage of cardholders who paid their balance in full fell to just 33% – the lowest level since 2020.

Despite this debt surge, the Consumer Expectations Survey indicates that Americans aren’t planning to cut back. They expect both essential and nonessential spending to rise.

This “resilient” spending is a double-edged sword for the U.S. economy.

On one hand, consumer spending is ~2/3 of the economy and keeps the wheels turning. On the other hand, increasing debt and declining savings rates could be setting us up for a harsh reality check.

The big question is: can we continue to fuel growth through spending, or will the weight of expensive credit card debt start to tip the scales? Time will tell.

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2. China’s population is shrinking

China is facing a demographic challenge that's hard to ignore. After a 0.85% decline in 2022, the population dipped another 2.08% in 2023.

This trend has significant implications for the world's second-largest economy, and here's why:

1. Economic growth: With fewer people comes less consumer demand. Unless exports pick up enough to offset lower domestic spending, China may struggle to sustain its growth.
   

2. Workforce availability: The workforce is also at risk. With fewer young people entering the labor market, replacing an aging workforce becomes a challenge.
   
   This could lead to labor shortages and put upward pressure on wages, impacting the competitive cost advantage that has been a cornerstone of China's economic rise.
   

3. Social welfare sustainability: Population decline puts pressure on social welfare systems, like pensions and healthcare. With fewer workers contributing to these systems and a growing number of elderly relying on them, the financial sustainability of these systems is tested.
   
   This could lead to increased taxes on a shrinking workforce or cuts in social benefits, both of which have negative repercussions for citizens.

China's population decline isn't an anomaly – it’s a natural consequence of aging demographics. Many developed nations, such as Japan and parts of Europe, are grappling with the same problem.

The most obvious solutions involve boosting the population (birth rates and immigration) or boosting productivity (technology and automation).

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3. Bitcoin ETF debut sets trading records

Last week’s approval of 11 Bitcoin ETFs made waves in the crypto market.

According to Eric Balchunas, senior ETF analyst for Bloomberg, Bitcoin smashed records with “easily the biggest Day One splash in ETF history.”

The day bitcoin ETFs opened, Bitcoin popped to ~$49,000. Since then, however, it has sold off nearly 20% – settling back into its range from before the SEC announcement.

So, why hasn’t Bitcoin’s price benefited from all this trading action?

The primary theory is that Grayscale Bitcoin Trust’s conversion to an ETF has created temporary selling pressure.

Previously, Grayscale Bitcoin Trust (GBTC) operated as a trust fund. Shares in this fund could only be sold on the secondary market – making it very difficult for holders to get liquidity. As a result, the fund traded at a discount to the market price of Bitcoin.

Now that GBTC is an ETF, owners can finally take back control of their funds. This change unlocked $29 billion worth of Bitcoin.

This conversion gave owners the chance to sell and cash in on Bitcoin’s 100% gain over the past year. Or, they may transfer their funds to a cheaper ETF provider. (GBTC currently charges a 1.5% expense ratio, whereas Fidelity charges just 0.25%.)

Then again, maybe this was just another “buy the rumor, sell the news” event.

At any rate, the early trading action is encouraging for crypto. Even though prices didn’t spike as some hoped, the validation and increased investor access should benefit the market in the long run.

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4. Homebuilder sentiment is improving

The homebuilding industry is witnessing a wave of cautious optimism, as falling mortgage rates begin to breathe life back into the market.

The National Association of Home Builders’ monthly index jumped from 37 to 44. Technically, this indicator still lies in negative territory (below 50), but it shows momentum over the past two months.

This budding confidence is largely fueled by the significant drop in mortgage rates, which have fallen from around 8% to approximately 6%. For those on the fence about purchasing a new home, these lower rates could be the deciding factor, potentially kickstarting a revival in the single-family home market.

To put it into perspective, consider the median U.S. house price, which hovers around $425,000.

For a buyer opting for a conventional loan covering 80% of this cost, this 2% reduction in mortgage rates translates to more than $450 in monthly savings.

This level of savings may re-open the door to homeownership for many. Others, however, may opt to plow those savings right back into more house. In that case, the drop in rates can add upwards of $70,000 to their home-buying budget.

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5. Car ownership is costly

In the land of road trips and car culture, Americans are struggling to keep up with the soaring costs of car ownership.

Since 2020, the price of a new vehicle is up 30% while the price of a used car has skyrocketed 38%.

The pandemic, with its supply chain disruptions and chip shortages, played a significant role, pushing car prices to record highs. But even as inflation eased throughout 2023, car prices remained elevated.

Now, let's talk numbers.

New cars average $50,400, while used ones hover around $31,000. With standard budgeting advice suggesting not to spend more than 10% of your monthly income on car-related expenses, the reality is stark.

Only ~18% of Americans make six figures, the minimum income needed to reasonably afford a new car.

So, why the steep climb in prices?

Besides pandemic-induced manufacturing hiccups, there's a shift in consumer preferences towards larger, tech-heavy vehicles like SUVs and trucks. These models, with their higher trim levels and advanced features, command a premium price.

The result? Smaller, more affordable cars are getting axed from production lines due to low sales and a changing market appetite.

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Also, check out TheMoneyManiac.com for more resources on earning, planning, and investing!

Until next time,
Daniel

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.