Is our economy acting weird?

Sometimes we find ourselves pondering why the Duolingo owl is so passive-aggressive. Other days we end up wondering what’s really going on with our world’s economy.

Today falls into the second category for five reasons, starting with…

1. Three million

That’s how many cars will get repossessed in the US this year, the most in recorded history (yes, more than during the Great Recession). And that’s got tongues wagging because auto-loans are the second-largest consumer debt category after mortgages.

Now, maybe this is just a subprime (struggling) household thing, with little broader risk given auto-loans are barely an eighth the size of mortgages. Or maybe it’s cyclical. Maybe it’s Maybelline. Or maybe (in a 2008 repeat) it’s a canary in America’s economic coalmine.

Anyway, speaking of the automotive industry…

2. “When you see one cockroach, there’s probably more” – Jamie Dimon, CEO of JPMorgan

That was the billionaire Wall St titan’s answer when a journalist recently asked about the collapse of an obscure sub-prime auto-lender out of Texas last month.

And that collapse itself was interesting, not so much because of how bad the lender’s business model was (it sucked), but because of who got burnt when it imploded: some of the biggest names in finance had loaned these cowboys more than half a billion dollars! We’re talking shops like JPMorgan, Barclays, and Fifth Third (with 1,100 branches).

So for some of the sharpest (or at least best-paid?) minds on Wall Street to lose steaming piles of cash on such an obviously-bad deal, it’s sparking worries about America’s broader private credit boom (recap: as traditional banks tightened lending after 2008, money pivoted into the high-yield, high-risk, and low-regulation world of direct lending).

Now zooming out a little, the boffins at the IMF just highlighted three more vulnerabilities in their latest Global Financial Stability Report, starting with…

3. “Well above fundamentals“

That’s how the IMF described some asset valuations, including US tech stocks. Of course, those valuations might reflect genuine optimism around AI’s transformative potential (we explored the contrarian ‘AI bubble’ case on Thursday).

The thing is, if sentiment suddenly shifts (on the fundamentals or not), there’s the risk of what the IMF charmingly calls a “disorderly” correction (something Intrigue would non-charmingly call a sh!tshow).

And sure, there are ordinarily ways to hedge against that sort of outcome, but…

4. “One of the most troubling shifts is the potential erosion of the hedging role of longer-term bonds“

That hedge role is weakening for all kinds of reasons, like more supply (ie more government borrowing) and weaker fundamentals (ie weaker ability to repay). The result is bond markets aren’t behaving as the ideal hedge they used to be. And a weaker hedge means (say) a tech or private credit crash might cascade more rapidly across the economy.

And that process can now play out even more quickly, because there are…

5. “Stronger interconnections between banks and nonbank financial institutions (NBFIs)“

As we hinted above in the ‘private credit boom’ bit, there are increasingly blurred lines between banks and NBFIs (asset managers, hedge funds, private credit lenders etc). The result is both banks and NBFIs often hold similar exposures, including via bonds — eg, many NBFIs hold massive bond positions backed by bank loans.

The result of these blurring lines is, rather than absorbing shocks, bonds can (via NBFIs) now transmit them.

So that’s why Uncle Gus falling behind on his F-150 repayments might auger our next crash. Or maybe not?

Intrigue’s Take

The IMF report uses some evocative language, arguing that “global financial markets appear calm, but beneath the surface, subtle shifts are taking place.“

We explore those subtle shifts here every day, ranging from tech and energy through to security and supply chains. But across them all, a few common themes emerge.

First, there’s our two-speed world, both…

• Within economies (running hot on optimism and liquidity, while also straining under debt and inflation), and…
• Across economies (the various haves and have-nots across AI, solar, et al).

Second, there’s the way stability often masks transition: our jobs, repayments, rates, politics, and security can seem stable and inevitable until they’re not.

And third, there’s the way these themes all increasingly interconnect, with one more easily snowballing into the other: a world gripped in transition — whether tech, political, energy, or economic — seems less likely to rush to the aid of Sudan or anyone else.

Anyway, we remain truly hopeless optimists, but it’s good to anchor that optimism in reality, even if it’s acting weird lately.