Debt and Delinquencies are on the Rise
Cracks are beginning to appear in the health of the economy. Here are two that have us concerned.
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Full Transcript below:
00;00;00;00 - 00;00;25;06
Unknown
Welcome back to 30 Minute Money is the podcast that delivers action oriented, smart money ideas and bite sized pieces. I'm Scott Fitzgerald at ROC Vox Recording and Production, sitting with Steve Wershing of Focused Wealth Advisors once again to talk about the ins and outs of money and stuff. More money, money and stuff. Good morning. Good to see you too.
00;00;25;08 - 00;00;42;11
Unknown
Good to have you back in studio. Nice to be back. And, this is one of those things we're going to talk about the two DS that apply directly to me. Debt and delinquency. You're not a delinquency. You're not a delinquent. Maybe it's a juvenile. You are doing. No, I got I got worse with age for sure. For sure.
00;00;42;14 - 00;01;05;06
Unknown
Well, well then then there, then you you you're the expert on this one. So, Yep. The New York Federal Reserve, their center for Microeconomic Data released their quarterly report last week on household debt and credit for the first quarter of 24. And there were some things in here that were interesting and I thought worth talking about.
00;01;05;09 - 00;01;25;28
Unknown
one one thing that that I'll point out is that household debt balances grew by 184 billion over the last quarter. That may sound like a huge number. It is a huge number. But, you know, in context it you know, it's not that huge. But, but there are some things about that, that, that, that I thought were, were worth talking about.
00;01;26;00 - 00;01;52;21
Unknown
and that is that, not so much the, the amount of debt that's outstanding, but how far behind people are getting on paying back that debt. and that, I think, is, is the thing that that's worth that's worth noting. So, what what they're seeing is that not only are credit card balances and auto loan balances going up, but the delinquencies on both of those things are going up as well.
00;01;52;21 - 00;02;13;09
Unknown
So, it's not so much the total outstanding debt that's important, but the fact that more and more people are struggling to repay that debt. That's the I think that's that's the thing that's that's worth talking about a little bit. And when you talk about household debt, that's like the average home, a couple of people, generally speaking, would be a married couple.
00;02;13;09 - 00;02;34;00
Unknown
Or is that are other demographics measured by a household? So if I house a single person household or could be a couple or could be a family, okay. But they measure it by household. Gotcha. Yep. And so, well, one of the things that we see is that, the utilization of debt is very different across age groups and income groups.
00;02;34;02 - 00;02;55;26
Unknown
And the more they, the more a household utilizes debt, the more likely it is that they're going to be struggling to pay it back or falling behind. So, you know, serious delinquencies, which are more than 90 days behind. That's the stat that they were looking at. And we can see clear distinctions between, different age groups and between different income groups.
00;02;55;27 - 00;03;21;26
Unknown
So, baby boomers, yeah, they don't use a whole lot of debt and they don't really have a whole lot of problems. But, Jen's, millennials and Gen Z have, you know, more and more debt, like the the baby boomers, they may have like 5%. They're utilizing maybe 5% of their of the potential that they have for how much debt they could take on, millennial or more like 14%.
00;03;22;03 - 00;03;39;28
Unknown
And, Gen Z is more like 19%. So, that's, you know, using a lot more of the debt that they could potentially qualify for. Would you say that that's like a generational thing, like people, boomers, you know, there was a part of their lives where credit cards weren't really a big thing? Yeah. You know, it could be that.
00;03;39;28 - 00;03;59;23
Unknown
But I have a feeling it's it's it more points in the direction of it's harder to, to make it in this world, you know, so the, the people who are younger and getting started are having a tougher time. Right, than, you know, the boomers. And that's not fair because where if we wanted to really measure that, we would look at the boomers when they were that age.
00;04;00;02 - 00;04;16;04
Unknown
But I think, you know, what it's pointing out is that people who are you have been out there for a while or better established and that kind of stuff are, you know, having fewer debt problems. And it's the people who are trying to trying to make it, trying to, you know, lift themselves up. They're the ones who are having the bigger problem.
00;04;16;04 - 00;04;38;13
Unknown
And, and I, you know, I worry about what the implications of that are. You know, as people as, as the boomers retire and as the, the people of Gen Z try to establish careers and start making it, because that's going to have a direct effect in, you know, how much they're putting into their 400 and K and how much they're, you know, saving for their goals and you know when they will be able to buy their first house.
00;04;38;13 - 00;04;57;21
Unknown
I think all of those things are the downstream things that we're going to be looking at that you know, we're going to affect not only the economy, but certainly going to affect those households in a big way down the road. And how does how does their income and their, professions and stuff like that, how does that mix in with, with this data?
00;04;57;24 - 00;05;23;28
Unknown
Well, one of the things, and I don't have this at my fingertips, but one of the things that I've also seen in the headlines recently is that unemployment is beginning to creep back up again. and so, you know, I think it has it's related to, you know, we, we, you know, we talk about really very low levels of unemployment, but the, but the levels of unemployment are in fact going up.
00;05;24;01 - 00;05;40;28
Unknown
And so we have, you know, although we're in this environment of low unemployment, we have a lot of stories of people who are graduating college, and they're really having a tough time finding a job. But, you know, a lot of the the unknown or the employed, they're not fully employed. They're part timers. Right. Well, and then there's all that kind of stuff that we can dig into, right?
00;05;40;29 - 00;05;57;24
Unknown
Yeah. Yeah, yeah. You know, we've, we've had the unemployment is low. But you know, oh here's Sarah who's a single mom and she's got three jobs, you know, and trying to keep things together. So yeah, there's a lot of there's a lot of nuance to dig into there. and where that shakes out, you know, is when, when you see household debt.
00;05;57;27 - 00;06;18;19
Unknown
Now, one of the interesting things and I'm going to get this is probably a terrible idea, but I'm going to get a little bit political when we talk about this, because I it points to a more important financial planning principle. If we take a look at, the households that are utilizing their, their debt capacity like they're, they're, they've borrowed as much as they can.
00;06;18;22 - 00;06;46;16
Unknown
And the ones that are falling behind, the ones where there are delinquencies, it's going up pretty significantly over the past couple of years, but it's really only getting back up to where it has been, you know, historically over the past 10 or 20 years. So when we look at a graph of, people who are, you know, what proportion of the people are you are maxed out on their debt and what proportion of people are more than 90 days behind?
00;06;46;19 - 00;07;04;21
Unknown
we're actually getting back to what was a pretty stable number before the pandemic and where I, where, I mean, I'm going to be political for a second. I think one of the things that this points to, this is what we would call what economists would call a natural experiment. It's not the kind of thing you could or would want to set up, but it just happened.
00;07;04;21 - 00;07;24;25
Unknown
So we can look at it and see what it tells us. And one, one interpretation that I'm making from this is that it's kind of a demonstration that if you give a bunch of people a bunch of money that doesn't necessarily fix their financial problems, right, right. So during the pandemic, people were artificially constrained in their spending. And then the government started sending out huge checks.
00;07;24;27 - 00;07;42;02
Unknown
Right. And so, you know, some a lot of people may very, you know, a lot of people who are having debt problems might very well say, oh, geez, if I could just get rid of this, everything would be fine. If I could just get past this, everything would be fine. Well, guess what? It doesn't look that way. It looks like if we give you a bunch of money, it'll be good for a bit.
00;07;42;04 - 00;07;59;27
Unknown
And then you go right back up to where you were. And you're right in the same boat. So the the message there, you know, one message, the political message message is government programs to send out big bunches of money do not do not make fundamental change in the long term. So, you know, we really have to question the wisdom of that.
00;07;59;27 - 00;08;20;11
Unknown
But the other thing that it points to is it reinforces that many of the people who struggle with financial issues, it's not because they hit I mean, for some people, it's because they had a particular setback and it just they couldn't get back out of it. But I think the bigger truth is, if people don't have the right habits or if they don't get into the right habits, then they're going to have problems.
00;08;20;11 - 00;08;45;18
Unknown
And if you give them a bunch of money, it'll solve their problems for about 2 or 3 years. And then if they don't have the right habits, they're going to be right back in the same problems. Yep. So, and I think that has relevance because, you know, we talk a lot these days about different programs like, you know, like, forgiving student debt and, you know, distributing money as a way to, to raise people up.
00;08;45;18 - 00;09;06;15
Unknown
And, you know, I might take one takeaway I have from this is that distributing a bunch of money to help people give people a hand up in the long run is not productive. There has to be some other way that we look to to help people get better established. Yeah. And this is, an interesting time because it's really the first time that they're putting that, like you said, it's a natural experiment.
00;09;06;15 - 00;09;22;09
Unknown
So they're they're putting that theory to the test. Right. Exactly. Yeah. Well, yeah. Exactly. And that the biggest issue I have with with government programs like that, one of the biggest issues I have is that they don't look at the data, they don't look back at it and say, okay, so we tried this. And how did it work out?
00;09;22;11 - 00;09;38;13
Unknown
Every time this comes up again, it's kind of like, well, this sounds like it would make sense. Let's do this and not ever look back at the data to see whether or not that actually, because, you know, very few of these things that that that they think about doing have it have never been done before. There's probably been some analog.
00;09;38;17 - 00;09;55;14
Unknown
Well, yeah. And you know, the, the, the pendulum swing and so wildly back and forth. Right. But every time it goes over here, let's change it all and then it goes back over here. Yeah. Let's change it all. So there's no consistency through the years. Yeah. Well yeah I or you know well here's a problem. So here's what we're going to do to solve that problem.
00;09;55;14 - 00;10;10;27
Unknown
And of course you do that. You create all these other unintended problems. Oh, well, let's let's do this. And that's the pendulum swing back the other way. We'll, we'll do this to solve those problems. And you just, you know, go back and forth. But it also there is something that that President Biden just signed into law that that also relates to this.
00;10;10;29 - 00;10;30;00
Unknown
And, you know, I and a lot of people would say, oh, that's a really good thing, but I think it's a little more nuanced. And that is that he just, you know, the administration just passed a whole bunch of rules to eliminate what they called junk fees on things like credit cards and that kind of stuff. And, and here's the thing about that.
00;10;30;00 - 00;10;49;10
Unknown
Yeah, you know, I, I've gotten I've gotten clipped by those every once in a while. If I forget to make a payment on time or something like that, I get this big, this big fee, you know, and I'm never happy about it. Then you don't do that again. That's it, that's it. Right? You learn what you know. What what what economists would say is prices have information, right?
00;10;49;10 - 00;11;09;12
Unknown
That's why surge pricing works as unpopular as it is. That's why that works is it's information. And, you know, I relate it to my own case. So I you know, I sold my house last year and I and I started renting and, you know, I didn't want to get on one of those automatic programs. I'm just, you know, I wasn't I'm not wild about, you know, people who can dip into my bank account and automatically pay.
00;11;09;13 - 00;11;29;12
Unknown
I want to I want to be the one making the decision. I want to push the button. Right. And so I was doing that, and I would get notified that my rent is due in one month. You know, I, I got behind in my email, I didn't see it. And I, you know, I missed the payment by like a day or two and I got and they charged me 125 bucks for that.
00;11;29;14 - 00;11;48;03
Unknown
Well guess what? I've never missed another bad day. Okay, I got to get over my thing about automatic payments. I immediately signed up for the automatic payments. And so, you know, if if we do these things, you know, in the, in the interest of, you know, I'll put it in air quotes helping people. We deny them information that that would be really important.
00;11;48;03 - 00;12;01;12
Unknown
I mean, if you knew that you were going to get hit with a big fee for not doing something, a lot of people, you know may not be able to avoid it, but there are going to be a fair number of people who would say who who would go through a once, like I did on my late payment for the rent.
00;12;01;14 - 00;12;19;22
Unknown
And I'm like, you know what I mean? I'm going to change how I do this because I'm not going to let that happen again. So prices have information. And I think anything that we do to reduce that reduces information and reduces feedback to consumers and actually, you know, denies them, denies them information that would help them develop a better habit.
00;12;19;22 - 00;12;44;22
Unknown
Because again, what it comes down to is habits. one related statistic that I picked up and again, this is from the New York Fed, the annual rate for car owners being behind one month or more on payments is now 7.7%, which is the highest, the highest percentage since the fourth quarter of 2010. Wow.
00;12;44;24 - 00;13;04;11
Unknown
And what does this mean? Well, we we just talked about it means that people are struggling more so that, you know, we talk about, you know, we we debate whether this is a good economy or a bad economy. And there there's a lot that points in both directions. But one thing it certainly brings up is that a lot of people are struggling to keep up with stuff.
00;13;04;13 - 00;13;24;22
Unknown
what it also potentially means is that, people will if, you know, rational consumers, will be cutting back on their consumption. So they will be buying fewer cars. If they can't afford a car, they'll be they'll buy fewer cars. If they're more in credit card debt, they will be, we hope, spending less. So they don't run up that credit even further.
00;13;24;25 - 00;13;54;03
Unknown
And customer consumer spending is 67% of the economy. So if they spend less then recession, that's where a recession comes from. So, you know, spending less means lower corporate profits. It means it means, you know, higher unemployment. Ultimately it means lower stock prices. So you know, the there's there's a lot of interesting information in this statistic that, you know, people are back up at record debt levels and falling further behind that.
00;13;54;03 - 00;14;17;24
Unknown
I think it's something that, you know, we should be paying attention to. One thing is if if, you know, if this affects somebody that you know or if it affects you, just bear in mind it's your habits. It's not how much money you have in the bank that will determine how you do well long term. But also if we think about where the portfolio is going, then this may be an early warning sign that that, you know, things may be the trends may be changing.
00;14;22;02 - 00;14;56;24
Unknown
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00;15;47;18 - 00;16;15;17
Unknown
All right so debt and delinquencies you're a 30 minute action item 30 minute action item is how much debt do you have total? Me? The whole family I'm just kidding. So that's it for us today 30 minute money. You can find us at three zero minute money and all the podcast platforms like review, share, and you'll notice a little link there so you can get in touch with Steve so that he can help you with your financial decisions.
00;16;15;17 - 00;16;36;23
Unknown
30 minute money. We'll catch you next time. Thanks.