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The Daily Missive

The Consumer Is Cracking

By October 24, 2023No Comments

There's always a period of curious fear between the first sweet-smelling breeze and the time when the rain comes cracking down."

— Don DeLillo

Zach Scheidt here, writing on behalf of The Essential Investor by invitation of Addison.

Today, I want to make sure you’re aware of this developing trend, so you can better protect your wealth and generate some extra income for retirement.

Let’s jump right in.

Car payment delinquencies are hitting an all-time high as inflation makes it more and more difficult for families to pay their bills.

This fact is particularly concerning when you think about the way many families organize their budgets.

I don’t typically recommend families borrow money for a depreciating asset like a car, especially in today’s high interest rate environment.

But for families that do take out an auto loan, there’s a huge incentive to stay current on the payments.

That’s because if you default on your auto loan, your car will almost certainly be repossessed. When that happens, it becomes even tougher to make ends meet.

After all, how are you going to get to work when you don’t have transportation?

Yes, there’s public transportation. And some people may choose to take an Uber or Lyft to and from work.

But those options are either time consuming or prohibitively expensive in most cities. So borrowers tend to avoid missing a car payment at all costs.

Typically, most families start by making sure their rent payment is covered with the family’s car payment being a close second on the priority list.

Once those two items are covered, families can then divvy up the remaining income for groceries, incidentals, and other family expenses.

The fact that auto delinquencies are hitting an all-time high is a very sobering statistic for our consumer-led economy.

On one hand, the rising rate of auto delinquencies is concerning.

Roughly 70% of the U.S. economy is driven by consumer spending.

And while many affluent consumers are in decent shape because of rising home values, many middle-class and lower-income families are struggling with stubborn inflation.

Wage gains simply haven’t been strong enough to offset rising costs. And that’s why we’re seeing more people default on auto loans.

On the other hand, our free-market society gives investors like us an opportunity to profit from just about any environment. You just have to know how to set up a trade that benefits from specific situations.

Today’s challenges are making life particularly difficult for companies who lend to lower-income families.

The risk of default continues to climb and in many cases, lenders simply can’t charge enough interest to make up for the delinquencies and defaults.

Shares of credit card issuers Discover Financial (DFS) and Capital One Financial (COF) are now in clear downtrends and could have much further to fall.

Buying put contracts on these subprime lenders is a great way to protect your wealth and actually profit in a challenging period for investors.

Just to be clear, buying put contracts on DFS or COF won’t harm the families that borrow money from these credit card companies. So you’re not making money off the backs of working-class consumers.

However, shares of these lenders are likely to continue lower as delinquencies rise. And as investors, it’s our responsibility to take advantage of the opportunities that this market gives us.

It’s certainly a challenging time for investors. But with the proper tools, you can continue to grow your retirement wealth even while traditional investors are stuck treading water.

Here’s to living a rich retirement,
Zach Scheidt
Chief Investment Officer
The Essential Investor

P.S. As you may know, I’ve been working on developing the important investment themes you’ll find in The Great American Shell Game. Consumers tapping out on their savings is just one formidable headwind for the S&P 500 going into earnings season and the election year, 2024. Please take a moment to view the very important message Addison and I are trying to get across, right here.

Addison Wiggin

Addison Wiggin Addison Wiggin is an American writer, publisher, and filmmaker. He was the founder of Agora Financial and publisher for 18 years. An acclaimed New York Times best-selling author, his books include: Financial Reckoning DayEmpire of DebtThe Demise of the Dollar, and The Little Book of the Shrinking Dollar. Addison is also the writer and executive producer of the documentary I.O.U.S.A., an exposé on the national debt, shortlisted for an Academy Award in 2008. He lives in Baltimore, Maryland with his family. Addison started his latest project, The Wiggin Sessions, powered by The Essential Investor, in March 2020. He films from a homegrown studio in his basement.