Just In Time

There have been a number of indicators that the consumer is starting to crack. And that’s at pretty much full employment. The deadly straw for the camel is if/when unemployment begins to accelerate. I think employment remains the key lynchpin holding everything together.

So it wouldn’t be great in an election year if unemployment spikes and dominoes start to fall. The key is to keep demand and spending higher. And with stimulus gone and credit card debt delinquencies spiking, we need something else. So…

A proposal was submitted to the Federal Housing Finance Agency for approval in April 2024 to allow Freddie Mac to begin purchasing and guaranteeing second mortgages. The goal would be to provide borrowers with a lower-cost alternative to cash-out refinancing and tap their home equity without refinancing their first mortgage at current higher interest rates.

I believe the proposal is still in the comment period, but it made me think about this chart. I can’t remember where I clipped and accidently missed the source, so note that. (If you know where to find it let me know in the comments)

Basically, it shows a link between credit availability and unemployment. That’s pretty straight forward but credit availability tends to lead spikes in unemployment. Sure, lenders start to get more conservative and/or borrowers look more shaky, demand weakens more, then unemployment ticks up, then dominoes start to fall.

In the most recent period, 1) it was different this time – Covid stimulus negated the spike in unemployment and credit availability continued to rise through the pandemic. 2) As we have started to “normalize”, we’ve seen a drop in credit availability and now we are starting to see unemployment tick higher.

Ok, so what?

Well if the Freddie Mac proposal passes, you could get a rebound in credit availability and ANOTHER stimulus from home “equity” as housing prices remain high which should help support spending. Now there’s the obvious long term considerations for doing that, but when did we start caring about the long term? (medium term?)

The irony is that such support could also be more inflationary which keeps us “higher for longer”. All of these “band-aids” that have been created over the last 50 years have certainly lengthened cycles, but I can’t see a path to eliminating them which ultimately leaves us with higher volatility in the long run, bigger ups and bigger downs.