It is becoming more apparent every day that the consumer is feeling the pinch. It is no surprise though given the chart above clearly indicates the spending since Covid has been on the back of debt.  If this was not the case, there would be a widening gap between consumer credit and spending like what occurred between 2005 and 2020. Unless everyone wins a lottery, spending is about to slow down significantly for the rest of this year and next.  People have no choice but to clean up their balance sheets and central banks are willing to speed up the process.  There is nothing the government can do, except cut taxes that will stimulate the economy and we all know this will not happen under Trudeau. Over the next two years, the indebted are going to feel more pain from their bad financial decisions. 

After announcing that same-store sales dropped 10.9 per cent and EPS dropped nearly 40 per cent during the second quarter, the CEO of Sleep Country, Steward Schafer, stated “we continue to see softness in the second quarter following a slowdown in consumer spending on large discretionary goods”.  He was, however, “cautiously optimistic” that the shift in spending is temporary (obviously – good times will follow the bad). The same week Canadian Tire reported ok earnings but rescinded on a three-year financial forecast and stated, “as inflation persisted and rate hikes continued, consumer demand for discretionary goods softened, particularly in the latter half of the quarter, and Canadians shifted to more essentials”. 

The Office of the Superintendent of Bankruptcy reported that the 31,224 consumer insolvencies between April and June was up 23.5 per cent compared with the same period last year, while business insolvencies rose 36.9 per cent to 1,090. The agency said total insolvencies for the 12-month period ending June 30 were 116,653, up 23.2 per cent from the previous period. On the business bankruptcies front, it is estimated that there are 250,000 small businesses on the brink of insolvency across the country.

It is no surprise that bankruptcies are increasing. Driving through the neighbourhood leading to my favourite hiking area there is subdivision consisting of middle-class homes built in the sixties and seventies.  Today they start at $750,000. Homes in the new subdivision up the street are all priced between one and two million dollars.  Just about every driveway along the way had between two-and-four cars and a toy on it.  How can people afford these luxuries when the average family income is now $122,000 per year?  Even with a $200,000 income people cannot afford all these toys and big houses. 

To gauge how much trouble is coming take note of how many cars, RVs, and boats are for sale in driveways and parking lots. Keep an eye on websites like leasebusters.ca and autotrader.ca as well. Today it is not serious, but if the amount spikes, then you know people are getting stressed. If few are up for sale in the fall it means the borrowing party will continue, along with higher interest rates. Central banks are vocal about their goal to push down debt levels, but too few are listening.

Sadly, Europe, the US and Canada continue to throw endless amounts of money at pseudoscience. Wasting money on renewable energy, EV customers and manufacturers is a drag on the economy because it is funded by taxes which comes at the expense of the disposable income needed to buy the goods and services in the first place. If the above business models worked, corporate titans would be investing their own money, but they’re not. Most that did have already sold or are considering selling their holdings.

Climate change driven industries should be funded by stakeholders, like every other business.  Shareholders are smarter than politicians and always prove they do better with their own money rather than giving it to the government to manage.  The world has 400 years’ worth of natural gas reserves backed by an existing clean and reliable infrastructure created by shareholder funds, freeing taxes for areas that benefit everyone such as healthcare, education, and military.     

Spending has continued to slow and will appear in the third quarter earnings reports.  This is already evident in the Baltic Dry Index (dry-bulk shipping rates) which is still falling, and down 9% this year already. It is a sign that world-trade has slowed and will slide further in the weeks ahead. There should be an uptick in the index in the fall as stores stock for Christmas.  If there is not, watch out, because it means household finances are falling apart.

It is becoming evident everyday that the economy is close to contraction. To protect your savings, continue to buy one-year insured GICs and blue-chip shares which have with yields between 5 and 6.5 per cent. These include utilities, Canadian banks, and energy shares. A yield above this level tends to indicate a future dividend cut.   Avoid shares that do not pay a dividend.