Markets Just Don’t See It Yet (Uncut) 05-13-2025

U.S. Consumer Is Breaking Down – Markets Just Don’t See It Yet | Stephanie Pomboy

Welcome back to Kitco News, I’m Jeremy Safran. Well, the Dow just surged more than 1,000 points and Wall Street is cheering what looks like a temporary ceasefire in the U.S.-China trade war. Meanwhile, stocks jumped after both sides agreed to slash tariffs for 90 days.

But while the mainstream financial media celebrates, some economists are asking whether we’ve simply kicked the can yet again. Now, one of those voices is our guest today, Stephanie Pompoy, founder of MacroMavens, known for spotting structural imbalances long before they show up in those mainstream headlines. Now, she recently posted on X, quote, I hate to be the one to rain on this spectacular parade, but isn’t this just a 90-day ceasefire? To listen to the financial media, you’d think it was the final agreement.

And it ain’t. Meanwhile, the 10-year Treasury yield, her number one macro signal, by the way, is surging. Credit spreads are widening, gold is plunging, and real consumption hasn’t grown in over two years.

And beneath the rally, the U.S. consumer, corporate borrowers, and even the Treasury may be running out of rope. What’s really driving the markets right now? What comes after this 90-day pause? And is the Fed even in control anymore? Joining us now is our friend Stephanie Pompoy. Great to see you, Steph.

Thank you so much for having me, Jeremy. Yeah, there’s a ton to talk about, isn’t there? There’s so much to talk about today. It’s just one of those, you know, every Monday, I feel like we just kind of get hit in the face with the news here.

But let’s jump into it. Wall Street, as I mentioned, is kind of throwing a party over this U.S.-China tariff pause. But the Treasury market seems to be telling a bit of a different story here.

I mean, the 10-year yield just surged to 4.45 percent. Credit spreads are widening. And as I mentioned, gold is down $100.

So what’s the market really responding to here, Steph? What’s the disconnect? Well, I think that tariffs all along have been sort of a convenient distraction from the main issue. And, you know, I wrote a piece back when Trump first debuted his tariffs and the markets got all hysterical about it called scapegoating. And, you know, the idea was that this whole tariff drama was going to steal headlines away from the main issue, which, of course, is our runaway fiscal situation and specifically how we’re going to be able to finance these deficits, which is why I continue to focus really intently on the 10-year Treasury yield.

And it’s not just me that’s focusing on it. Scott Fessett, the Treasury secretary, long ago basically said, you know, our focus isn’t on the stock market. That’s not how we’re measuring our success or failure.

It’s the direction of the 10-year Treasury yield. So right now he’s got to be rather disappointed that he spent the weekend cobbling together this 90-day ceasefire and the 10-year yield backs up. Now, arguably, you would say that’s because people are anticipating stronger economic growth and that may be the case.

But the fact is that the 10-year yield has been really recalcitrant. I’m going to use one of my SAT vocab words, but it’s the perfect one to describe the action in the 10-year. Long rates just really have been stubbornly high.

And that’s an issue for an economy as levered as ours, not just for the government financing. But as you mentioned in your opener, the corporate sector, which has a tremendous amount of debt to roll this year and next year and the year after that. Yeah.

And the year after that, maybe. Get into this Treasury for us a little bit. Talk a little bit more about them, because you point to the 10-year yield as your number one thing to watch.

What is it telling us right now that the stocks are ignoring here? Yeah, well, I don’t think the stock market’s going to be able to ignore it for long. I mean, this is just a giddy celebration on the tariff headlines. But generally, you know, everyone, I think, understands that raising the cost of borrowing in an economy as levered as ours is a major issue.

We’ve seen corporate debt service has doubled since the Fed started raising interest rates when it first started tightening back in 2022. So we’ve had these, you know, S&P large, the largest companies in the country, the S&P 500 companies, their debt service has doubled over that stretch. And you can only imagine what the picture looks like for the smaller cap companies beneath that.

You know, if you broaden the lens out to the Russell small caps and if you even look into the private credit space, and obviously it’s very hard to get data on that. But there is some work that I’ve seen recently that suggests that, you know, interest coverage ratios in that area have really deteriorated in just the last couple of years. So higher rates are an existential problem, not just for the federal government again, but for the corporate sector.

And to put numbers on it, there’s a trillion dollars in bonds, corporate bonds that have to roll this year and then 1.2 trillion next year. And it’s another one point something or other trillion in a year after that. So I haven’t even memorized that number because I’m worried about us just getting from here to that point.

Yeah, a trillion. OK, we’re going to jump into that trillion before we do. I mean, are you watching other countries buying U.S. debt here? I mean, if foreign buyers retreat from the U.S. Treasuries, as some believe China is already doing, what’s the plan B? I mean, can U.S. banks really replace the demand or is this where the Fed steps in? Well, this is the million dollar question, Jeremy.

And this is why when the administration came out and really proposed this big economic reset, which is really not just a reset for the U.S. economy in terms of revitalizing domestic manufacturing production and bringing supply chains home. But obviously it’s a reset for the world, you know, whether they want to participate or not, they’re going to have to. But that economic reset in trade has to coincide with some kind of plan for how you’re going to finance the deficits.

Because basically, if you’re saying the U.S. consumer isn’t going to be the consumer of global goods and the rest of the world can’t just rely on exporting all kinds of cheap stuff to us, then the necessity for them to recycle dollars from selling those goods to the U.S. consumer obviously diminishes as well. And if that goes away, that’s been what sustained our deficits, is that we’ve had this sort of vendor financing quid pro quo in place for decades now where, you know, it was kind of a good arrangement or it appeared to be for U.S. consumers got cheap goods. The rest of the world, you know, was able to boost their growth by having strong export sector.

And then they would take those dollars and basically lend them right back to us by buying our U.S. treasury debt. So basically what they’re resetting isn’t just trade, but they’re resetting the entire dollar reserve dynamic. And I think that part of it hasn’t gotten the attention or focus from the markets.

And it also hasn’t been articulated by the administration. I mean, what is their game plan for that? How do they intend to finance these deficits? And I think the answer right now is they are hoping that some combination of savings from doge and tariff income and then growth, you know, if they can get these tax cuts through and stimulate some real growth in the economy, they’ll generate enough revenue to help bring down the deficit. But that’s a lot of ifs and, you know, time is of the essence.

In the meantime, we’ve got to figure out who’s going to buy two trillion dollars worth of paper. And as you said, you know, the banking sector, I know they’re talking about changing the leverage ratio for the banks possibly as a way to allow them to free up more funds to buy treasuries. Do you really want to have the banking sector lending to the federal government? Isn’t the banking sector supposed to be lending to the private sector? And if they’re lending to the federal government, then, you know, who’s going to lend to the private sector? It just seems like that’s not really the solution to this problem, which is why, as you and I have talked about before, I always come back to the Federal Reserve as the only obvious candidate to absorb all this issuance.

So let’s go back to the Fed here, because, I mean, we’ve been talking about, you know, these T-bills. We’ve been talking about other countries selling some of this debt. But how close are we to a Treasury market accident? I mean, does the Fed eventually return to QE? Does that become inevitable in your view here? Well, I think we got a little glimpse of a potential accident with this unwind of the basis trade, which has been really enormous and ongoing for years now, and actually is one that the Federal Reserve has flagged as a potential source of dislocation in the financial market.

And I think it’s not an accident that they started to taper the quantitative tightening way back, you know, several months ago and now have accelerated that taper as the Treasury market has really refused to come to heel. And Secretary Besant acknowledged that there was some issues around the unwind of leverage associated with the basis trade. So I think the good news is that he, obviously being a Wall Street, you know, very successful hedge fund manager, understands the dynamics of what’s happening in the Treasury market and is mindful of it.

But even he sort of poo-pooed that as just a few players getting overly levered and now having to unwind their positions. But there’s still the larger issue of how we’re going to finance all this paper. And you alluded to T-bills and what’s happening there.

And, you know, one of the things that’s kind of created a problem for us is that Janet Yellen, Besant’s predecessor, decided to finance these two trillion dollar deficits with T-bills. So something like north of 80 percent of our Treasury issuance was Treasury bills, which meant that, I mean, basically she was gambling that the Fed was going to cut rates so she could borrow cheap. And then a year from now, when she had to refinance, she’d be able to do it at lower rates.

And of course, that turned out not to be the case. Since arriving on the job, Scott Besant hasn’t made any changes to the structure of issuance as yet, which is a pretty powerful indication of how challenging the situation is because he was very outspoken against this sort of reckless financing with T-bills. So, but he obviously is sort of struggling to figure out a way around that since, again, you know, we’re facing an environment where yields are just stubborn.

And if he doesn’t continue to finance at the front end, interest expenses is going to be a lot higher. Sorry, I waved a little too long. I forgot what the question was.

Well, I mean, it brings me to the next point, because you just brought up Janet Yellen, obviously, you know, printing some money, relying on that debt issuance. Those higher rates aren’t being just affected, obviously, by the government. I mean, we’ve seen household and commercial bankruptcies accelerating.

April saw a 16 percent jump in consumer filings year over year. You flagged this in your past research. I mean, what does this wave of credit distress tell us about the true state of the economy, something we keep talking about here? Yeah, well, I like to focus a lot on the U.S. consumer because I figure if it’s almost 70 percent of the economy, if I get that right, I’m probably going to be pretty close to getting this story right.

Sadly, though, people are remarkably quick to dismiss some of the details as to what’s going on with the consumer. As you said, you know, we’ve seen a surge in delinquencies. In fact, the Federal Reserve’s data on credit card delinquencies shows it’s the worst level on record since they started tracking it.

And obviously, auto loan delinquencies have picked up as well. But there are a variety of other clear indicators of distress. I mean, one of my favorite was Hooters.

I figure, you know, there’s there’s a place where the demand for the goods are inelastic. But it turned out they couldn’t even survive. You know, the scenery couldn’t make up for the rising cost of the chicken wings or whatever.

So they went belly up or tits up as the case may be. And then we had McDonald’s and Burger King in the last couple of weeks with McDonald’s, the weakest sales since COVID lockdowns, which is stunning. So and we’ve seen a variety of these sort of fast, casual restaurant chains really struggling and obviously a bevy of retailers.

And then you look at things like Walmart, which is one of my favorite economic signals, because when Walmart is outperforming, it’s because the consumer is stretched and they’ve got more people from higher income levels that are now having to go shop at Walmart. And that stock has been really flying relative to the market for a while. So there are a lot of signals.

And then, you know, people dismiss it now. But the consumer confidence and sentiment numbers are obviously really spectacularly bad. And they’re so bad that people dismiss it as, you know, just they’re responding to the hysterical headlines and it has nothing to do with their actual day to day lifestyle.

But, you know, the delinquency rates would say otherwise. So I think the U.S. consumer is really in not in great shape. And then what we saw in the last in April was that there was a surge in retail spending.

I’ll be very interested to see what the retail sales report says on Thursday. But the weekly retail sales numbers were very strong in April, as I imagine consumers try to front run the tariffs. But they were trying to pay down credit card debt and slow and had slowed spending before that.

In fact, January and February were very weak. And so I suspect that we’ll have a very severe give back after, you know, they did this sort of involuntary spending because they they were concerned that if they didn’t buy the stuff immediately, the tariffs were going to make them absolutely unaffordable. So they really stretched to buy those things.

And I think we’ll see a pullback of material proportion in coming weeks and months. Yeah. In those upcoming numbers.

I mean, we’re going to watch them. Let’s get back to China. You just talked about this tariff.

And obviously we saw this 90 day tariff reprieve with China. It’s driven stock sharply higher here. But I mean, Steph, there’s no structural deal.

There’s no enforcement mechanism. It just seems like a pause. Is it a game changer? Is it just a headline driven sugar high? Like, where are we here? I mean, I think the most important message of the headline is that they were able to agree on a pause.

And so that suggests a little less stubborn stance on the part of China that maybe you see, you know, there’s a lot of speculation about, you know, his his popularity and his ability to maintain a power. You know, the economy there is obviously really struggling. And so the last thing he needed was this.

So the fact that they were willing to come to the table and come up with this agreement is very positive in that regard. But in terms of the actual substance, we’ll have to wait and see what happens, you know, three months from now when that when the pause is over. I said, you know, if you go back and look at Trump’s first term where he imposed tariffs, China at that point, you may recall they put on the tariffs and we had all the same, you know, tariffs are a tax on the consumer and inflation is going to go to the moon kind of headlines.

And it turned out that both the CPI and the PPI were lower 12 months after they put the tariffs on than they were at the time they were imposed. So clearly it was not a tax on the consumer. And the reason why is that China and the Chinese exporters took the hit.

They absorbed the tariff so as to maintain market share with U.S. consumers. And they did that in twenty eighteen when their economy, albeit not in great shape, was in vastly better shape than it is today. So, you know, this is just speculation.

But my sense is if they were willing to absorb the hit back in twenty eighteen, probably even more inclined to do so today. And again, you know, with Xi’s kind of tenuous grip on power or whatever, you know, I’m sure he doesn’t have a tenuous grip, but he’s got issues. His propensity to try to figure out a solution is probably a lot higher.

So I don’t worry about the inflation standpoint of it. But again, the thing that I worry about is how do we answer the question of the financing of our deficits? Because obviously, if China has no reason to be buying our treasuries, we have to come up with another buyer to sweep. Yeah, I wonder, you know, I mean, China’s famous for obviously putting stimulus in their market, too.

I mean, they have that in their treasury. Could that stimulus, you know, combined with this truce maybe boost global demand enough to delay this downturn that we’re talking about? Yeah, I mean, never underestimate China’s capacity to stimulate the economy and their willingness to do so. So, yeah, I think that’s absolutely true.

And, you know, we’ve actually you’ve seen a huge increase in Europe in particular in terms of the export business. So that helped them because you had that, again, this rush to front run the tariffs. So while U.S. consumers were buying things immediately, the foreign exporters were producing as quickly as they could.

And everyone was trying to, you know, we saw the first quarter GDP numbers with the massive inventory build up. So all of that is kind of already happened in terms of the production there related to trade. But I think your point on China’s stimulus just to support their economy is a very good one.

Yeah, yeah. Well, OK, we got it. We got to talk about the Fed.

I mean, you are probably watching J-PAL just like I was last week. They obviously held rates and signaled patience. And Powell said, quote, we just don’t know whether inflation or unemployment will be the bigger threat.

With inflation still sticky in services, unemployment is creeping up a little bit. Do you think the Fed’s trapped here, Steph? Yeah, well, that was a refreshingly honest answer from Powell. And, you know, normally they think they have the answers to everything and perfect foresight, and then they get it totally wrong.

So I appreciate that he’s not rushing to make any, you know, big decisions. But I don’t underestimate their capacity to get it completely wrong again. The one thing I will say is, I guess they’re definitely in a box because you do have inflation pressures that are higher than you would expect them to be at a time when the economy is slowing.

And you look at those consumer confidence and sentiment numbers and business sentiment and CapEx plans and all of this. You would expect inflation to be much softer and particularly in the commodity space. And I know there was a big celebration about oil getting back below sixty dollars a barrel.

Well, if you blinked, you missed it because today we’re back up to sixty two. So it does seem like those pressures are not going to abate. And that’s a problem for the Fed, as you mentioned, at a time when it’s clear that the employment picture is deteriorating.

But, you know, I think that his modus operandi right now is largely political. I hate to say that, but, you know, when you look back at the rate cuts in September and compare the economy then to the economy now, the case for cuts right now is substantially better than it was in September. So that’s not a question that any of the journalists in the room happen to ask him last week.

But they probably would have been booted from the room. But, you know, if you look at just simply from this is sort of a nerdy macro economic way to look at it. But if you look at nominal economic activity, nominal GDP growth and consider that generally long term rates should equal the growth rate of the economy.

Like generally, if you’ve got 5% nominal growth, you should have 5% interest rates. And that would be a neutral rate. We’re pretty much we’ve had an environment where growth has slowed down toward 4% and now Treasury yields are backing back up.

So we’re about to reach that point where the 10 year is telling you that the Fed is too restrictive. And I think actually Scott Besant made a point to that effect, although I think he was talking about more shorter maturities. But, you know, it’s essentially the same thing right now that the Fed is just too restrictive.

And that’s what the bond market is telling you. I find it so interesting, too. I mean, it is almost like they’re still fighting the last war.

I mean, they’re focusing on inflation, but they’re kind of ignoring signs of these tightening on credit and slowing demand. I mean, we saw small business loan demand fall to its lowest point since 2011. And banks continue to tighten their standards here.

I mean, what is it? What is it? What’s the Fed overlooking? Well, that’s why I said, you know, I hate to say it, but I feel like the number one thing is really political. Like he just doesn’t want to. Now, now Trump inadvertently has put Powell in a position where if he does cut rates, it appears like he’s caving to the administration.

And so that sets a very high bar for him to do anything, which is the exact opposite, I think, of what Trump was hoping to achieve. But, you know, he’s really set this up where Powell is trying to demonstrate that he’s got a spine. And the only way to do that is to resist cutting rates regardless of what the data says.

But you’re so right. You know, the credit stress is there. The interesting thing, though, Jeremy, and it’s been enormously frustrating to me, is that the credit stress is there when you look at bankruptcies and the sort of distressed debt exchanges, the rate at which that’s happening in the credit markets.

But when you look at headline credit spreads, you know, they’ve moved up during the risk off thing and now they’ve come back down. They’ve recovered a fair amount of the blowout in spreads that we saw prior. So this risk on attitude seems to just ignore what’s going on in terms of the actual fundamentals for a lot of these economies.

And it may be that they’re really betting on earnings accelerating. Maybe it’s a bet both that, you know, the tariff situation will resolve in a favorable way, but also we’ll get this big, beautiful bill with the tax cuts and that will provide some extra wherewithal for the corporate sector to withstand the higher interest rates and and service their debt. So I don’t know.

I can only speculate. But it is frustrating because you clearly see, you know, the worst bankruptcies basically since the Great Recession outside of COVID and credit spreads that don’t really reflect that yet, I would say. But I think they will.

Well, I wonder, too, about, you know, the refinancing. You know, you said 2025 is a year of corporate debt bomb, how it’s going to explode nearly a trillion dollars set to roll over. I mean, earnings season showed revenue misses and falling margins and cyclicals and small caps.

At what point does this declining corporate profitability begin to break this market optimism we’re seeing, right? Say amen. I mean, this is what I ask every day. And then you look at things like obviously the consumer has been the flashpoint of the real weakness, consumer discretionary, like I mentioned, all the retailers and fast, casual restaurants and whatnot.

And in the consumer discretionary space, earnings, you know, appear to have held up well. But then when you go in and you dig through the numbers, what you find is that if you exclude Amazon, which is in the consumer discretionary space sector, but makes the vast majority of its revenue from AWS, which obviously has nothing to do with consumer discretionary. If you take them out of that index, earnings are negative.

So the consumer discretionary sector is in recession. It’s just that people who look at these headline earnings numbers imagine it’s OK because they’re actually being fooled by the Amazon footprint in there. And I again, I come back to this idea that if you get the consumer right, you’re probably going to get this story right.

And I just can’t believe that you can have a recession in discretionary earnings in that sector and not have it have broader consequences for the rest of the market. So time will tell. But we’ve seen earnings revisions come down, albeit begrudgingly.

I think that analysts came into the year looking for twelve and a half percent earnings and now they’re down to seven and a half, which is a pretty significant downward revision. But so far, the market doesn’t seem to really view that as anything important. I don’t know.

Maybe they’re they’re waiting on the rate cuts. So something’s going to happen. They’re waiting.

You know what else is down today? Gold. It’s down over a hundred bucks. I mean, despite this volatility and credit stress that we’re talking about, you’ve argued that this may be a broader deleveraging.

I mean, do you see this as a buying opportunity or is there another liquidity shock coming that could send gold even lower before it goes higher? Well, I mean, I think there could be more headlines that send it lower, but I just in full disclosure, I after sitting on hold with my broker today because the website was down amid all this frenzy trading activity, bought more gold because I figured this was a great opportunity today. So I am still very bullish. I think the move has just gotten started because, again, I keep coming back to it.

If we’re going to reset global trade, we have to reset the financing of our deficits. And that whole that’s the flip side of the coin. And it hasn’t received the attention.

And there’s no talk of any real solutions to that. And so, you know, the administration may have a very strategic plan for how they’re going to go about this tariff diplomacy. But they have yet to persuade me or anyone, I think, that they have a strategic plan for what they’re going to do about the deficits.

Yeah. And that’s that’s gold’s biggest positive. No one’s talking debt, Steph, like still no one’s talking debt here.

OK, you’ve also said that a correction isn’t doom. I mean, it’s necessary. What needs to break or reset before you consider buying stocks again? You know, is there a sector or signal, maybe a metric that you’re watching? I mean, I’m just looking at broad valuations and they’re just so obscene, you know, that people will say, you know, now, do you like stocks when they’re down 10 percent? And I’m thinking you really have no idea just how obscenely overvalued this market is.

So I think the valuation is the number one thing. And, you know, right now we’ve already recovered quite a lot of the territory we had lost. But the last I checked, you know, the market could get cut in half and still be overvalued by historic measures that old Buffett, you know, market cap to GDP measure.

So I think we’ve got a ways to go. But I will say you’re I appreciate you saying it’s not doom. And I do feel that way.

I think that this is all I am so excited about this reset that the administration is pursuing and trying to change the entire foundation of the U.S. economy from one that relies on endless amounts of debt to run that is accommodated by artificially repressed interest rates by the Federal Reserve. That’s just not a sustainable or healthy economic model. And to stop doing that and to revitalize domestic production and have the economy actually be real men building real stuff rather than the manufacturer of paper claims, you know, that are transacted over, you know, digital platforms all over the world.

That’s just not a productive, viable, long term path for this for our economy. So I’m very excited about that. I hope they stick with it and that Trump uses his final term as an opportunity to take the because there will be pain involved with that transition and reset the foundation.

And when that happens, I will be the most bullish person you have ever seen because the opportunity to buy fantastic American companies and valuations that are reasonable or at that point even really cheap is going to be phenomenal. And I won’t need to own gold or T-bills or anything. So I very much look forward to that day.

I don’t look forward to the transition phase that will be required to get there because that’s going to be very challenging for a lot of people. Do you think it’ll be there by midterms? That’s the question. You missed your calling as a comedian, Jeremy.

Exactly. No, I wish. And that’s that’s going to be an issue.

So we’ll see, because if they can’t keep control of Congress in the midterms, then maybe this reset doesn’t end up happening. So fingers crossed. Fingers crossed.

Well said. Stephanie Palmboy, founder of MacroMavens, joining us from Palm Beach. Thanks for this, Steph.

I appreciate it. Have a great week. Great to see you.

Thank you so much, Jeremy. Thanks so much. And thank you for watching.

Be sure to hit the subscribe button. I’m Jeremy Safran. For all of us here at Kidco News, we’ll see you next time.