Americans Are Doing Something They Only Do When Things Get REALLY Bad

[00:00:00] Steve: According to the latest report from Wall Street, get this, U.S. consumers are cutting back at the gasoline station. Well, they're cutting back on the extras. They have to pay more for gasoline, as we all know. In fact, everybody knows these days. But as they're paying more for gasoline, since incomes are not rising, the job market is not resilient and robust, consumers therefore have to skip a Red Bull or a hot dog or whatever else they use. The small creature comforts that people got when they would go fill up at the gas pump, go into the convenience store and just grab a couple of items. According to this report and several others that we've talked about over the last several months, convenience stores are saying consumer habits have indeed shifted. They're still filling up, maybe not as much as they did before, but what they're skipping, where the volumes are really declining, where the demand is really being destroyed, are those extra little things that people used to buy. And those are the things that most people notice, right? Because, you know, it makes sense when you put it together with consumer sentiment that, again, we get more data on consumer sentiment that is just absolutely atrocious. According to certain surveys, consumers rate this economy the worst that they've seen in their lifetimes. Other surveys like the Conference Board, which is one of the more optimistic surveys, that one was the lowest in 14 years. And this is the reason why, connecting all these dots together. You hear from central bankers and economists and the financial media and the stock market, at least the narrow part of the stock market that's still performing, and the economy must be holding up. Meanwhile, when you're skipping the Red Bull, when you're skipping the extra snack at the convenience store, you know that things are not adding up. They can't be adding up. So, Steve, more confirmation from the convenience store sector. Not that this is a surprise or, you know, provides some massive insight that we were missing before, but it's confirmation, more confirmation that you don't get really anywhere else. Because when you look at the aggregate data, especially something like GDP, it looks like, okay, the economy is holding up resilient. Even retail sales recently, at least when you look at just the monthly changes, forget the benchmark revisions, which were absolutely huge, which just confirms everything I said. But, you know, when people look at the monthly data report for, like, retail sales, they'll say, oh, consumer spending is holding up. It may look like that, but it's not holding up in reality. [00:02:13] Jeff: You know, Jeff, that's interesting because it wasn't more than, like, a couple months ago we were talking about how Walmart noted that people are coming to the store and then they're going to the gas station and filling up with less than 10 gallons of gas. And then all of a sudden, you know, that big retail sales print, of course, people are like, oh, you guys don't know what you're talking about. Look, see, the consumer is strong. It's resilient. The market loves this. You know, and then, of course, we get another blowout report, but it was all gasoline. I mean, it was literally all gasoline in that. So now we're actually starting to see consumers actually be cutting back. And that's just kind of a big indicator. You know, we talked about Pepsi. You know, they lowered their prices and then now they're raising them. They're a little confused by this. But you're right. It's the little incidentals that we're now starting to see consumers cut back on. You know, I'll give you a perfect example, Jeff. And, you know, I love a sausage and egg McMuffin. And every once in a while, if I go shopping in the morning and I've got, you know, the little app that says $2, I'll go in there. So what does McDonald's do? They come out with the Monopoly game and say, hey, now it's $5.50, but you get a token for a game that I don't want. And so what's my response? Well, tell me when this thing is over and I'll come back. And I think there's a lot of consumers out there that say, look, I'll spend a dollar, a couple of dollars. Like you said, that instant gratification, just a little bit of a splurge. But companies right now are just being squeezed at the margin where they're just trying to force higher prices. What we're now going to start seeing in the data is consumers pulling back and in a big way. [00:03:38] Steve: Even the blowout retail sales reports weren't actually positive signs. Let's put it that way. Even though the first one was August, August retail sales came in way above expectations. And that wasn't just gasoline stores and gasoline prices and gasoline sales. That one was actually pretty broad based, which you'd think, okay, that's a booming number. Therefore, it's the consumers are being resilient. But then you realize what consumers were actually buying. A lot of it was automobiles. Consumers were basically panic buying ahead of, you know, the Fed's going to hike rates. Therefore, if I want an automobile, I better buy it today instead of waiting three months down the road when the financing costs are going to be much higher. Or they were buying other supplies, thinking that the energy shock was going to filter into everything else and therefore make the prices of what they really wanted to buy more expensive. And realizing that their incomes were not going to grow, the job situation was and remains uncertain. I love they use that word. They realized they better buy something. If they want to afford it, want to be able to afford it, they got to buy it today. That was August. It was basically panic buying across the economy as consumers realized the energy shock was not going to be done by July. That was the initial impulse. The initial thought was, okay, we've got the Iran conflict. Oil prices will surge. And certainly by summertime, everything will go back to normal. And kind of everybody, you know, you held your breath. You did what you had to do in the short run, but you didn't make any big changes. Well, when oil prices started to go back up and gasoline prices really didn't come down, and then diesel prices start to go up and then the Fed starts talking about rate hikes. People in August said, okay, I better buy a bunch of stuff today because I'm not going to be able to afford it. September was a little bit different. As you were pointing out, Steve, September was basically gasoline and nothing else. A few other things, but basically gasoline and nothing else, which is again, two months in a row of retail sales that look absolutely spectacular on a monthly basis, but are actually big, huge red flags when you look under the hood. Before we go on with our video today, let me ask you a question. What if your gold could actually pay you every single month in more gold? That's what today's video sponsor, Monetary Metals, lets you do. And here's how it works. You still own the gold. It's still in your name. It's fully insured. But instead of just sitting there doing nothing, it actually starts working for you. Monetary Metals has built a system that turns idle gold into productive gold, earning real yield, paid and physical gold, not dollars. No selling, no trading, no converting. You keep your gold and every month you get more of it. It's a simple idea, but it solves a big problem. If gold is money, it should act like money. And now it finally can. 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And there's good reason because we know even if the Iran war ended tomorrow and, you know, the Strait of Hormuz reopened and maximum levels, it's going to take quite a long time just to get things built back up. And we've been hearing from, you know, CEOs of a lot of the big energy companies saying, look, our priority as things come back online is refilling inventories. We're not interested in lowering prices. We need those tanks and those buffers built back up because we don't have it. So what I saw from a lot of consumers is saying, hey, you know, I've got a big gas guzzling vehicle, a truck or something, and I don't really drive it that much. Well, I better go downsize it now because you think about what's going to happen to that vehicle in the months to come, it's going to be losing value because people are saying, look, I don't want something that gets 10 miles a gallon. I need something that gets, you know, 19, 20 or more. And we've seen, you know, a lot of electric vehicle sales just jump as the same result of that. So then when we got the EIA report just this week and showed that big gasoline build, and of course, we talked about before the show, it wasn't because there's some magical new supply of gasoline. This is the first sign of what, you know, we look at when consumers are cutting back, they're driving less, and when they drive less, it means they spend less at convenience stores, at the gas station stores. They don't run into Walmarts or Targets or anything like that. They cut their spending. And the initial aspect of what we see is, again, you know, big jump in, you know, on the retail sales from gasoline. But what we, what people missed was the fact that the other number, as you said, was a whole lot smaller. And that number is going to be shrinking in the weeks and months to come. [00:08:34] Steve: Yeah, so everything you just described is not something that consumers or anybody, for that matter, does because they're confident or things are good, right? It's one thing if, you know, the economy was legitimately booming or legitimate, even just legitimately resilient, then people would be, okay, I'm going to go buy a car because I'm confident in the future, right? That's one thing. What we're really talking about here is people are unconfident. They are the exact opposite. And they're being forced to do things that they wouldn't or wouldn't normally do. They talked about the gas guzzling truck that people have. You know, people like to have gas guzzling trucks, especially Americans. Americans want their big vehicles. So when they have to sell their big vehicles and buy a smaller vehicle, they're not happy about it. They're forced into do it, forced into doing it. And when you're forced into doing something, that is an anecdotal signal that things are not going well. And so that's what we keep seeing in data point after data point. If you look at the surface, especially when you look at only the monthly changes, it looks like, okay, maybe things are holding up. Again, setting aside the benchmark revisions that continue to happen and write everything down, which shows that, you know, consumers were right the entire time, as was the bond market. Retail sales, the revisions were just absolutely astonishing and enormous. And I did a video on this yesterday if you want to see the full details, which you really should. But the point is consumers know they're being forced into doing things they wouldn't otherwise do, which is a sign of an unhealthy economy, not a sign of a healthy economy. So everybody talks about the labor market being solid. This is why there's such a disconnect between consumer sentiment and at least the mainstream interpretation of economic statistics before they get revised anyway. It's because things are not good. Consumers are indeed cutting back. They're being forced to alter the behavior. And as they continue to be altered their behavior and don't see any relief on the horizon, that altering of behavior becomes increasingly entrenched. And it also becomes increasingly likely to accelerate, which means you don't just stop, you know, you go to the convenience store, you pay way too much for gasoline. You don't just skip the Red Bull that you would normally buy along with the gas. You actually, you skip an entire trip to Walmart or you skip, you know, I have to cut my Netflix subscription because I don't really watch it anyway. And, you know, every once in a while I do watch it, but I can't afford to have a subscription that I don't actually watch regularly. People really do start cutting back over and over again. And that's really the danger that we continue to see more and more signs of. [00:10:52] Jeff: You know, Jeff, and you're right, because, you know, when you look at, you know, consumer spending habits, how do a lot of people spend it? It's not at home, although people do order online. But you think about this, right? You're going to run to the store. And again, I drive by McDonald's in the morning. I'm like, oh, I got a $2 sausage and an angry muffin coupon. I'm going to stop and buy one. But I'm not the only one that does that. So, you know, but the problem here is on top of all the fact that consumers were under strain, the market all of a sudden decided, hey, we need higher interest rates. And look, consumers can afford it because can't you see the headline retail sales number? Inflation's up, spending's up. Well, everything must be okay. But, you know, we know it's not because you look at the, you know, not only the auto market, you see all of a sudden that drying up as people who's, as you said, would buy a car. But because of higher interest rates, it makes no financial sense. But on the other side, you look at things like the housing market. All of a sudden, what do we see? Pending home sales just completely just dropping off a cliff. We're hearing from the National Association of Realtors. I think, man, the last quarter of the year is going to be like a ghost town that no one's going to buy anything. And so as we start to see what starts out, as you said, a hot dog and a Red Bull or a McMuffin, it starts to morph into bigger and bigger things like, hey, I'm not going to buy a car. I'm not going to buy a house. And the pipeline, you know, you look at from the manufacturing side, okay, hey, we got a front run stuff, build up inventory due to higher prices. And I get that. The problem is, as we know, Jeff, there is a point where all of this comes together and it just is going to grind right to a halt. [00:12:20] Steve: Yeah, it comes together usually at the worst time. And you mentioned housing. That's another key indicator. It's another, you know, people buy houses for a number of different reasons. They don't buy houses for a couple of specific reasons. One is, you know, fear of interest rates, sure. But it's also the job market. If you're not confident about your job, you're not going to go out and make a huge financial commitment for a long time, like 30 years. If you don't know if you're going to be employed or if maybe your hours could be trimmed or something adverse could happen at your job, and therefore you're kind of stuck with a home payment that you can't really afford, people actually act prudently. I know, you know, we've been scarred by the memories of, you know, 20 some years ago, subprime mortgages and ninja loans and all that kind of stuff. But by and large, most people behave responsibly. They know I'm not going to go buy a house if I don't think the market's going to, if I don't think the job market and my income is going to be able to support it. And you would think that the housing market, which has been scraping along a historic bottom for several years now because the job market hasn't been resilient, that we would have found the bottom. They can't possibly get worse. And then, Steve, like you said, pending home sales come up and it's like, holy crap, this thing can get worse. So as bad as the housing market has been and as consistent of a signal as that is about the state of consumer, not just in terms of sentiment, again, housing market is activity or activity that didn't happen. So when everybody says consumer sentiment is all, you know, as an outlier over there by itself, it's not true. Consumers have been cutting back. Housing is a big one and it looks like they're going to cut back even more. And so is revolving credit, credit cards. The Federal Reserve's revolving credit statistics for August. What did Americans do? They cut back. In fact, the seasonally adjusted aggregate balance fell by almost 5 billion, which, you know, doesn't sound like a lot, but it's 5 billion is one of the biggest declines that you'll see, especially since this is a recession type of indicator. People love using their credit cards. People love buying big trucks. People love buying the Red Bull and the hot dog and the Egg McMuffin. It's not just Steve. The Egg McMuffin at McDonald's. When you have to cut back and you're forced to cut back, again, this is not confidence. It's a lack of confidence. It is indeed showing up. It's just that it doesn't show up in something like the stock market. [00:14:29] Jeff: You know, because I think we can go back to what, somewhere around 2024. And what do we see? What was driving retail sales? We know it's a decline in savings. So as the economy slows and spending habits change, the biggest indicator that I look at, and Jeff, I'm glad you mentioned it with credit cards, is when people say, okay, look, I'm going through my budget. And like you said, maybe they're canceling Netflix, but maybe they realize they look, if I'm going to be home more, I got to have some things entertain myself. So they've cut everything they can. Let's downsize the car, let's do this. And then what you have left, if you still can't keep pace and you're worried about your job in particular, is you start prioritizing your savings and paying down your debt. And you think, well, you know, if I owe $1,000 on this credit card, well, if I can pay that off, that's one less payment I have. And that mindset that shifts from paying down debt and building savings from consumption is really dangerous for the economy. We're talking about the inflection point. That's the biggest one is when consumers say, look, I've had enough. At that point, all of the pipeline building and inventory building that can continue on for a little while longer. But once the goal is full from the retailers, the wholesalers, all the way to the top, next thing you know, that's where we see the labor market start to take a hit. [00:15:40] Steve: Yeah. Because all that inventory is intended to be sold into a resilient economy that doesn't actually exist. Right. You panic, you panic, uh, manufacture and ship and wholesale. And all, you know, all these wholesalers have had, they've been building up tons of inventory and they're expecting to be able to sell it reasonably soon. So they're just trying to get ahead of the price increase so that they have, you know, uh, better profit margins rather than waiting, waiting around to see what happens down the road. But you're anticipating being able to sell this stuff. And this is one of the reasons we went through this once before 2021, 2022, during the supply shock inventory was panic built as suppliers went absolutely crazy because they weren't, they weren't sure they could actually get stuff, uh, had no idea. So they would, they would up their order 10 times, hoping that two times their regular order would show up. And then usually half the order would show up and then they'd have to reorder again. So they overordered for quite an extended period of time. And what one reason they were, they were confident in doing so is because everybody told them at the time, the economy is booming. Consumers are spending. They, they, this is going to be great forever. This was supposed to be the, you know, the new plateau of permanent prosperity for the 2020s. So they built the inventory thinking, Hey, this is going to be terrific. We're, we're actually out of the 2010s for once and into an economic boom, except the demand didn't, the demand didn't keep up. Let's put it that way. There was demand in the initial initial supply shock phase, but it did not keep up as everybody expected. And what happened afterward, the manufacturing sector specifically went into a prolonged slump, call it a recession. If you want, some people don't like that word. And as we've seen with retail sales revisions, spending went into a prolonged slump. Yes. Nominally spending looked like it held up, but in real terms, people were buying less and less and less and less. And they felt they were buying less and less and less, which explains why consumer sentiment has been so bad. And the reason they were buying less, paying more to get less, they would have bought the same amount. There weren't the jobs. There wasn't the income. So we had, we've gone through this once before where everybody, everybody looked at the current statistics and the current level of activity and said, this sucker's booming. And then it just seems to just fall off. And in many ways, it took years for the statistics to catch up with the fall off. Again, what I call forgot how to grow. We really did forget how to go in 2023. It's just that now it's taken three years for people to realize it. It's not going to take people three years to realize if there is another fall off in demand because we're already seeing signs of it here. And there's, like you said, Steve, with savings as low as there, there's really no place to hide this time on like three years ago. [00:18:11] Jeff: And, you know, Jeff, part of the problem is we had bad data because, you know, again, we can go back to mid 2024 and you and I, we've been talking about, you know, for the last couple of years, what is wrong with the labor market? When you see these retail sales prints that tell you that there's actually nothing wrong until you find out now that, oh, those retail sales numbers were actually completely inaccurate. I mean, not even close to real. And so you start to see the challenge of what consumers have been saying all along. Look, my spending has been contained. The labor market's weak because the boss doesn't want to hire because the demand isn't there. The Fed's telling me, look, the economy is booming. Everyone can handle higher interest rates. But yet when they close out their cash register at the end of the night, the boss is going, I'm not seeing it here. So you think about this, you know, as we look at the economy over the next couple of months and the shock we're facing, we've got, you got energy shock. We've got high interest rates. We've got a yield curve that's collapsing. This could threaten to pop a credit bubble. And you've got a labor market that is completely weak. And on top of that, you know, those who do have a job, what do we continue to see with them? Decelerating average hourly earnings. So they're not getting the pay raises. Their spending is not keeping up. And this all comes back to, like you said, the very smallest little thing is, hey, I went to the gas station and you know what? I want to get a hot dog and a Red Bull or Steve wants to get a sausage and egg and muffin or whatever it starts with the littlest things that start to spread into bigger things like housing and auto sales. And that's the risk we're facing right now is consumers. And we're getting the very first indicator now that, hey, we've had enough. When they start prioritizing their savings and spending down their debt at that point, I think it's game over. [00:19:47] Steve: Right. It starts at a 7-Eleven, right? It starts at the convenience store. You do the little things first and then you get used to doing the little things. You get used to cutting back at the, you know, the stuff you used to do before and realize, you know, maybe I can go without. If I can go without the sausage McMuffin with egg, maybe I can go without a couple of other things. Maybe I don't need two of them. Maybe I don't need three of them. It does start at the convenience store at the margins and that's already been happening. And then in this economy, what's the, what are the positives here? The positives are, well, what you hear from the mainstream is, well, it's not worse. That's, that's basically what, when they say that the economy and labor market is resilient, what they're really telling you is, well, thank God it's not worse. It's like the equivalent of job save that you get out of stimulus. Yeah. Things aren't great, but it could be worse. Well, okay. Just wait a while. And then the other part of it that's positive, that's legitimately positive is AI. And it's almost like everything is, is being bet on AI, except AI in the macroeconomic sense, isn't creating enough jobs, nowhere near enough jobs. There's a ton of spending. There's big numbers. A lot of it's just debt. A lot of that debt is propelling price increases, which just created, for example, a huge decline in smartphone production and sales. According to sources, smartphone sales across the entire world, the global economy, collapsed by 22% year over year because manufacturers realized they can't make smartphones any cheaper and the component prices have gone through the roof. And if they raise their prices on these cheaper, cheaper model phones, nobody will buy them. So smartphone sales are an example of, you know, how AI is supposed to contribute to the economy, but it's actually because of the situation that we're in the fragile economy. It's actually taking away. We're seeing even more demand destruction forced on it by price increases with that weak situation. So it all really does come back to the convenience store or the Apple store or whatever else. Consumers are indeed cutting back at the margin. And as they start cutting back more and more, eventually gets to the position, especially with all these other imbalances like inventory, where everybody just, as you said earlier, Steve, all these things are starting to really come together and coalesce. And if they do, that's when we no longer have to wait for the revisions to realize we were in trouble the entire time.