By Henry Dubroff Thursday, October 26th, 2023

At a pivotal moment for investors, the future of the U.S. economy lies in the hands of American consumers and their ability to fund aspirational trips and gifts and without breaking the bank.

On a morning where war in the Middle East and turmoil in Congress were making headlines, Eric Freedman, chief investment officer at U.S. Bank was not surprised at the stock market’s resilience in the face of turbulent times.

During an interview in Santa Barbara on Oct. 18, Freedman, who guides the bank’s investment strategy, said the fundamental story for investors is “how resilient the consumer has been” and how much savings built up during the pandemic are available for future spending.

But the moment is pivotal, Freedman said, because higher interest rates are sharply raising the cost of borrowing for consumers and weakness at the margins could have a ripple effect. 

“Does this mean that the consumer is going to exhaust themselves and fall back on bad habits?”

My interview and Freedman’s prior talk during a meeting with clients and wealth management staff marks a debut of sorts for U.S. Bank on the Central Coast. 

It was the first investor forum in the area since the nation’s fifth-largest bank in terms of branches closed on its purchase of Union Bank.

It also came on a day when U.S. Bank beat analyst expectations on earnings at $1.05 per share, including Union Bank operations, but also increased its set-asides for potential future loan losses.

Freedman said his fundamental view is a “glass half full” approach with the nation likely to avoid a recession thanks to a strong labor market that will enable consumers to stay employed and keep spending.

But he said he continues to look at activity at the margins such as credit card debt levels and nonbank lending to look for trouble spots. 

“Two things we need to keep the economy progressing are continued participation by consumers and ongoing capex from businesses in anticipation of growth,” Freedman said. 

He put investments in AI and cybersecurity at the top of his list of business investments.

What also makes this a pivotal moment is the upcoming holiday season where aspirational purchases of luxury goods and services like leisure travel will be closely watched. 

“Crossover buyers are what we are tracking,” he said.

Another factor buoying the economy he said is an unusually large level of government stimulus for energy conversion and other programs. 

That is increasing economic activity but also adding to federal deficits, which are beginning to flash their own warning signs about sustainability.

In a “higher for longer” interest rate scenario, the cost of financing the U.S. debt, now roughly 115 cents per dollar of GDP, are unsustainable. 

And those debt levels are substantially different than they were in the 1970s and 1980s when the economy previously experienced an inflationary period.

“Interest rates are like a ramp on a treadmill, slowing the runner down. But the dilemma is the runner is not slowing very much. Increasing resistance has not kicked in in a big way,” he said during his presentation.

He said the fact that inflation remains stubborn likely won’t stop the Federal Reserve from keeping interest rates elevated until its goal of 2% inflation is achieved. Anchoring expectations around 2% is going to be key and the Federal Reserve will likely stay the course.

He said that eventually, the federal government will have to reckon with rising deficits, whose solutions — higher taxes, less spending and reforms to Medicare and Social Security – are hard to visualize with a polarized Washington. 

“Those are hot-button issues but they will have to be addressed,” he said.

He said that portfolio diversification beyond stocks and bonds is something the bank is recommending to clients — with private loans and private equity in the mix. 

He’s skeptical about crypto, suggesting that most crypto investments will “go to zero” because the market simply is not big enough or deep enough to be sustainable.

Henry Dubroff is the founder, owner and editor of the Pacific Coast Business Times. He can be reached at hdubroff@pacbiztimes.com.