By Inflation and rising interest rates have been a minor annoyance for wealthy Americans thus far. While prices for groceries, cars, and airplane tickets have deviated from the balance between price and value, the affluent haven’t been compelled to make significant changes to their lifestyles. Rather, their complaints have revolved around banks and brokers making it difficult to earn higher interest rates on their idle cash.
However, there are indications that the well-to-do are starting to experience new stresses. American Express (ticker: AXP), known for its charge cards often favored by the wealthy, recently announced an increase in the set-aside money for bad debts from $1.1 billion to $1.2 billion in the previous quarter.
This increase should not be overlooked as it has the potential to signal that consumer spending, which plays a crucial role in powering the U.S. economy, might be under more pressure than previously thought. If affluent consumers struggle to pay their bills, it raises concerns about how those with lower credit scores and less income will fare.
While this point is speculative, it is not unreasonable. The leaders of the Federal Reserve have repeatedly emphasized that there is a time lag between higher interest rates and a slowdown in economic activity. Consequently, American Express’s higher provisioning could serve as an early indicator of an impending economic slowdown.
Naturally, an accurate analysis of the economy requires more than just a single data point. The challenge lies in sifting through the market and economic noise to identify relevant facts or themes that could serve as early warnings for potential future events. One such useful measure, which can be tested with friends and family, is what I refer to as the “PA Indicator.” Recently, during a gathering at a wealthy individual’s home on Eastern Long Island, the conversation turned to what everyone was doing with their personal accounts, or PAs.
The Hamptons: A Playground for the Wealthy
Introduction
In the exclusive enclave of the Hamptons, where the elite mingle and soak up the summer sun, there is a sense of excitement in the air. However, beneath the surface, there are whispers of caution among a select few.
A Conservative Approach
Among the privileged few who inhabit this luxurious world, it is the finance experts who have taken a more conservative stance. While a real estate developer is busy constructing another high-end development, complete with eye-watering square foot prices, others have grown concerned about the rapid rise in prices.
Hedging Against Risk
For those who are already invested in the market, some have turned to strategies to safeguard their positions. Put-spread collars and covered call selling are two popular methods used to reduce market risk. These strategies indicate a prevailing belief that securities are more likely to decline than ascend.
Frenzied Energy
Despite the whispers of caution, the overall mood in the Hamptons remains one of unabated enthusiasm. Whether it be in the stock market or on packed planes filled with vacation-bound individuals, there is an unshakable commitment to make the most of life now that the Covid pandemic appears to be in the rearview mirror.
Signs of Disconnect?
However, one must not ignore the subtle signs that begin to emerge. While the extravagant dinner parties continue and conversations revolve around plans for the future, questions arise about Amex’s increasing bad debts. Are these concerns merely coincidental, or could they be indicative of an impending threat looming over investors like a Sword of Damocles?
As we wait for answers, it is worth pondering whether the idyllic world of the Hamptons and the frenzied stock market are truly immune to unforeseen dangers.
Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.
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