Happy New Year! Strap in. 2025 is Going to Be Interesting

Not to start the year out on a downer… but this is will probably be the most important story of 2025 - so you should be prepared!

As we enter 2025, signs of a worsening debt crisis are becoming harder to ignore. From soaring delinquency rates in credit cards and commercial real estate to ballooning government debt, the financial landscape is fraught with risks that could ripple through every corner of the economy.

And the world economy is even WORSE.

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1. The Subprime Credit Card Delinquency Surge

Delinquency rates among subprime credit card borrowers have hit a staggering 22%, the highest since 2010. Over the past 15 months, these rates have climbed by 7 percentage points, reflecting significant financial strain on a demographic that constitutes 23% of the consumer credit market, according to Federal Reserve data.

At the same time, U.S. credit card debt has reached an all-time high of $1.17 trillion, with some estimates placing it above $1.3 trillion. Worse yet, the average interest rate on this debt has surged to 23.4%, a record high.'

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2. Commercial Real Estate: Office Loans in Free Fall

The commercial real estate sector is under immense pressure, particularly in office spaces. Delinquency rates on commercial mortgage-backed securities (CMBS) for offices hit a record 11.0% in December 2024, surpassing the previous peak of 10.7% from December 2012.

Alarmingly, delinquency rates are rising twice as fast as during the 2008 Financial Crisis. Over $2 billion in office loans became newly delinquent in December 2024 alone, marking a 9.4 percentage-point increase in two years. Small banks, which control 67.2% of commercial real estate loans, are particularly vulnerable. These same institutions were at the heart of the regional banking crisis just two years ago.

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3. Multi-Family Housing Delinquencies Climb

Serious delinquency rates for multi-family housing loans jumped to 0.6% in November 2024, doubling in just 18 months. Outside of the pandemic, this marks the highest level since 2011, with delinquencies rising at a pace reminiscent of 2009.

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4. Credit Card Defaults Hit New Highs

The broader credit market is also feeling the strain. In 2024, U.S. credit card loan defaults reached their highest level since 2010, with lenders writing off $46 billion in seriously delinquent balances during the first nine months—a 50% year-over-year increase, according to BankRegData.

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5. Pandemic-Era Savings Fully Depleted

By mid-2024, the financial cushion provided by pandemic-era savings had been entirely erased. Households burned through $2.1 trillion in excess savings in just three years, leaving a negative $170 billion in cumulative savings. This depletion has left consumers financially unprepared for future shocks.

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6. The U.S. Debt Crisis: A Ticking Time Bomb

Amid all this, the U.S. government is grappling with its largest debt crisis in history. Federal debt has soared to $36.2 trillion, with the average interest rate more than doubling to 3.4% over the past three years. The rising cost of servicing this debt poses a significant challenge, potentially crowding out other vital spending and destabilizing financial markets.

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Key Global Trends and Economic Signals

• Chinese Bond Market Collapse: Flight to safety has driven yields on Chinese one-year bonds to record lows amid systemic banking issues​.

• Global Trade Decline: Imports and exports worldwide have fallen sharply, reflecting a slowdown in global economic activity​​.

• Labor Market Weakness: The U.S. job-finding rate plunged to 21.3% in November, indicating a labor market under severe strain and echoing patterns seen before past recessions​​.

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Additional Data Points and Anecdotes

1. Auto Industry Overcapacity: European carmakers like Volkswagen are cutting jobs and shuttering factories due to overcapacity and weak demand​.

2. Stock Market Bubble Warning: Equity risk premiums are at historic lows, signaling complacency in the face of systemic risks​.

3. Emerging Market Struggles: Brazil and India are grappling with currency crises, with Brazil’s real showing signs of severe stress​.

4. Repo Market Tensions: U.S. repo fails surged to over $200 billion for three consecutive weeks, signaling liquidity stress​.

5. Safe Haven Demand: The U.S. dollar has strengthened significantly, reflecting global economic uncertainty​.

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What’s Next?

The confluence of these challenges underscores the fragility of the current financial system. The need for adaptive strategies and robust risk management has never been greater. Stay informed and prepared