 Good day, fellow investors. Do you have a mortgage, credit card debt, a car loan maybe? Or all of them together? Today's topic will start with your debt position and how that affects the economy, which is driven by credit, and eventually how that reflects onto investments, the stock market, some stocks more, some stock less. So I'm going to try to explain based on the example of normal people. So from a bottom up perspective, how credit works and why it is so important, what's going on now, and these interest rates changes that might not look important, but are extremely important. Let's start with student debt. The average student debt is $33,000. Might not seem that high, but some have $200,000, some have less than that. Nevertheless, according to student hero and the government student aid organization, the average interest rates is 4.5%. If I take those numbers and put it in a seven-year repayment plan, the monthly payment is $459. What would add up for a year to $5,508? So the average student, when finishes college, let's say, has a salary of $50,000. The $5,580 are already 11% of the student's income. So the debt-to-income ratio is now at 11%. Let's go on. What do you need to buy when you finish school, find a nice job, you need to drive a really nice car? Better be a nice blue BMW, right? So the average car loan financing in the US was $40,621, which translates into a monthly payment of $571 that adds $6,852 to the already mentioned yearly burden from college debt. This means that we are already at a debt-to-income ratio of $24 in relation to the $50,000 salary. Now, if such a person wants to buy a home, let's take a mortgage, let's say you want to buy a $400,000 home, then you have to pay a down payment of $80,000 and you get a mortgage of $320,000. How does that work? Monthly payment is $1,500, which translates into $18,000 per year on a $320 loan with an average interest rate of just 3.88%, which is very low and at historical lows. Now, if I sum up all the debt, we are now at $30,360 as debt repayments, which is 60% of the salary and that is not allowed. However, what is allowed is, let's say, a 43% debt-to-income ratio. So let's now assume a couple wants to buy the same $400,000 house, they have two cars and the average student debt, which is very unlikely to have such a low student debt. Then they can buy the same house. Let's see. If we split the house payments, then the debt-to-income ratio drops to 42.8, which is just shy of the 43% required by most banks. You can go higher, but that's then very risky if the bank has less than $2 billion in mortgages or something like that. That's a different story. And now comes the tricky part. We haven't yet seen higher interest rates in consumer related purchases. So interest rates are still low because car companies are still paying for the difference. So they are lowering their revenue and their margins to sell more cars. Similarly, mortgages, they are still using money from before because they had a lot of money, so still keeping interest rates low. We haven't really seen the current higher federal interest rates, the current higher treasuries. We haven't really seen that reflect on consumer debt, but it will reflect eventually. Let's see how that works. Remember the couple that bought the house if the interest rate goes from 3.88% to 5.88% the debt payment per month goes from 1,500 to almost 1,900. So that is 400 more per month or 4,800 per year, which is 10% of the income, which means that the debt to income ratio increases by 10% from 43 to 52%. This means that the poor couple cannot buy a new car anymore, cannot increase their credit card debt or is really their credit scores deteriorate, which means they will save on some other things, they will not refurbish the house, they will spend less and that's the key of higher interest rates. Everything is marginal, so they start spending less, there is less employment and then the spiral of economic contraction, which is completely normal in an economic cycle, then that contracts. What is very important that with higher interest rates, the mortgage our imaginary couple can get goes down from 320,000 to 256,000. So 2% interest rate increase lowers the mortgage by what 20%. So also house prices would drop us the possibility to pay for those houses is much lower. So there will be less demand at these prices and this will lower national wealth, lower the confidence and you get to reversal to this cycle, which is something again normal as I say. Even if now with the global economy in expanding in synchronization, everybody's doing well doesn't seem like that, but this is normal because when it's fueled by debt, it's normal that the debt burden increases. Further the average American has a credit card debt of 6,375, which makes it 16,883 per household and just the interest paid yearly is 1,292, the most expensive debt credit card debt. Further when you pile everything up, some statistics here, so a broader perspective, the household debt service payments as a percentage of disposable income has increased a little bit in the last two, three years and is rising. As interest rates increase, this will further increase and we have seen how just a 2% interest rate increase just of the mortgage of that poor couple increased the household payment by 10% the debt to income ratio. So this number might go much higher and then everything changes, then it's not that easy to give credit and interest rates go higher, liquidity titans, consumption titans and you have an economic recession or slowdown. So that's something that will eventually happen. We don't know yet why, nevertheless it will happen. So what is here investment related? I would be very very careful when investing in companies that rely on consumer debt and all kinds of debt related to customers. If customers need to get a loan to buy the product, it means that higher interest rates will make those products much more expensive. Even if you think it's not that meaningful 1-2% higher interest rates, when you put it in a perspective from one household and the economy is already very stretched and the household debt is let's say stretched, especially if interest rates go up because there is a lot of loans with variable interest rates, which you have to refinance or whatever, then you see how fragile that driven economy is. Just to show you vehicle sales in the US, they have dropped in the 1982 recession, I don't know 50% from the peak or the average, 1990-25% from the average. In 2000 there wasn't such a significant drop, however in 2009 car sales dropped almost 50% and that's very very important to see what could happen next, especially as motor vehicle loans surged and they are 37% higher than what we have seen in 2007, so I would be very very careful when investing in such companies. We'll be discussing deeper the short-term credit cycle, a little bit about the long-term credit cycle, how to invest and how to move your portfolio accordingly and to learn more about investing and the economy. Thank you for watching, looking forward to your comments, really love reading how you think as we learn together, so please comment, click like, subscribe if you haven't and I'll see you in the next video.