Consumer credit contracted $3.6B in July. In short, the year over year rate is improving, but the bottom line is that consumer credit continues to contract as the de-leveraging continues at the household level (via Econoday):
“Consumer credit outstanding in June contracted $1.3 billion-but at least it was at a slower pace than in recent months. Credit in May fell $5.3 billion while April dropped a particularly severe $14.9 billion. Simply, the consumer sector is showing weak demand for loans combined with tight bank lending and heavy charge offs by banks.”
The economy has gone from bad to worse. On Friday the Commerce Department reported that GDP had slipped from 3.7% to 2.4% in one quarter. Now that depleted stockpiles have been rebuilt and fiscal stimulus is running out, activity will continue to sputter increasing the likelihood of a double dip recession. Consumer credit and spending have taken a sharp downturn and data released on Tuesday show that the personal savings rate has soared to 6.4%. Mushrooming savings indicate that household deleveraging is ongoing which will reduce spending and further exacerbate the second-half slowdown. The jobs situation is equally grim; 8 million jobs have been lost since the beginning of the recession, but policymakers on Capital Hill and at the Fed refuse to initiate government programs or provide funding that will put the country back to work. Long-term "structural" unemployment is here to stay.
The stock market has continued its highwire act due to corporate earnings reports that surprised to the upside. 75% of S&P companies beat analysts estimates which helped send shares higher on low volume. Corporate profits increased but revenues fell; companies laid off workers and trimmed expenses to fatten the bottom line. Profitability has been maintained even though the overall size of the pie has shrunk. Stocks rallied on what is essentially bad news.
This is from ABC News:
"Consumer confidence matched its low for the year this week, with the ABC News Consumer Comfort Index extending a steep 9-point, six-week drop from what had been its 2010 high….The weekly index, based on Americans’ views of the national economy, the buying climate and their personal finances, stands at -50 on its scale of +100 to -100, just 4 points from its lowest on record in nearly 25 years of weekly polls…It’s in effect the death zone for consumer sentiment."
Consumer confidence has plunged due to persistent high unemployment, flat-lining personal incomes, and falling home prices. Ordinary working people do not care about the budget deficits; that’s a myth propagated by the right wing think tanks. They care about jobs, wages, and providing for their families. Congress’s unwillingness to address the problems that face the middle class has led to an erosion of confidence in government. This is from the Wall Street Journal:
"The lackluster job market continued to weigh on confidence. The share of
Consumer credit increased at an annual rate of 1/2 percent in April 2010. Revolving credit decreased at an annual rate of 12 percent, and nonrevolving credit increased at an annual rate of 7 percent.
In dollars, non-revolving loans went from $1.5925 trillion to $1.602 trillion, an increase of $10 billion. But revolving (credit card) debt decreased $8 billion from $846.5 to $838.
The previous values were revised (negatively) as well.
To put this in chart terms in percentages:
Yeah, ok, the rate of change has leveled out in the credit card space and turned up a tiny bit in the non-revolving. But in dollars it looks like this:
Nice little hook there eh?
The consumer continues to say "screw that!" on more spending - especially spending that goes on plastic.
Believe whatever you want about the magic market pumpers, the numbers do not lie, and it appears the stock market is figuring it out too, with RTH (Retail Holders) down to just under 93 from $108 just a couple of months ago, a loss of 14%.
I haven’t thought the 75%+ rally was particularly irrational over the course of the last 12 months. Surprised by the strength? Absolutely. But irrational, no. As of late, we’ve begun to see signs that the consumer is back, but the equity action implies that the consumer is not only back, but ready to break records. In late 2006 I wrote a letter that said:
“So here we sit with a relatively healthy economy, signs of inflation and record housing prices. Sounds pretty good, right? Not so fast. The markets could certainly move higher if housing doesn’t collapse, but we see very few scenarios in which that can happen. When the housing market slows consumers will spend less and businesses will begin to suffer. The US economy will then fall into a recession and European and Asian countries will quickly follow suit as the world’s greatest consumers wilt under the environment of low liquidity and higher debt….The credit driven housing bubble remains the greatest risk to the equity markets at this time.”
The day before the market bottom in March 2009 I said government intervention would likely generate an equity rally. But I did not come close to predicting that we were on the precipice of a 75% 12 month move. Not even close. On the other hand, I have never thought the move was particularly irrational and didn’t fight the tape through 2009.
I was very constructive on the market heading into 2010 and maintained that stimulus, strong earnings and an accommodative Fed would result in higher stock prices in H1. I point this out not because I am trying to toot my own horn or gloss over my many imperfections (many can be emphasized), but overall I have been able to not only foresee the macro mechanics driving the market, but have also done a fine job translating that into…
See the green part of the graph? That’s home mortgage debt up until 2008.
See the blue part? That’s consumer credit.
Call me mathematical, but what’s wrong with this picture? More importantly, what propaganda machine continues to succeed in preventing the breathing portion of humanity from recognizing that the government sponsored and encouraged lending in the home mortgage industry for decades, and this is what happened.
Stated another way: The government not only caused this, it encouraged it. This has nothing to do with market action. This is pure, politically-motivated manipulation. For those of you still so mind-numb that you remain skeptical, ask yourself this: why is the commercial mortgage market still solvent? Answer? Because it doesn’t have government sponsorship.
The Commerce Department reported higher retail sales in January, the third increase in the last four months, as American consumers continue to open their wallets after one of the sharpest contractions in spending since the Great Depression.
Following an upwardly revised decline of 0.1 percent in December, overall sales adjusted for seasonal variations rose 0.5 percent in January and the gains were broad-based with a full nine of 13 categories posting increases.
After rising 0.1 percent in December, auto sales were unchanged last month and, excluding autos, overall sales were up 0.6 percent following a decline of 0.2 percent. Excluding both automobile sales and sales at gasoline stations, January saw an increase of 0.6 percent after a decline of 0.3 percent in December.
On a year-over-year basis, overall retail sales were up 4.7 percent and, excluding autos, sales rose 4.6 percent. As these figures are not adjusted for inflation and when considering the level of sales one year ago (see chart above), the recent data loses some of its luster, particularly when considering which components contributed most to the increase in sales over that time.
Sales of food and clothing, aided by government assistance to a degree never seen before, continued to rise at about the rate of inflation, but, with unemployment still quite high, incomes flat or falling, and consumer credit collapsing as it has over the last year, it’s hard to see how spending in the U.S. will rebound to anywhere near the levels seen during the middle of the last decade absent the hefty contributions from discretionary spending.
Moreover, as we move further into 2010, the year-over-year comparisons will become increasingly difficult since the worst of the spending slowdown occurred in late-2008 and early-2009.
For example, from last January, gasoline station sales rose 29 percent and this was due exclusively to higher prices since the average price at the pump was about 50 percent higher than a year ago. Other categories posting the biggest gains were sales at nonstore retailers that rose 12.4 percent and auto sales that were 6.7 percent higher than immediately after the virtual shutdown…
Consumer credit decreased at an annual rate of 6 percent in the third quarter of 2009. Revolving credit decreased at an annual rate of 10 percent, and nonrevolving credit decreased at an annual rate of 3-3/4 percent. In September, consumer credit decreased at an annual rate of 7-1/4 percent.
Here’s the graphical representation.
Nothing good in here. The non-revolving flattened out some in September (gee, you think "cash for clunkers" might have influenced August and September?) but revolving credit – that is, credit cards – continues its base jump without any appreciable change in slope.
Here’s the longer-term view:
We are a credit-based system, as are all modern monetary systems. No meaningful economic recovery can or will occur until the consumer has purged his balance sheet of the inappropriate debt he has and is once again able to earn and borrow.
If we supposedly exited the recession on or before September, it sure isn’t apparent in this report. You can put a fork in that line of garbage – it’s done.
PS: The next update of the Z1, due out in a couple of months, should be interesting….. especially the "Ponzi Finance" indicator….
Ask an economist about their biggest concern about the U.S. economy and you’re likely to get one of two starkly different answers: America is either about to be swamped by a major bout of inflation or decimated by deflation.
Count Mike "Mish" Shedlock of Sitka Pacific Capital among the deflationistas.
While some consumer prices are rising and the Fed is printing money like crazy, Shedlock says deflation is "definitely" a greater threat than inflation.
People looking at prices are completely missing the mark," says Shedlock. "Consumer credit is falling, banks aren’t lending, and we’ve got bank failures at a massive rate. These are the same kind of conditions as in the Great Depression."
Indeed, bank lending has tumbled and the Fed reports consumer credit has shrunk for seven consecutive months and was down 5.8% on an annualized basis in August, the most recent month available.
The Dow Jones Industrial Average closed above 10,000 today for the first time in a year, and more than a decade after first breaking the mark. Since hitting lows in March, the Dow is up an astounding 50%, while the S&P 500 has gained 60%.
Before you get your broker on the phone or start trading that dormant online brokerage account, take heed of this warning from Mike “Mish” Shedlock, the blogger behind MISH’S Global Economic Trend Analysis: "Five years from now, I think its quite likely the Dow is not going to be much more than 10,000," he says.
Why so negative?
"We’ve still not solved any of those structural problems" in the housing, banking and debt markets, that caused last year’s crisis, he claims.
Shedlock’s advice: ignore the euphoria, and "take some chips off the table. Now’s just not a good time to be invested."
Shedlock, also an investment advisor representative for SitkaPacific Capital Management, thinks investors are better positioned in gold and cash.
Consumer credit fell 13% year over year in a sure sign that the deleveraging cycle is alive and well. Consumers are paring back on credit in an unprecedented fashion.
Those who are curious as to why this recession is different from past recessions need look no further than the following chart. You’ll notice that consumer credit is falling at a rate that has never been seen before. In fact, consumer credit declined marginally during the 1991 recession and actually climbed throughout the 2001 recession. Why is this important? An economy that is based on a fractional reserve banking system has trouble expanding if the debt in the system does not continually expand. Consumers are still deleveraging and that means a robust and sustainable recovery is unlikely to occur.
The biggest risk in such an environment is not whether the consumer recovers – the consumer needs to deleverage and clean up their balance sheet – but whether the government continues to pummel the currency and rack up massive debts as they try to dig our way out of the debt hole. These are the same mistakes Japan made in the 90’s. Let’s hope we wise up and stop the printing presses before they cause an even larger boom/bust cycle….
The Federal Reserve’s latest (through July) G19 update is out, showing consumer credit.
To say that these figures are ugly would be an understatement. In fact, there is simply no way you can spin this – while this contraction in credit has to happen it has horrifying implications if our Washington policymakers don’t get on the stick and deal with the underlying issues here and now instead of pretending that everything is ok or worse, try to "borrow our way to prosperity."
Let’s start with the "Full Monte"; this is the "de-noised" version of The Fed’s "annualized" rate of change chart (click for a larger version of any of these):
The important point is that we have never been here before in the post-Depression era. Any and all claims that "The Consumer has reached a bottom", or "The Recession is over" (based on July data) or any such is pure nonsense. There is not only no sign of a bottom there is no change in the second derivative – that is, the rate of change continues to be essentially straight down!
(By the way the method I use to "de-noise" the figures is simple – I have Excel computing a percentage change .vs. 12 month prior numbers rather than annualizing monthly changes as The Fed does in its headline release. Their method is extremely noisy and difficult to draw conclusions from without waiting for a number of months in sequence to indicate a trend shift, where going y/o/y very effectively highlights true trend shifts almost immediately and yet is not subject to this problem.)
Looking at the same de-noised figures for revolving and non-revolving debt is even worse:
I had taken a (small) amount of comfort in the fact that non-revolving credit looked to be well behind its cousin the credit card. Well, not so much any more. Yes, its behind, but its catching up fast and in fact the slope has matched its brother now. With "Cash for Clunkers" partially in July that we saw non-revolving credit (car loans) continue to decline is an extremely ominous sign.
Here’s the close-up of the last couple of years, corrected per The Fed’s latest release. Note that credit card debt went negative on a rate-of-change basis at the end of
Markets have been turned upside down by a surprise Brexit result and the resignation of David Cameron. While there is looming uncertainty around how this will affect the United Kingdom and Europe from an economic perspective, it might be just the tip of the iceberg in terms of long-run consequences.
A Brexit opens the door for future events that would be previously unfathomable by popular opinion, ...
By Jacob Wolinsky. Originally published at ValueWalk.
George Soros is back again with a dire warning – the Brexit could lead to the disintegration of the European Union. I noted in his earlier op-ed that Soros only focused on UK concerns with the EU and not with a EU break-up, but that it must surely be on his mind since he has warned that the EU is on the verge of collapse and Brexit now will hasten it. This too was my biggest fear regarding Brexit and even though I think Europe needs to get a hold of its immigration policy I favored remain. It looks like Soros so far is proving right – the IRA is back with demands in Ireland, the Scotts might vote for independence, there is talk of Italy breaki...
We continue to receive requests for updates to the "Best Stock Market Indicator", which used to be a regular guest post from John Carlucci. Here is an update of the "Carlucci" indicator along with a summary of John's explanation on how he uses it.
As John described it: "The $OEXA200R (the percentage of S&P 100 stocks above their 200 DMA) is a technical indicator available on StockCharts.com used to find the "sweet spot" time period in the market when you have the best chance of making money."
I have mixed feelings about Brexit today. Clearly the European institution need reforming. The addition of so many countries in the last 20 years has created a top heavy administration. The Euro adds more complexities to the equation as the ECB policies cannot fit every country's problem. On the other hand, a unified Europe has advantages as well – some countries have benefited from the integration.
For Britain, it's hard to say what the final price will be. My guess is that Scotland might now vote for independence as they supported staying in Europe overwhelmingly. Northern Ireland might be tempted to leave as well so possibly RIP UK in the long run. I was talking to some French people and they were saying that now there might be no incentive for France to stop immigrants from crossing over to the UK like they do now and simply allow for travel there and let the UK deal with them. The end game is not clear to anyone at the moment....
One week ago, when bitcoin first crossed above $700 on the seemingly insatiable Chinese buying which we forecast last September (when bitcoin was trading at $230) would take place as a result of China's capital controls (to much pushback by the "mainstream" financial media), we tried to predict what may happen next. We said that "it could go much higher. That said, anyone who bought last September when the digital currency was trading at $230 may be advised to take some profits, and at least make...
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After a three-year bull run that more than quadrupled its value by its peak last July, IBD’s Medical-Biomed/Biotech Industry Group plunged 50% by early February, hurt by backlashes against high drug prices and mergers that seek to lower corporate taxes.
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at firstname.lastname@example.org with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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