Monday, Aug 10, 2009
Consumers have now "hit the wall" will not borrow more
The Market Ticker: Economic Bottom Calls: Willful Ignorance
Great chart analysis of consumer debt. "With the breakdown it becomes more clear: it is the turn in revolving - that is, credit-card - debt that has led the market up in the modern era. " But now is leading it down.
Posted by mountain goat @ 12:52 PM (1340 views) Add Comment
15 Comments
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1. mountain goat said...
Notice how the blue peaks of revolving credit (chart 3) form a straight downward sloping line, that has now collapsed.
2. mrmickey said...
Again I feel there is a demographic reason for this, if the population is ageing there will be less and less people around to push the debt on to, and your average Somalian immigrant won't be taking up the slack any time soon.
3. techieman said...
MG - are you a bit more relaxed now after your paddling (sorry if that is derogatory term - its not meant to be)? :
"Apologies if you think this sounds like a paniced rant of a lunatic. It probably is! Just saying what I think and been up to the past few days. Third waves have a habit of catching everyone by surprise so be prepared. Green shoots...bah!"
i think this might be a bit premature to call the top of this counter trend move. Having said that yes FTSE looks opverbought and there has been a bit of divergence in the rsi - so in short yes poss a short term top, but i would like to see a pullback and a bit more upside myself, and then i am with you. I'd be selling at 4800 (if it gets there).
That could be in combination with a retracement toward the lows of the $, which now looks to be over. So yes if thats true the demand for the greenbacks will reduce the price of commodities probably including the yellow stuff.
4. mountain goat said...
TM yes a bit more chilled thanks! My partner is a kayaker and I tend to go along when they pick easy things to do. In this case we went to the seal island Ynys Dulas which is pretty safe without rip tides. We saw about 20 seals. The wind was pretty strong so some of the party struggled getting back. But we all got back safely without having to call out the coast guard!
I took action last week for a few reasons. One was a call from Prechter to EWI subscribers that it was safe/recommended to start shorting again. He cited extreme bearishness on the dollar and fib targets.
As I mentioned on Friday my main decision on Friday was to turn bearish on gold. I feel if gold can't break $1000 in the face of record dollar bearishness and this crazy green shoots inflation nonsense then it needs more time to consolidate before the inevitable blow off in a few years when QE overshoots or fiat money collapses. So I am not long term bearish on gold but rather think the dollar is not ready to roll over yet.
Unlike you I am pretty useless at market timing so maybe I have gone too early. But as I said a few months ago I wanted to go into the autumn short EURO Stoxx. I decided to include SP500 because of the weak dollar, which will help me when it rebounds. On the amounts I invest I make sure I don't get into the situation "that the market can be irrational for longer than I can remain solvent".
5. techieman said...
MG - yes re pretcher read that but he himself admits to being often too early. You may remember he was a bit early on the covering shorts advice on the march low (he went for late feb), and i think i said it was a bit too early at the time. He also makes the point that we are at the lower range of the area of retracement - which could be as much as 2,000 dow points without invalidating!!!
MG so long as you are comfortable and might realise you might get some pain. I guess what i am saying is that very short term you may be right, but personally i would be inclined to cover shorts - or move to b/even relatively quickly.
Glad the real waves didnt get you and hope the virtual ones dont either! All the best.
6. icarus said...
Consumer debt vs The market graph isn't too convincing visually. Also his Consumer Credit Outstanding chart shows a decline from $2.6 trillion to just under $2.5 trillion - not particularly dramatic. This total is only about 10% of all loans outstanding in the US, so substitution between consumer credit and other loans could explain this decline. About 70% of the value of these loans outstanding came from securitised loan markets and traditional bond markets (the other 30% by banks). Much of that 70% has been erased by the crisis of the last two years and banks haven't been able to fill the void. This is far more important than a small decline in consumer credit or the revolving / nonrevolving distinction.
Too much of this analysis is based on two variables (revolving consumer debt and the stock market) over a period of time (from 1980) when such much has changed in financial markets (e.g. the securitised loan markets barely existed in those days). The rest is simple - banks are trying to rebuild their balance sheets, consumers are deleveraging.and bailout money is going into liquid assets like shares and bonds and not into lending.
7. mountain goat said...
TM - thanks I am considering how best to cover shorts. Frustrating though, my attempts so far often stopped out at a loss by "head-fakes". Easier when the market goes your way for a while giving some buffer.
Icarus - I think his main point is about picking an economic bottom, rather than stock market bottom (although that is the chart I chose to show). You are probably right that the credit crunch has led to all sorts of displacement in the credit markets so these charts might not be that meaningful, and may bounce back. His point being this has not happened yet, but that doesn't stop people saying there are greenshoots of recovery. Also, his point about the declining peaks in the rates of change in revolving credit have nothing to do with the credit crunch but has more history to it. So although the consumer has steadily increased debt levels over the last decades this driver of the economy is declining as the consumer "hits the wall".
8. mountain goat said...
TM
The Question Every Rich Trader Asks All the Time - How much can I lose on this?
Guess this is what I need to pay more attention to...
9. mountain goat said...
Link never came out for the above http://www.growthstockwire.com/
10. techieman said...
not the only question MG :
"11. techieman said...
MG - yes not much lower though before a new move up. I am interested in cable myself and said a while back that 1.64/65 was a target with a possible blip up to 1.70 before breaking down. Alternatively it might just break down now. Re my shorthand - do you have the link handy. i will take a look and explain.
Wednesday, July 29, 2009 12:37PM"
Well i then changed my view to 1.73 for some reason!! So didnt short @ 1.70 then. So the question i am asking is why not!! :-). Thats futures!
11. icarus said...
MG @7- If he's saying the consumer has hit the wall - and all that that implies - he needs a deeper analysis and one that takes in the world rather than just the US. e.g. some (Marxist?) analyses go like this:
Since the heady days of the 50s and 60s, when rates of return on capital investment (rate of profit), growth of real wages and GDP were feisty, there has been a long-term decline in vitality (slow if any real growth in such indicators). There has been a global tendency to overcapacity as first Germany, then Japan, the newly industrialised countries (NICs) of northeast Asia, the Tigers of southeast Asia and finally China added to world supply and brought down growth in prices and profits. Big companies tried to compete by innovation and investment in new technology but this just exacerbated the underlying problem of overcapacity and the slow (if any) growth in plant, equipment, employment and real wages. These spending cutbacks led to a decline in aggregate demand. To counteract this governments have encouraged state and private borrowing. Keynesian budget deficits have been an attempt to halt the slide in demand. The Clinton attempts to balance budgets (i.e. not rely on such deficits) led to recession up to the mid-90s. The Fed then did what Japan did in the 80s - low IRs, leading to soaring asset prices and paper 'wealth' to fuel consumption and investment - the badly needed shot in the arm for stagnating economies.
Those who hold this view point to the underlying performance of the US economy during the 2001-07 'boom'. It was much weaker than other booms (despite huge federal deficits) employment and real wages were flat, investment in plant/equipment was historically low and economic growth was driven purely by residential investment and consumption. When the housing bubble burst the inevitable consequence was a great fall in consumption/borrowing and housing investment. The main link between the financial meltdown and the real economy is the utter dependence of the latter on borrowing and on asset price bubbles for that borrowing to continue.
12. mountain goat said...
Icarus - good summary, we need some deflation to stop this sorry trend.
TM - I remember that thread well, you were right on the money! So..., why not?
13. icarus said...
MG - If the underlying problem is overcapacity and weak aggregate demand I'm not sure what the answer is.
Another (not necessarily mutually exclusive) explanation might involve the power of bankers to set in train a seies of events which have, after all, enriched their leaders. Take the potential derivatives Chernobyl. If the Fed hadn't bailed out Fannie and Freddie there would have been several rounds of cascading cross-defaults which would have destroyed Wall Street and the financial system. What did the bankers do to get us to that point? By July 2007 everyone had seen that WB was right when he spoke five years earlier of the derivatives timebomb. So what did the B'stards do? Why they increased the amount of outstanding credit derivatives from $35 trillion in that month to $62 trillion a year later. Why? Because it was profitable AND if, or rather, when it all blew up the size of the bomb ensured that governments would just have to come in and save the system. It's quite possible also that Lehman was allowed to go belly up in order to give the world a taste of what would happen if other big institutions weren't bailed out.
Then of course lots of money has been made since by the leaders of the pack.
14. uncle tom said...
Revolving credit (essentially, plastic) first appeared about 40 years ago, and has now come of age. There is no real demand for more of this class of credit, either in the US or UK; so with ups and downs smoothed out, it is reasonable to expect its growth rate, going forward, to track that of income growth.
Income growth meanwhile, is a combination of inflation and per capita economic growth.
Per capita economic growth of the last decade or so has been a combinaton of three factors:
1) The ability to achieve more for less effort, thanks to technological advances.
2) The willingness of countries such as China to act as vendor financiers on an unprecedented scale, selling us cheap goods, even though we have insufficient goods and services to offer in return.
3) Debt growth.
Factor one is quietly fading - new technologies are achieving remarkable advances in medicine and leisure, but are grinding to a halt in those areas that are more significant with regard to GDP.
Factor two is ultimately unsustainable. Sooner or later the Chinese will realise that it is no longer smart to exchange goods for depreciating IOU's.
Factor three is the killer detail. The growth of debt has only a temporary impact on GDP; and it requires an exponential growth rate to continue providing the medicine. However, the consumer, on both sides of the pond, clearly doesn't want to play this game any more.
The attempts of government, both in the US and UK to force feed debt on the consumer, are prompted by the realisation that without continued debt growth, GDP will continue to fall.
What the Fed and the BOE need to realise is that this amounts to flogging a dead horse. Worse is the fact that many consumers over indulged in debt before, with the result that debt growth is now going negative in the US, and is close to doing so in he UK.
It is clearly ludicrous to hope for return to economic growth as has been seen in the past, or indeed a return to the GDP levels enjoyed before the bubble burst; for many years yet.
Our economies need to plan and adjust for an on-going lowel level of GDP, and not just by a percent or two..
15. bellwether said...
Some really good posts here and I'm struggling to disagree with any of them.
I have a real problem right now with the concept of "consumer confidence" which typifies for me in a microcosm what's wrong. Why don't we talk honestly about consumer capacity, see it for what it is and as UT says plan accordingly. Another level to this is the idea of confidence trick, the belief that we can shape our own destiny if only we believe hard enough, this is pure Americana, and while it works within parameters, we are living on the rotten carcass of "if we build it they will come" line from the pile of steaming "Field of Dreams"
Having survived world wars it seems we cannot take any amount of pain or difficulty now, the mere suggestion that GDP might not grow sends us into hyperbole and panic.