Consumer Credit

That US consumer credit soared by $21.4 billion in March on expectations of $9.8 billion rise, or the fastest monthly expansion since March 2001 would have been commendable and memorable if one did not dig through the actual components. Which sadly are atrocious: of the entire surge, a modest $5.1 billion was from real credit, or revolving, credit-card type debt. This brought the total revolving debt to $804 billion or to a level first crossed in January 2005. The balance, or $16.2 billion, was non-revolving debt, or the type of debt used to fund GM car purchases by subprime borrowers and push the student loan bubble well into its $1+ trillion record territory. The total non-revolving debt is now $1.739 trillion: an all time record. As for the source of such debt? why the US government of course, in what is the supreme ponzi scheme, whereby the US government allows US consumers to purchase Government Motors products and to keep the Higher Learning status quo in power. In other words, the US government has become the final enabler of the consumer spending bubble with proceeds used to keep the US auto unions happy (as channel stuffing is already at record high levels), and of course, to fund such ancillary student purchases as iPads. As for whether any of this debt will ever be paid off? Don't be silly.

European cash equities opened sharply lower this morning following electoral uncertainties arising from various corners of Europe, notably Greece and France. Volumes also remain light as the market closure across the UK reduces the number of participants today. The mainstream political parties from Greece, PASOK and the New Democracy, failed to establish a majority this weekend as voters firmly expressed their discontent with the political establishment, evident in the rise of fringe parties. As such, the leaders of New Democracy and PASOK will now attempt to establish a coalition party with the splinter group Independent Greeks (a party notable for its anti-EU/IMF stance), due to begin as soon as today. The uncertainty in Greece’s future has taken its toll across the markets today, with EUR/USD beginning the session sub-1.3000 and all European equities trading markedly lower throughout most of the morning session. Elsewhere on the political front, Francois Hollande has won the French Presidency and is to be inaugurated on May 15th, as such; participants now look out for any comments regarding the relationship between the new French leader and German Chancellor Merkel. The Spanish government are set to make an announcement on Friday concerning the continuing troubles over the Spanish banking sector, with a government source commenting that the plans will include the creation of a 10- and 15-year ‘bad bank’. Recent trade has seen a recovery across forex and stocks as EUR/USD grinds higher and stock futures move closer to unchanged. Strong German factory orders data has helped the moves off the lowest levels, as demand from outside the Eurozone helps lift the figure above expectations of +0.5% to +2.2% for March.

All major European bourses are trading lower with the exception of the DAX, which holds just above the open by a modest margin. Adidas ranks among the top performers in the German index, following the report of a strong set of sales figures, contributing to the positive trade. Spanish concerns continue to build up as Standard & Poor’s took ratings action on 16 of the country’s banks, downgrading the notable names of Banco Santander and BBVA. Although the move was not a surprise as this is the usual procedure following a sovereign downgrade, both Santander and BBVA, along with the IBEX are in negative territory.  The Bund is seen higher amid a generally risk-off theme to markets this morning. Volumes have been relatively light, however a slight pick-up has been observed in recent trade, grinding the security upwards in the last hour or so.  EUR/USD continues to experience weakness and now trades close to a touted option expiry of 1.3200, as traders seek the safety of the USD across a number of currency crosses.

Last night, Goldman entered into unchartered territory with its first observations of the student loan bubble in a piece titled "Are Student Loans Driving Consumer Credit Growth?" Most of the observations are nothing new, although author Alec Phillips does bring up one amusing implication of what the soaring student debt may mean in macro terms. Specifically, to Goldman the rise in debt is merely "A more important source of countercyclical credit. Since federal student lending standards are looser than most other forms of credit, they now rely mainly on Treasury borrowing for financing, and demand for them appears stronger when the labor market weakens, it seems likely that education-related debt will grow fastest at times when the economy slows and other lenders are pulling back." In other words, the rate of change in student debt is inversely proportional to the improvement in the US economy, or directly proportional to its deterioration. So since the student debt chart is, for lack of a better word, parabolic, what does that mean for the broader economy?

Last night it was uber-dove Janet Yellen, today it is uberer-dove, former Goldmanite (what is it about Goldman central bankers and easing: Dudley unleashing QE2 in 2010, Draghi unleashing QE LTRO in Europe?) Bill Dudley joining the fray and saying QE is pretty much on the table. Of course, the only one that matters is Benny, and he will complete the doves on parade tomorrow, when he shows that all the hawkish rhetoric recently has been for naught. Cutting straight to the chase from just released Dudley comments:"we cannot lose sight of the fact that the economy still faces significant headwinds and that there are some meaningful downside risks... To sum up, the incoming data on the U.S. economy has been a bit more upbeat of late, suggesting that the recovery may be getting better established.  But, while these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods in terms of generating a strong, sustainable recovery.  On the inflation front, the year-over-year rate of consumer price inflation has slowed in recent months, and despite the recent rise of gasoline prices, we expect inflation to moderate further in 2012." Translate: NEW QE is but a CTRL-P keystroke away now that all the inflation the Fed usually ignores continues to be ignored.

In an attempt to not steal too much thunder from Gary Shilling's thought-provoking interview with Bloomberg TV, his view of the S&P 500 hitting 800, as operating earnings compress to $80 per share, is founded in more than just a perma-bear's perspective of the real state of the US economy. As he points out "The analysts have been cranking their numbers down. They started off north of 110 then 105. They are now 102. They are moving in my direction." The combination of a hard landing in China, a recession in Europe, and a stronger USD will weigh on earnings and inevitably the US consumer (who's recent spending spree has considerably outpaced income growth) with the end result a moderate recession in the US. The story is "there is nothing else except consumers that can really hype the U.S. economy" and that is supported by employment but last week's employment report throws cold water in that. "Consumers have a lot of reasons to save as opposed to spend. They need to rebuild their assets, save for retirement. A lot of reasons suggest that they should be saving to work down debt as opposed to going the other way, which they have done in recent months. So if consumers retrench, there is not really anything else in the U.S. economy that can hold things up." While the argument that the US is the best of a bad lot was summarily dismissed as Shilling prefers the 'best horse in the glue factory' analogy and does not believe investors will flock to US equities - instead preferring US Treasuries noting that "everyone has said, rates cannot go lower, they will go up, they will go up. They have been saying that for 30 years."

There is no free-lunch - especially if that lunch is liquidity-fueled - is how Gluskin-Sheff's David Rosenberg reminds us of the reality facing US markets this year and next. As (former Fed governor) Kevin Warsh noted in the WSJ "The 'fiscal cliff' in early 2013 - when government stimulus spending and tax relief are set to fall - is not misfortune. It is the inevitable result of policies that kick the can down the road." Between the jobs data and three months in a row of declining ISM orders/inventories it seems the key manufacturing sector of support for the economy may be quaking and add to that the deleveraging that is now recurring (consumer credit) and Rosenberg sees six rather sizable stumbling-blocks facing markets as we move forward. On this basis, the market as a whole is overpriced by more than 20%.

With expectations of a $12.0bn rise in Consumer Credit, yet another market 'economic' indicator flashes orange as the Seasonally Adjusted number comes in at $8.735bn - the largest miss from expectations in 6 months. Furthermore, using the Non-Seasonally Adjusted data, this is the largest sequential drop in 12 months (since the Feb 2011 plunge). While non-revolving debt managed to increase (though at a considerably lower pace) for the second month in a row the deleveraging that ended in Q4 has resumed following the end of the retail shopping season (as revolving credit contracted). Perhaps the same 'glitch' that destroyed Groupon, namely accounting for product returns, is about to sweep the entire retail industry?

As it now stands, the US economy faces a “fiscal cliff” in early 2013 – meaningful Government spending cuts AND tax increases at the household level. Nothing like a double whammy, now is there? Unquestionably this is one of the reasons why the Fed has pledged to leave short-term interest rates low for some time. So what happens if nothing is changed and both tax increases and spending cuts are allowed to materialize? Although it’s an approximation, the deadly combo could shave 1.5% plus from US GDP next year. Estimates from the Congressional Budget Office are for a more meaningful contractionary impact. And that’s before the ultimate global economic fallout influence of Europe and China slowing. But there is a larger and very important issue beyond this, although the “cliff” is something investors will not ignore and could be very meaningful to forward economic and financial market outcomes, especially given the relative complacent market mood of the moment.

We have discussed numerous times the surge in Student Loans as the lifeblood of the consumer credit expansion that we seem to be having but now its just getting ridiculous. Smart Money reports on the growing use of student loans for the private K-12 education needs of affluent families. This is not affordable loans for impoverished savants to get their PhD at 14 years old, roughly 20% of families that applied for aid to pay for their children's kindergarten through 12th grade private school education had incomes of $150,000 or more, up from just 6% in 2002-3. 'Pre-college' loans are becoming more popular as the story notes "It used to be that families first signed up for education loans when their child enrolled in college, but a growing number of parents are seeking tuition assistance as soon as kindergarten." These loans, which do not have to be repaid until the child graduates college are expensive (varying between 4 and 20% and average $14,000) which would be on top of the nearly $34,000 average that 1 in 6 parents already carry for college graduates - leaves parents at risk of owing considerably larger sums of debt.  Still, perhaps the e*Trade baby will put that cash to good use but one parent sums up the alternate reality that exists within so many US households with regard to debt: "We'll figure out how to pay for it then, or with any luck they'll get scholarships," he says. "Right or wrong, we're hoping our experiment works." Keep buying those Mega Millions tickets too...

Depending on debt to fuel nominal growth leads to an economic death spiral. Sometimes one chart says it all. Charted against consumer credit, the S&P 500 (SPX) collapsed after the 2000 dot-com bubble burst and has been tracing out a descending channel since then. The Fed's injections of liquidity via trillion-dollar purchases of toxic mortgages and Treasury bonds does not funnel money into productive investments--all it accomplished was to further incentivize speculative churning and financialization to enriched the few at the expense of the many. So sit back, tighten your seatbelts and enjoy the death spiral ride, brought to you by the Federal Reserve and your elected servants of the financial Elite.

While the recent employment report will most assuredly give the current Administration plenty to boast about the underlying trends are far more disturbing.   The ongoing structural realities, the fact that many of the jobs that have been destroyed will never return, combined with the demographic shift make the headline number much less important compared with the emerging trends.  Take a look at a recent Gallup Organization poll which polls weekly, rather than one week out of a month with BLS, in regards to the emerging trends of employment.  The most recent poll update shows the trend of the percentage of unemployed rising.   As you can see the Gallup survey tends to lead movements in the BLS poll by about 4 weeks or so.   Therefore, it is highly likely that in the coming month as the massive seasonal adjustments in January and February fade out we will see the unemployment rate rise back towards 8.5%. 

Topped off with Wall-Street-esque hype ... how refreshing, and so unlike the congressionally mucked-up USPS.

All you need to read.

One look at the just released consumer credit data would make one believe that the US consumer is getting back into it and the velocity of money is finally starting to ramp up: after all the headline January number came at a whopping +$17.8 billion on expectations of +10.5 billion. Nothing could be further from the truth.  As the first chart below demonstrates, January revolving credit, as in that used on one's credit card, actually declined by $2.9 billion compared to December, and was back to $800.9 billion: the first decline in 4 months as consumers spend less following an already weak holiday season. Yet offsetting this was an absolutely massive surge in Non-revolving credit, i.e., mostly student debt, which soared by $20.7 billion in the month, the highest sequential jump in this category in history, leading to a very misleading print of a major increase in credit. For earlier observations on the soaring student loan bubble see here. And it gets worse: when spread by sources of credit, the only place where credit came from was the US government, which funded a near record $28 billion, all of it going into student loans, even as every other source of credit declined in the month! If this is not the most blatant gaming of headlines, we don't know what is. But yes, America's lucky students get ever deeper into debt slavery, only to realize upon graduation that there are no jobs that pay high enough to allow them to pay off this debt. Thank you uncle Sam - may we have another bubble.