Is The New US Consumer Consumption Binge Primed To Pop?

Reggie Middleton's picture

The Wall Street Journal recently ran the following: College Debt Hits Well-Off: Upper-Middle-Income Households See Biggest Jumps in Student Loan Burden. Having a college age child myself, I can certainly identify. From my perspective, there is absolutely no way in the world a cogent mind can deny that there is an education price bubble in the US. I most certainly find the "This couldn't be seen coming crowd" to be anathema - to wit, the MSM and even Wikipedia (whaaatttt????) have featured the problem:

What makes this topic so interesting is that it brings to mind the work that we've been doing in the consumer discretionary/durables sector shorts - reference "BS At The BLS Leads To Profitable Short Opportunities As Hopium Smokers Get High Off Of Depreciated Dime Bags Of Manipulated Euphoria!" for a strong supportive fundamental/macro argument and some sample short candidates. Long story, short - I believe the consumer and retail sector is due for a pretty significant correction. My team and I have gathered a material amount of evidence supporting said assumption, and the evidence keeps mounting. The Economonitor ran a most interesting piece that puts a different perspective on this, which I excerpt as follows (the emphasis is mine):

... We look at aggregate consumer credit (and not merely the revolving portion more commonly associated with retail activity) because we believe that term loan borrowing—where available (chiefly student loans and autos)—frees up cash for other consumption.  Another way of viewing this is that transportation and education are not truly elective purchases and not leveraging those purchases would otherwise reduce overall consumption.

What the numbers tell us today (as illustrated in the below graph) is that, as of January 2012, the growth rate in all forms of consumer credit on a 3 month average basis grew at a rate greater than at any time during the credit bubble.  Moreover, at $2.495 trillion, outstanding consumer credit stands a 97% of its peak of $2.576 trillion in August of 2008.  Deleveraging, my friends, this is not.

Yesterday the Consumer Financial Protection Board reported that student loans alone likely moved past the $1 trillion milepost at year end.  

Aren't the post recession eras supposed to be engines of growth? Is it different this time? Of course not, silly rabbits. Tricks are for kids. It's not different this time because we NEVER LEFT THE RECESSION OF 2008! The Fed's liquidity spigot combined with regulator's legalizing outright fraud simply hid the fact that we have been in a great recession ever since. I have discussed this in detail in the post "The Circle of Life -Purposely Disrupted By Multiple Central Banks Worldwide!!!"

Additional tidbits from that most excellent Economonitor article...

    • Are we once again entering a zone similar to the period immediately prior to the Great Recession in which consumer borrowing also grew rapidly, and more and more of the new borrowing was applied to debt service instead of new consumption? Watching retail sales trends over coming months should be instructive in this regard.
    • The crash in the housing market has left us with $873 billion in Home Equity Line of Credit balances (at Q4 2011) owed by consumers, most of which is no longer collateralized by home value. While borrowers may be making payments (many at vastly reduced rates of interest given the floating rate nature of those loans), I would put forward the argument that as a practical matterunsecured consumer debt in the U.S. is actually well over $3 trillion.
    • We are programmed by past cyclical phenomena to look at consumer credit expansion after a recession as being a positive – heralding the arrival of the “confidence fairy” who the more supply-focused in the macroeconomic establishment view as the critical element to a recovery.  There is no doubt that there is an element of this in the expansion illustrated below but, like so many things about the present secular crisis, that is surely not the driving force when a substantial portion of the increased indebtedness is applied to making ends meet, rather than triggered by optimism about the future.

So, what's next? Well,  my next post will illustrate my findings on a company closely tied to consumer credit. Then I will drill down farther into the consumer discretionary/durables sector for casual readers and paid subscribers (privileged content, of course) alike. New subscription research is available for download in the consumer discretionary sector - Preliminary analysis and short candidate (Consumer Discretionary).

For those that do not follow me, I have been pretty spot on in regards to bubble identification... SeeWho Is Reggie Middleton for my track record

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Never One Roach's picture

Excellent article Reggie! Thank you.

Dburn's picture

Good article Reggie. I saw this at NBC yesterday and was astonished. I don't know if the writer was the biggest idiot that they could find that sounded like he knew what he was talking about or they actually believe it. The article is worth a read just so you can get an idea of what the Sheeple have been hearing. I guarantee you there are millions who read that article and thought "Who the fuck do I know that's paring their debt without some legal help? " 



orangegeek's picture

More debt.  More defaults.  Any questions?

marz929's picture

Hey Reggie. If I invest with you will you steal my money? It appears you can and you should steal all of your clients funds because the Court says they really belong to you anyway! See the recent Court ruling in the Sentinel case:

darkpool2's picture

Agree this represents a shocking circumvention of ( at the very least) the spirit of the rationale for segregating customer funds. If the legal system " stretches" the rules like this , the answer is abundantly clear. These instituations will cease to exist without customers and their funds.....THATS EXACTLY THE CONCLUSION TO BE REACHED. Withdraw all funds, close accounts and terminate these abominations. It can happen in days !

Not Too Important's picture

Legalizing fraud. Anyone that doesn't pull their money out now is a complete fool.

That article made me sick.

max2205's picture

.... Toil and trouble....

deez nutz's picture

as of January 2012, the growth rate in all forms of consumer credit on a 3 month average basis grew at a rate greater than at any time during the credit bubble.  Moreover, at $2.495 trillion, outstanding consumer credit stands a 97% of its peak of $2.576 trillion in August of 2008 

  Reggie, have you seen guns and ammo sales lately?  78% of GM car loans to subrime market? Ford tapping the gub for $350M?  ..... it's seems to be "that one last free for all", or "last dance" or "last chance"......

It's all good Reggie!!! it's America and CREDIT is OUR BEST FRIEND!!

/sarc ......

"America is about freedom, the right to choose which financial instrument you will use to bury yourself in the items you think rightfully deserve.  We will never give in to the terrorists who want to take this freedom away from us!!"


resurger's picture

Either this or HFT glitch..

nice post

Getting Old Sucks's picture

I really feel sorry for cash strapped parents today.  Every parent wants their child to get a good start on life and the child is hoping that somehow the parents will be able to help them acheive that.  It must be heart wrenching for them to watch their child get accepted into a good school only to realize that there is no way, even with student loans, they can afford it because of overwhelming debt already extended.  2010 to 2020 high school grads are certain to be the lost decade of opportunity generation.

Freddie's picture

A lot of these helicopter parents are part of the problem.  Who in their right mind allows their kid to sign themselves into serfdom to get a degreee in women's studies?  The parenst are as bad as the corrupt universities with tenured con artists. 

The parents are TV and Hollywood brainwashed serfs like their kids.   Ball games, news propaganda and reality TV.  Serfs are happy with their clickers and HD.

mkkby's picture

So true. 

All the parents I know have daughters who want to study fashion merchandising...  Guaranteeing their parents will never retire, and the girls will live serving coffee to the rest of us.  But hey, on teevee it looks so cool to design clothes for supermodels and party all the time.  It must be real.

sessinpo's picture

"It must be heart wrenching for them to watch their child get accepted into a good school only to realize that there is no way, even with student loans, they can afford it because of overwhelming debt already extended."


And if the parents aren't learning from that experience and passing onto the child, I am not sure college will help much. The college of real life, school of hard knocks eventually comes into play.

brettd's picture

"The college experience" is one of the biggest marketing frauds laid off on the American public since WWII and the gi bill.

It is unnecessary to spend more than ten grand a year to get a rock-solid education:  from good will hunting:

See, the sad thing about a guy like you is in 50 years you're gonna staht doin some thinkin on your own and you're gonna come up with the fact dropped a hundred and fifty grand on a fuckin education you coulda got for a dollah fifty in late chahges at the public library 


jimcg's picture

Reggie and I have been on the same economic analysis page for quite a while, maybe 2006. We, independently, arrived at the same conclusions regarding the FIRE economic and market collapse, and traded accordingly.

And I still agree with his current economic theories and conclusions.

But the separation in trading thesis' began in 2009 with the massive Fed, treasury, and government, market interventions that continue daily and dominate all market outcomes.

Unfortunately, I find it impossible to intelligently trade in this environment when logic and facts are trumped by intervention and manipulation.




FinalCollapse's picture

That's correct. The Fed (plus Treasury, TBTF banksters) destroyed the capital markets. Everything is in ruins and they continue their reckless behavior. The pricing mechanism across the entire spectrum of the capital markets is destroyed. We have one-tailed risk with big banks rampaging on the upside. 

This is a collusion of big players to destroy small players and extract money from them. Everyone lost money which was transfered to the pockets of the TBTF banks. This is a criminal behavior to corner the markets. Everyone should scream to open criminal investigation into Fed/Treasury/TBTF Banks, even though our regulators are captured - cops on take.

I do not see any difference between the behavior of the Hunt brothers and the behavior of the criminal syndicate of Fed/Treasury/TBTF today. 

I am sure that folks at the Fed wrap themselves with the American flag as some sort of fucking patriots. They are not patriots - they are criminals and financial terrorists destroying this country - pure and simple. All Fed governors, their boards, and the traders there should be sent to the Guantanamo Bay to join Geitner, Dimon et al. 


Dareconomics's picture

I always enjoy reading Reggie Middleton's posts. He is my second favorite Reggie of all-time.

In his latest, he supports what I wrote earlier in the week regarding student loans and indeed all forms of government intervention including housing and healthcare.

Massive government intervention invariable leads to massive unintended consequences.