Thursday, April 10, 2008

WSJ: Borrowers Keep Piling on Debt

Back to the real economy - I wrote last week [Apr 4: Late Payments on Consumer Loans at 16 Year Highs] and many times in the past that I believe credit cards will be the last thing people let go of, as they lose their house ATM, stop paying the mortgage, drain their 401ks, and deplete their savings... wait strike that last part, most Americans don't believe in savings (or can't afford to believe in them with their wages stagnating).

I actually believe credit cards will be the last to go - since people are using them as perpetual cash machine... i.e. charge $800 this month, only have to pay back $75 to keep the game going. Everything else will go first - but it's a long term process so we can have "hope" in the meantime and cling to rebate checks and everything will be fine in 6 months.

I've discussed this in a series of blog entries in the past (shouting into the wind of course because "hope" trumps reality)
  1. Aug 28: Getting more Short ETFs
  2. Sep 15: Consumer Spending Continues, Where is the Money Coming from? Credit Cards
  3. Dec 10: Consumers Increasingly Turning to Credit Cards
  4. Dec 23: Unpaid Credit Cards Bedevil Americans
  5. Jan 10: Credit Card Warnings Here, Credit Card Warnings There
We've been focusing recently on lighter fare such as global famine or how best socialism can work in the US, so it's been a while since we've discussed this subject - something plain to the view if someone actually looks and does not bury head in sand (ostrich) as most economists seem to be doing. What was most interesting to me from research last fall was how for the first time ever people were choosing to pay credit cards instead of mortgages. In the "old days" when people had to put (gasp) 5% down, or heck 10% (dare I say 20%) and had skin in their mortgages (i.e. a down payment) it used to be reversed; save the house first and foremost. But we've created a whole new class of home consumer through our "innovative financial" products and they'd rather pay down the cards (so they buy minor things like gas and food), and are cool with giving up the house that many got 100% (or 110%) financing - the same people we are trying to bail out with your tax dollars :)

This story shows this addiction we have... many people out of habit, and others out of desperation (before they eventually fall into bankruptcy) to credit cards. Notice the predicted trend of people needing to use cards for day to day items - gas, food, medicine, etc. Much of the recent increases is not for HDTVs like the pundits like to tell you; especially from the right. It is people trying to survive the day to day. This has been a trend for a long time, something I've argued for many years - but masked by the house ATM. This is why the country requires asset inflation - new bubbles - to constantly create short term "infusions of cash" for people over the last decade - because from normalized economic activity wages are not keeping up with life costs (mostly a situation of the last decade). So we will continue down this path until a new bubble can be formed that large parts of society can partake in, temporarily relieving the stress... this appears to be the government strategy - keep kicking the can down the road until a new bubble can be formed somewhere.

Much like the government, when facing a shortfall, we borrow more. Only, unlike the government we don't have unlimited creditors (nations across the globe willing to buy Treasuries they have been losing money on as the dollar free falls), or a printing press. So eventually, as individuals, (unlike our country) we face an end game. But it will be dragged out for a while more since this depletion takes time... we should really start seeing the effects by this fall going into summer 2009. Again, since it's not a glorious blow up or 1 time event like a Bear Stearns we can ignore this "white noise" as investors and continue to believe everything will soon be fine. But as most things economic; its a slow erosion; only after lapping at the shore for months upon quarters will the full affects be seen. But the first waves are beginning to crash in...only when every spigot is exhausted by a large swath of the nation will Wall Street move from denial to recognition of the tidal wave. (boy did I do a great job of using a whole "sea" of oceanic verbage there!)
  • The credit crunch has made it harder for Americans to indulge in their love affair with debt. So what are they doing? Borrowing more.
  • While tighter lending standards have cut off all but the most credit-worthy borrowers from auto loans and home loans, many people are turning to credit cards and tapping more of their home-equity lines of credit to dig themselves in deeper.
  • Average balances on credit cards and home-equity lines of credit are growing rapidly, rising 9.5% and 8.1%, respectively, in the first quarter from a year earlier, according to new data from Equifax Inc. and Moody's (see chart to right, home equity ATM spigot now off, on we move to HELOC and credit card spigots)
  • Borrowing is climbing quickest in the regions where house prices plunged most sharply, making it tougher for people to extract money in cash-out refinancings. Credit-card balances rose nearly 15% during the first quarter from a year earlier in California and Florida and more than 20% in Nevada -- all states caught up in the housing bust, according to Equifax and
  • The rise in borrowing shows just how addicted the U.S. consumer has become to credit. Even as borrowers are cut off in one area, they promptly look for new sources. Workers have increasingly been raiding their 401(k) plans to take out loans over the past year, according to plan administrators and nonprofit groups. (we've discussed this many times)
  • Across the country, consumers are increasingly relying on credit cards to stay afloat. This week, the Fed reported consumers are boosting their use of credit cards. In February, Americans had $951.7 billion in total revolving debt, most of it on credit cards -- a seasonally adjusted annualized increase of 5.9%. Although that increase has slowed from the 7.1% pace in January, it is up 8.2% from year-ago levels.
  • Credit counselors say they have started seeing more people turn to their credit cards to cover everyday items. "Food, fuel and medicine -- people are charging their day care, even their tithes to church, and any incidental items.
  • In a conference call last month, Discover Financial Services Chief Executive David Nelms told analysts that sales growth in the first quarter "generally became more concentrated in everyday categories such as groceries, gas or discount stores, with less growth in specialized retail segments such as department stores and home improvement."
  • In a separate survey released last week, Discover said 52% of consumers it surveyed in March expected to spend more in April on household basics by cutting back on discretionary expenses, such as vacations, or by setting aside less money for savings and investing. That is an increase of 12 percentage points from its February survey and close to the highs seen last November, when gas prices spiked.
  • The Fed's aggressive rate cuts have helped make home-equity lines of credit, whose rates are typically pegged to the prime rate, more attractive compared with fixed-rate home-equity loans. For example, utilization rates on home-equity lines -- or the percentage of a credit limit that has been charged up -- increased to 46% in the first quarter, the second consecutive quarterly rise since early 2005, according to data from Equifax and
  • But home-equity lines, once a major alternative to credit cards, are also getting harder to access. In recent months, certain lenders, such as Countrywide Financial Corp., Washington Mutual Inc. and Bank of America Corp., have reduced or frozen certain borrowers' home-equity lines of credit, especially in markets that have been hit by a slump in housing values.
So once again I'd like to emphasize we are not in the middle or tail end of this recession (regional - don't worry you farmers, you're good!). [A recession that the same people who denied its existence up to 2 months ago are already calling for an end to? ironic] We are just in the beginning; our perfect storm awaits us... full steam ahead.... (is that an iceberg I see?)

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