Americans Running Out of Places to Hide Debt - Now Credit Cards Go

We've been on this beat a long - since the fund was born, we've been saying this is the first consumer led recession we've had since the early 80s and many (most?) market participants who have entered post 1983 are not prepared for it. They are going by the wrong playbook - the "corporate led" recession. Remember back then (almost a year ago) we had just began our first credit dislocations, interest rates were over 5%, and everyone was telling us not to worry! After all stocks always go up over time - just be patient. How patient - is a decade enough? They lied [Mar 26: Stocks Tarnished by Lost Decade] Houses have never gone down nationwide - don't listen to the hecklers! They lied [Jan 24: They Said it Could Never Happen. Ever.] Need I go on? I won't - you get the picture.

Back to our friend the consumer... he is in big trouble. We are financially illiterate (if we were not, we would never allow our government to do the things it does - we'd be storming D.C. in outrage) On top of financially illiterate we are massively overextended.... as I wrote then, when everyone was focused on the narrow niche that was subprime loans - that's just the tip of the iceberg. The easy to see spot. We have a whole nation built on consuming. A nation whose wages have not kept up with (relatively low) inflation eras, not to mention what we've had the past half decade. So they turned to their homes - and withdrew from that ATM. Over. And over. And over. Once home prices began to fall, that spigot turned off because frankly, many in the 2005 and later era got a house for little to no down... so without home appreciation there is no "bank" to draw upon. ATM is off. But no, pundits told us - we will be fine - just a little problem this summer and we'll be fine by fall... after all the Federal Reserve (starting in mid August) is on our side. And the market took off like a scorched monkey - racing to new highs in September and October 2007. On Kool Aid dreams.

Meanwhile I was typing to a much smaller audience: this is lunacy. The consumer is going to keep looking for spigots - personal loans, home equity loans, 8 year car loans, drain 401ks, and finally credit cards. Well that happened, the great "juggling act" of 2006-2007. And the bill is now coming due - the banks are beginning to turn off this spigot as well per the NYTimes. As I've been writing this will lead to bankruptcies - just a trickle for now. But we should see the tidal wave begin in 2009. I'm early. Just be patient. You see, when you run out of places to hide your debt, and your creditors come knocking and you're out of house equity to hide, you're out of 401k to hide, you're out of car loan to hide, you're out of credit card to hide - well you're doomed. And that's for those who remain employed. Sounds unreasonable right? Just as unreasonable as "stocks always go up over extended periods of time" and "housing will never fall nationwide".

We don't talk about this one much since it's a long term issue but we have whole series of posts so we have it on paper when it does start playing out (series from Aug 07 to Jan 08 here) and from there... (note you won't find this stuff in government reports)

[Apr 8: Late Payments on Consumer Loans at 16 Year Highs]
[Apr 10: WSJ - Borrowers Keep Piling on Debt] (we never learn)
[Apr 30: MSNBC - Americans Tapping Attic for Spare Cash]
[Jun 3: WSJ - Pinched Consumers Scramble for Cash]
[Jun 3: Credit Card Usage is Surging, Risking Another Debt Crisis]

So let's overlay that last headline, with the news from this NYTimes article - people turning to cards.... while credit card companies turn off the spigot... and the conclusion from this in an economy that is 70% consumer spending? Aha - 2nd half recovery. Again we can ignore reality and listen to government reports of joy, and CNBC pundits of happiness - or go walk to a neighborhood full of people who earn the median US wage of $38K and ask them how life is going in this low inflation, low unemployment environment. Trust me, even the "well off" are turning to credit cards to pay that $75-$85 gas fill up... how's it working for those in lower income strata? Juggling... it's going to be coming to an ending within 12 months. Then comes the real pain. So about this time next year after the debt for the 'housing bailouts' are working through, the debt from the 2nd 'stimulus' check is worked through (trust me, it's coming), then should come the debt hit from the 'credit card bailouts'... and our grandchildren must be built like Atlas to try to hold up all this debt we are going to be piling on them due to our current era of lack of self control and financial education. Strong dollar anyone?

• The easy money that led Americans to depend on credit cards to pay their bills is starting to dry up.
• After fostering the explosive growth of consumer debt in recent years, financial companies are reducing the credit limits on cards held by millions of Americans, often without warning.
• Banks... are cutting the limits for customers who have run up big debts, live in areas that have been hit hard by the housing crisis or work for themselves in troubled industries.
• The reductions come as consumers, squeezed by a slack economy, a weak housing market and rising unemployment, are falling behind on monthly credit card payments in growing numbers.
• Credit card lenders are also culling their accounts ahead of new rules that are intended to benefit consumers but could limit the profits on customers deemed bigger risks.
• Many Americans have come to rely on credit cards to cover everyday expenses like groceries, gasoline and medical bills, in addition to big-ticket items and luxuries. While consumer spending, the nation’s economic engine, has been surprisingly resilient of late, a more sweeping reduction in credit card limits could pose serious challenges for hard-pressed consumers and, in turn, the broader economy.
• Many are already feeling pinched. Pamela Pfitzer, a family therapist with a stable six-figure income, was stunned when she went to a garden center near her home outside Sacramento in early April and tried to buy about $30 worth of flowers with her American Express card. Her transaction was denied, she says, even though she insists she had rarely missed a payment and had just made one for $1,000.
• After inadvertently hitting her credit limit a few months ago and then falling behind on a mortgage payment, Ms. Pfitzer said her limit was lowered by American Express to $900 from $2,300. (oops)
• Then last month it happened again, she says, when she tried to buy office furniture with her Wells Fargo Visa card. Although she had just made a payment of about $700, Ms. Pfitzer found out that her credit limit had been lowered to $2,000 from $2,800.
• “In all the years I have had credit cards, I have never had this happen before,” Ms. Pfitzer said. “Now it has happened twice in the last few months.”
• Banks and mortgage companies are required by law to notify customers within three days of changing the limits on a home equity line of credit, and many have been aggressively lowering them. But credit card lenders have 30 days to notify their customers, and often do so only after taking action. (Credit card companies also happen to be major contributors to political campaigns - the world is their oyster)
• Washington Mutual cut back the total credit lines available to its cardholders by nearly 10 percent in the first quarter of the year, according to an analysis of bank regulatory data. HSBC Holdings, Target and Wells Fargo each trimmed their credit card lines by about 3 percent.
• Among those four lenders, that amounts to a reduction of about $15 billion in three months.
• Big banks face intense pressure on their balance sheets as they bring on billions of dollars worth of complex mortgage-related investments and other loans they are struggling to sell. Meanwhile, they are bracing for a surge in credit card losses as the job market and economy falter. (what? 2nd half recovery won't allow that to happen)
• Michael Taiano, a credit card industry analyst at Sandler O’Neill. He projects that credit card loss rates for lenders, now around 5.7 percent, could go as high as 10 percent in next 18 months. That would be higher than the peak levels reached after the 2001 technology bust. (I predict higher than that)
• Since borrowers typically run up their balances before they stop paying, issuers have started cutting lines of credit. Often, lenders will lower customers’ credit limits as they pay down their debt — a technique known in the industry as “chasing the balance.” This way, they are on the hook for less money if borrowers default.
• Bill Ryan, an analyst at Portales Partners. “The consumer that used to use his house as an A.T.M. is now starting to use their credit card as an A.T.M.” (same undisciplined behavior, different vehicle)
• Chase Card Services, the consumer arm of JPMorgan, is taking similar action on distressed borrowers, especially in places like California, Arizona and Florida, where home prices have declined sharply.
• “It has definitely made me spend less,” she said. But Ms. Sherman said that it had been a blow to her ego, too. “It made me feel like I wasn’t responsible,” she said.
• Meredith Whitney, an Oppenheimer banking analyst, said the impact of the recent regulatory proposals on lender profits could be so severe that she expected the industry to pull back $2 trillion in outstanding credit lines by 2010. That would be a 45 percent reduction in credit currently available to consumers.

Think about that last statement above, and even if its 50% correct, stare at the all and think about the implications. Overlay that with 70% of our economy is consumer spending in our "new era, service economy" and get back to CNBC with your thoughts about the impending boom/recovery/blah blah blah.

The United States of Subprime is in deep do-do. Both the government and the people - but the government can just run printing presses. The people? Not so much. Their printing press is found at the local lawyers office when they file personal bankruptcy.

And to think, we have not even started a recession....