Consumer Credit

On the heals of Intel's blowout quarter, stock index futures mostly surged overnight. Nasdaq 100 Futures were up over 1.2% and S&P Futures were up 3/4 of a percent.  European markets started out strongly but have erased gains and are firmly in the red led by the banking sector. Maybe this is technical selling and locking in profits as profits have been few and far between for the bulls since late April.

Everyone seems to believe that INTC numbers are a proxy for global growth and more importantly US Consumer growth. How sad a point is being made here. Most of Intel's progress is in Asia. SURPRISE! SURPRISE! As the Asians are the ones with all of our money it would be nice if they actually spend it on our industries. But how does this help the US Economy? How does INTC blowout quarter give us a better insight into US Consumer spending patterns?

Retail Sales are on the tape and they came in -0.5% which was worse than forecast because lets be frank the forecasters should, would, and could be the same ones washing your car on the weekends. What the hell do they know? Very little but the following charts are quite alarming and cant be set aside just because INTC had a great quarter.

As we all know The US consumer is credit and debt addicted.  If anyone wants to know why The US Economy has exploded since the early 80's all you have to do is look at the below graphic. Credit exploded. It wasn't lower taxes although that helps. People started to live way beyond their means a long time ago and the bill has come do. Many used the equity in their homes as an ATM. That ATM says insufficient funds at the moment. As a former mortgage trader I can tell you that when securitization was first developed in the late 70's / early 80's it was like crack cocaine in the inner cities. It was open season on Wall Street.

Now that banks are doing what most rational sane enterprises should be doing in a recession we have a problem in that the US Economy is a ponzy scheme economy. Pay old investors with money borrowed from new investors.  Don't let anyone tell you any differently. Bernake and Geithner have nothing on Madof. All of that was and is done with debt and credit. US Monetary policy has been a joke ever since "Tall" Paul Volcker left. Greenspan just inflated asset prices and pandered to power so that he can demand $100K a speech after his reign of terror. Bernanke has doubled the monetary base of the country in the last 2 years. Just sit back and absorb that last statement. America just celebrated its 234th birthday and one man has single handily doubled the money supply base in 2 YEARS! Its beyond imagination. All of this to keep and preserve the rotten to the core global banking institution which supports a cesspool like shadow banking system.

 

Now that consumer credit is shrinking. US consumers have to come out of their debt zombie/slavery trance.There is no other way for the majority of Americans to live. The forced deleveraging that is happening at the moment is a deleveragng of survival and necessity not convenience. Many are worried about the future. Worried about retirement. Worried about sending kids to college which in itself is a scam but nonetheless its keeping many up at night. The banks are doing the country a favor by not extending credit. Give them props for that. The banks are actually for once doing what is rational. This is good. Why are we busting the banks chops for not extending credit when the real employment rate is probably hovering 20%? The banking sector needs to rebuild their balance sheets and grow reserves.


We are in a secular bear market where we will get sharp rallies. These rallies may last some 12-16 months but they have to be thought of in this secular bear market thesis.  We have so far seen huge snap back rallies after huge declines. This is exactly what we see in bear markets.

I expect consumer credit to keep declining for the foreseeable future. This is very good for the country long term but will hurt the US Economy short and medium. Japan had a corporate deleveraging that lasted 20 years. Their economy has paid the price. US citizens ran up debt in the 80's and 90's and gorged on cheap credit during this decade. It will take probably a generation at the earliest to get back to equilibrium. What Japan was going through in the 90's was a balance sheet recession where monetary policy is basically useless. You are telling corporations to spend but they cant even in the face of ultra low rates because they are so extended, so far from shore that they need to paddle back to the beach. This is where we are in this country. Every one wants to sucker you into saying that this is an ordinary recession that it was inventory led. So wrong. The US is going through a vicious balance sheet recession that is far worse than Japan's in that US consumer spending is 2/3 of the economy. When 2/3 of the economy is in the open water with sharks swimming around it is best to do a Michael Phelps and swim back to shore. Why is this so lost on the Obama Administration is beyond me.

As long as consumer credit keeps sinking the recovery is in doubt. In fact we never had a recovery in the first place. Housing still sucks. Job losses have turned the corner but job creation at the moment is a myth. We need to create some 125,000 new jobs a month for the foreseeable future just to get back to where we were before the recession. We are no where near that figure for many structural reasons.

All of the countries polices are wrong or misguided.

1-Defense Policy
2-Foreign Policy
3-Monetary Policy
4-Fiscal/Tax Policy
5-Entitlement Spending Policy
6-Immigration Policy
7-Legislative Policy

Can anyone say with a straight face that these policies are helping America?

Lets add one more policy that is misguided. This preposterous housing policy that is basically subsidizing bad bets made by homeowners. More on this soon.