by Dave Kranzler, Investment Research Dynamics:
In Hemingway’s, “The Sun Also Rises,” one of the characters, Bill, asks his friend, “Mike,” how he went bankrupt. Mike replied, “I had a lot of friends. False friends. Then I had creditors…” This passage from the novel comes to mind when I hear ads during the local sports radio programming from mortgage brokers urging listeners to use a cash-out refi or home equity loan to take care of credit card debt that piled up during the holidays. Beneath the surface is the message, “c’mon in, the water is fine, go ahead and take on even more debt.”
If in fact the retail sales turn out to be as strong as projected, it’s because the average household has tapped into its savings and used an unusually large amount of credit card debt to fund holiday spending this year:
The chart on the left shows the 13-week annualized percentage change in household credit card debt. The data comes from the Fed. As you can see, the use of credit cards to fund spending has soared. Further compounding potential household financial stress, the personal savings rate in November dropped to 2.9% from 3.2% in October. It’s the lowest personal savings rate since November 2007. November 2007 is one month before an official recession was declared back then.
The 18% spike in credit card debt is perhaps more troubling than the plunge in the savings rate. It’s been theorized that consumers may have used credit cards to “pre-spend” an anticipated savings in taxes from the tax legislation. Unfortunately, the changes to the tax code will be neutral at best for the average middle class household.
Furthermore, borrowing to fund current consumption in the absence of future income growth or capital gains received from monetizing assets (stocks, homes, etc) merely shifts future consumption into the present. If retail sales come in “hot” for Q4 because of strong holiday sales fueled by credit card debt, it will be offset by a steep decline in consumer spending in 2018. This is because the rate at which consumer credit is rising at more than double the rate of growth in wages. The “cherry” on top of this scenario is that there will likely be an acceleration in the rate of credit card and auto loan delinquencies and defaults. This latter development would a continuation of the rising trend in credit delinquencies and defaults that emerged during 2017. Mortgage payment problems are sure to follow.
The “feel good about the economy” propaganda has been over-the-top this year. Trump has been the primary cheerleader as he extols the virtues of a soaring stock market that he labeled “a massive bubble” when he was begging for votes on the campaign trail. Now he points to the stock market as an indicator that the country is better off since he became president.
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