The Plight of the Consumer

While we’re suffering through it, every recession is “special” with unique characteristics; however, as mentioned before the type of recession that Our Man fears is a ‘balance sheet’ recession as he’s not convinced that the power that be (let alone simpleton’s like himself) have figured out a way to get out of such a recession (see Japan). Thus, as we’ve also discussed before, he makes it a point to mosey on over to the FED’s website and take advantage of the voluminous information that they provide. Last week, we saw on how Commercial Bank’s lending to real companies (as defined by their Commercial and Industrial loans) provided unpleasant viewing and the pain has yet to show signs of abating. Today, Our Man thought he’d stop in and see how consumers are doing…

As you know, Our Man is a Brit and as such has great respect for the American consumer. In fact, when he was knee-high to a grasshopper his first ever money making scheme was an arbitrage involving American consumers; where he would purchase cans of Coke from his subsidized school shop, before strolling down Church Road to sell them at a hefty premium to the tourists (mainly American) queuing to get into the Wimbledon tennis tournament! As such, he learned at an early age never to underestimate the buying power of the American consumer!

So Our Man fully expected to see credit growth over the last few years but what he hadn’t expected was to see how consistently positive it was. Some random things he discovered by looking at the statistics:

- From 2002 to July 2008 (peak of consumer credit) consumer credit grew at an amazingly steady rate of c5% per annum (with each calendar year falling in between 4.0% to 5.6%). This was positively tepid compared to the previous few years (where it threatened double digit annual growth)
- In the 10-years leading up to July 2008, credit never contracted in any single month. Not one….in 10 years!
- In the 15-years leading up to July 2008 credit contracted in 1 (yes, one) month. October 1998, in case you were curious.
- The longest contraction in consumer credit lasted 20months (Nov-90 to Jun-92) and consumer credit contracted a whopping 2.01% in that time. (It recovered the loss in 9months)
- That 2.01% contraction was the largest contraction since the end of World War 2 (until the 2008 peak).
- The current contract has lasted 14months, and credit has contracted by 4.87% in that time and hasn’t showed much sign of slowing (3.92% annualized over the last quarter, including August’s C4C impact, and almost 7% annualized last month).

And here are some self-explanatory charts and graphs:


Consumer Credit



So how does this fit in with Our Man’s thinking?
Well, he assumes that the last few years have seen a negative wealth effect for Mr. & Mrs. Consumer given the likely impact on their home price and investments. Now, as well as the increased prospect of unemployment, they are also seeing their access to credit financing is being diminished not to mention higher credit card rates (per Rasmussen, 50% have seen increased rates in the last 6months). What are Mr. & Mrs. Consumer to do? Well, Our Man’s thinking is if…and it’s a big if...they are rational, we should see Mr. & Mrs. Consumer choose to pay down their credit balances (and its 20% interest rate) and start to save a little for their impending retirement, rather than splurge it on a (final?) Christmas shopping binge. This broad thesis is, amongst a number of other reasons, why Our Man is quite comfortable with his large Long TLT/Long-end Treasuries position. That slowly, despite the government’s best efforts and bribes, saving will become the new consumption and (given Mr. & Mrs. Consumer’s age) income will become the new capital gain. However, Our Man is wary of the American consumer…and as such, you will find him each month checking in with the FED to see that Mr. & Mrs. Consumer’s credit is declining (and quarterly to check-in on their savings).