Wednesday, May 7, 2008

Credit Card Time: The Consumer is about Tapped Out

Well ladies and gentleman I don't know how else to put this: We are in trouble. Welcome to the final leg of the debt bubble. We are down to credit cards now everyone!

Take a look at the credit card update on Bloomberg:

May 7 (Bloomberg) -- U.S. consumer borrowing jumped more than double the amount economists forecast in March, indicating a slowing economy is forcing Americans to accumulate credit-card and other forms of debt.

Consumer credit increased by $15.3 billion for the month to $2.56 trillion, the biggest monthly rise since November, the Federal Reserve said today in Washington. In February, credit rose by $6.5 billion, previously reported as an increase of $5.2 billion. The Fed's report doesn't cover borrowing secured by real estate, such as home-equity loans.

Consumers are turning to credit cards after banks tightened standards for home-equity loans and other borrowing. The March figures brought U.S. consumer borrowing in the first quarter to $34 billion, the most since the first three months of 2001, when the economy entered its last official recession.

``Consumers are strapped as incomes are not keeping up with inflation and this is leading them to rely increasingly on credit to see them through the worst housing downturn since the Great Depression,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi in New York. ``The days of extracting cash from one's home to spend on goods and services are long gone.''

Economists forecast an increase of $6 billion in consumer credit for March, according to the median of 34 estimates in a survey conducted by Bloomberg News.

Overdue payments at the six largest U.S. credit-card lenders reached the highest since November 2004, according to data compiled by Bloomberg. An average of 4.11 percent of loans were at least 30 days late in February and March, according to reports filed by American Express Co., Bank of America Corp., Capital One Financial Corp., JPMorgan Chase & Co., Citigroup Inc. and Discover Financial Services."

My Take:

Well now that the cash and home equity lines are gone we are now left with the credit cards.
Economists were expecting a rise of $6 billion for the month and we came in at $15 billion like the good little credit junkies that we are. In my opinion, the sad thing here is this credit cards were used to pay for gas and food versus the plasma TV's that we binged on last year.

If this isn't a screaming alarm that the consumer is close to being tapped out then I don't know what is. The credit card game will also come to an end as the defaults start to rise. Note we hit a 4 year high on defaults in February and March. I expect this rate to surge as the banks have cut off all other sources of credit.

Time to hit the panic button!! Pelosi is already discussing a second stimulus package. They know the lending game is over.

So I have a question for the bulls. How are we going to have a second half recovery with the consumer is tapped out?


SEC announcement rocks the street:

Equities tanked in the middle of the day as the SEC announced its "show me the money" time for the investment banks. Another question here for the bulls. If the banks are so well capitalized then why did equities tank when they were simply told they need to open their books? Let me answer that...Uhhh maybe because they are insolvent?

Here is the SEC's announcement on Bloomberg:

"The SEC is re-evaluating its oversight of securities firms after the Federal Reserve had to help rescue New York-based Bear Stearns in March to prevent a market panic amid a worldwide credit contraction. Concern that Bear Stearns was running short of cash prompted customers and lenders to desert the firm in March, forcing it to accept a takeover by JPMorgan Chase & Co.
Data on capital and liquidity will be required this year ``in terms that the market can readily understand and digest.'

``This move by the SEC is very helpful,'' said John Kornitzer, chief investment officer of Kornitzer Capital Management, which oversees $5 billion. ``Covering up this kind of dirt was never a good idea.''


Final take:

Well at least the banks now have some time to clean up their house before its show me time. Expect a ton of skeletons to fly out of the closet over the coming months as the IB's struggle to clean up their balance sheets.

The SEC is giving them time but by the end of the year we will finally see whats inside door #1. Expect this to rock the markets for awhile.

I hope you enjoy watching a financial train wreck. You are watching one happen right before your eyes. I thought the credit crunch was over? haha don't think so.

This train is gaining speed and losing control. Pay attention to the markets because we are nearing a point of potential capitulation of the debt bubble.

I don't believe the consumer can live very long on credit cards, and after those are tapped they are out of options. It will then be default time followed by a resetting of the economy.

6 comments:

James B said...

4% of cardholders are late? Jesus. At least they'll be helped out by the rampant increasing of credit card rates. Oh... wait...

On the upside, it wouldn't be too unhealthy *in the long run* to have people being more responsible with credit. Your comment about plasma TVs is absolutely right - everyone wonders around with $10K of debt and when it dips below, they splurge on crap they don't need. At least, I hope it causes some new understanding about how to use a credit card.

Jeff said...

Scary stuff isn't it?

I think the market might have topped here. The way the markets been acting though who knows?

James B said...

The markets seem to have way to be much optimism happening. They're in the sketchy investment mode of hoping for bailouts and good surprises, which has always been a suspicious approach to me.

If you look at the numbers - and you clearly do, given your awesome blog - there is only one direction and it's not a good one.

Now since credit card debt is not collateralized, I have to suspect that the defaults are brutal. $10K of CC debt at 27% for a $60K/year family that decided not to pay anymore... that debt is worth zero. No repos here.

Jeff said...

I agree. The wild card is the Fed keeps stick saving the market.

Its tough to invest in this environment. I agree with you though. The next big leg is WAY DOWN.

Avl Guy said...

This is another indicator that needs some 'cleaning up'..or am I being to nerdy? We need card issuers to provide how many cards carried no balance. Of the cards with a balance, they should report the number of accounts and the median balance, not the average. I don’t recall where I heard the figure but a significant % (40%?) do not carry a balance; they pay it off monthly (hooray for us)!
Their discipline dilutes both the oft-reported 'average balance' as well as the rarely reported 'median balance'. I suspect the average balance, where a balance exists, is much higher than $10k. Perhaps 40% higher? And of course, median is still a better number for calculating how much stress these households are really under and forecasting their breaking point.

Avl Guy said...

mckarkquey is right; credit card debt is not collateralized. But didn’t the Fed just announce they will accept securities backed by credit card debt pmts, in exchange for US treasuries?

And when are people gonna call these large credit card balances what they really are....income-stream-producing liabilities that whose principals are uncollectible by the issuer (though the incomes – tiny pmts to cover int - do get recorded). Or am I wrong?