Tag Archives: consumer credit

Sparks Fly Toward The Debt Powder Keg

The stock market has gone 74 days without making a new high but that hasn’t stopped the bulls from boasting about how it is up or flat six days in a row. I still say to sell into strength – David Rosenberg, Gluskin-Sheff

The narrative that the economy continues to improve is a myth, if not intentional mendacious propaganda. The economy can’t possibly improve with the average household living from paycheck to paycheck while trying to service hopeless levels of debt. In fact, the economy will continue to deteriorate from the perspective of every household below the top 1% in terms of income and wealth.

Theoretically, the Trump tax cuts will add about $90 per month of extra after-tax income for the average household. However, the average price of gasoline has risen close to 40% over the last year (it cost me $45 to fill my tank last week vs about $32 a year ago) For most households, the tax cut “windfall” will be largely absorbed by the increasing cost to fill the gas tank, which is going to continue rising. The highly promoted economic boost from the tax cuts will, instead, end up as a transfer payment to oil companies.

The Fed reported consumer credit for March last week. Consumer credit is primarily credit card, auto and student loan debt. The 3.6% SAAR (Seasonally Adjusted Annualized Rate) rate of increase over February was the slowest growth rate in consumer debt since September. Credit card debt outstanding actually dropped 3% (SAAR). But the 6% growth in non-revolving debt – auto/student loans – rose 6% (SAAR). Given the double-digit increase in truck sales in March, which offset the double digit decline in sedan sales, it’s safe to speculate that the increase in consumer credit during March was primarily loans to “buy” trucks/SUVs.

Remember, the average light truck/SUV sales ticket is about $13k more than for a sedan, which means that the average size of auto loans in March increased significantly during March. This is a horrifying thought in my opinion. Here’s why (original chart source was Wolfstreet.com):

As you can see, the rate of subprime 60-day-plus delinquencies is nearly 6%, which is substantially higher than during the peak financial crisis years. Why is this not directly affecting the system yet? It is but we’re not seeing it because the banks are still sitting on unused “excess reserves” – pain killers – that were given to them by the Fed’s QE program. The excess reserves act to “buffer” the banks from debt defaults, which in turn enables the banks to defer taking these auto loans into foreclosure and writing them off. But this will only serve to defer the inevitable:  debt defaults in quantities that will far exceed the amount of debt that blew up in the 2008 financial crisis.  Bank excess reserves are down 13% since August 2017.

I knew at the time that the Fed’s QE program was a part of the Fed’s strategy to build a “cushion” into bank balance sheets for the next time around. The only problem is that the size of the debt bomb has grown disproportionately to the size of the “cushion” and it’s only a matter of time before debt defaults blow a big hole in bank balance sheets.

Here’s the other problem with the statistic above. The regulators, along with FICO, lowered the bar on differentiating between prime and subprime. Despite the supposed effort to tighten lending standards since 2008, it’s just as easy to get a loan now as it was in 2007 and the variables that differentiate sub-prime from prime have blurred. I witnessed this first-hand when I accompanied a friend to buy a near-new car from a major Audi dealer in Denver. Based on monthly income, I advised him to buy a less expensive car. But Wells Fargo was more than happy to make the loan with very little money down relative to the cost of the car. No proof of income disclosure was necessary despite being self-employed. The friend’s credit rating is a questionable mid-600’s

This is the type of loan transaction that occurs 1000’s of times each day at car dealers across the country. If we had gone to one of the seedy “finance any credit” used car dealers, getting the loan would have been even easier because those car brokers also use credit unions and other non-bank private capital “pools” like Credit Acceptance Corporation (CACC) and Exeter Finance (private).

Student loans are not worth discussing because no one else does. Someone with a student loan outstanding can easily put the loan into “deferment” or “forbearance,” which makes it difficult to assess the true delinquency/default rate on the $1.53 trillion amount outstanding (as of the end of March). However, I have seen estimates that the real rate of serious delinquency is more like 40%. Most borrowers who defer or request forbearance do so because they can’t make current payments. Again, this is one of the bigger “white elephants” that is visible but not discussed (the $21+ trillion of Treasury debt is another white elephant).

The debt bubble and implosion will push homebuilder stocks off the cliff.   Several of my subscribers plus myself are raking in money shorting and buying puts on homebuilders stocks.  I took 50% profits on the puts I bought late last week.

The commentary above is an excerpt from last Sunday’s Short Seller’s Journal. My Short Seller’s Journal is a unique newsletter that presents the alternative to the “bull” case. It also presents short ideas, along with put strategies, every week. You can learn more about this newsletter here:  Short Seller’s Journal information.

 

“Too Warm In March To Spend Money On Amazon.com?”

Quote courtesy of Zerohedge.   Retail sales bounced in March thanks to a spike in auto sales fueled by the huge jump in non-revolving credit in per the latest Fed report.   Retail sales gained .9% in March but missed expectations for the fourth month in a row.   Electronics dropped, as did grocery store sales.   Online sales declined .1%.

Wasn’t Easter and Passover a bit early this year?  Shouldn’t holiday sales at the end of March help to boost March retail sales?

It’s just amazing to me to that the media continues to repetitiously insist that the weather is having an affect on the economy.   This absurdity symbolizes just how Orwellian our system has become.

This reminds me of a story a colleague told me about how Wall Street analysts feed business reporters their storylines.   At the time this colleague was an analyst in the junk department of the bank where I traded junk bonds.  He had just fielded his first call from a reporter.   After he got off, he went the head of the research area and asked her how to handle media inquiries about why the bond market is moving.

This was her answer:  Go over to the Bloomberg terminal and pull up “headlines.”  Take the top three headlines – regardless of their content – and give those as the reasons for the reasons the market is moving.  Then hang up.

That’s it folks.  Whoever decided to use the “bad weather” attribution for poor economic reports starting in November 2013 started a trend that has become virile.  I wonder what the excuse will be in July when the consumer is in the intensive care ward:  “people are staying home to watch baseball.”

So retail sales are estimated to have had a dead-cat bounce in March after 3 consecutive months of declines, including a decline in the biggest retail sales month of year (December).   I would suggest that the March number will be revised significantly lower next month.  This serves two purposes:  1)  it covers up what would have been a bad headline number for March;  2)  with a lower comparison number used for March, it makes the April headline number look better or less worse on percentage gain/loss basis.

Either way, this stock market is setting up for a colossal fall.   I would suggest that, given online sales dropped in March.   Amazon.com reports its Q1 at the end of this month (April 29).   It has already forecast a deeply negative operating income number.   Although I’m sure AMZN will use a full array of GAAP accounting gimmicks to stretch its reported net income (which will be a loss) into a “beat” of expectations, the stock will likely get hammered.

If you want to make money off of this event, you need to be positioned ahead of the event.  I am short AMZN and adding to my position via various options strategies.   My AMZN report explains how the Company uses highly misleading accounting to make its numbers look better than the actual economic rent (cash flow) being generated by the Company.   My report also explains how to use options to play a downside move if you don’t want to short the stock outright (I recommend a combination):   AMAZON dot CON

This can only be described as the look of a man (Jeff Bezos) who knows he’s pulling off a scam that makes the Madoff Ponzi scheme look like a small scale drug dealer selling oregano to high school kids (ironically, Bezos started out his Ponzi finance career at Bankers Trust – the same crooked bank at which my colleague and I toiled):

Bezos1