Tag Archives: credit card debt

The Four Most Dangerous Words In Investing…

“This time it’s different.” That quote is from Sir John Templeton, a legendary investor who is considered the father of the modern mutual fund industry. For most of the month of December, I’ve been hearing ads from mortgage brokers who are promoting the idea of refinancing your house in order to take care of holiday bills. It reminded of the early 2000’s when then Fed Chairman, Alan Greenspan, was urging Americans to use their house as “an ATM” by taking on home equity loans as a means of drawing out cash against home equity for consumption spending. Adding more debt against your house to pay off big credit card balances merely shifts household debt from one creditor to another. What’s worse, it frees up room under the credit card accounts to enable the consumer to take on even more debt.

In reference to the mortgage and housing market collapse in 2008, Ben Bernanke wrote, “Clearly, many of us at the Fed, including me, underestimated the extent of the housing bubble and the risks it posed.” It’s hard to know if that statement is genuine or not, given that many of us saw the housing bubble that was developing as early as 2004.

The Federal Government’s low-to-no down payment programs via Fannie Mae, Freddie Mac, the FHA, VHA and USDA, combined with the hyper-promotion of cash-out refinancings (bigger 1st mortgages and/or second-lien mortgages) tell me that, once again, most people in this country believe – or rather, hope – that the outcome will be different this time.

The graphic just below  is an interesting way to show the affect that Central Bank monetary inflation has on asset valuation vs income. Asset valuation should be theoretically derived from the income levels connected to the assets. Either the asset requires a certain level of income level to purchase and maintain the asset or the asset itself generates income/cash flow.

You’ll note the pattern that developed starting with the tech bubble era. Prior to the Clinton administration the Fed subtly intervened in the financial system by been printing money in excess of marginal wealth creation (GDP growth) once Nixon closed the gold window. But, in conjunction with the Greenspan Fed, the Government’s willingness to print money as an official policy tool took on a whole new dimension during the Clinton administration.  Note:  I’m not making a political judgment per se about the Clinton presidency, because the Fed’s ability to print money to prop up the stock market was established with Reagan’s Executive Order after the 1987 stock crash. You’ll note that the household net worth to income ratio began to rise at a sharp rate starting in mid-1994, which was when the Clinton-Rubin strong dollar policy was implemented. It’s also around the time that Greenspan began regularly printing money to address the series of financial problems that arose in the 1990’s.

The current ratio of household net worth to income is 6.75 – the highest household net worth to income ratio in history. It peaked around 6.5x in 2007 and 6.1x in early 2000. You’ll note that from 1986 to 1995 the ratio averaged just around 5.1x.

A graphic that is correlated to the household net worth/income ratio is the household net worth to GDP.  The pic to the right shows household net worth (assets minus debt) vs. a plot of the U.S. nominal GDP. As you can see, when the growth in household net worth deviates considerably from the growth in nominal GDP, bad things happen to asset values. Note: household assets consist primarily of a house and retirement funds. Currently the level of household net worth – that is, the value of homes and stock portfolios – relative to GDP is at its highest point in history. This will not end with happiness.

I wanted to present the two previous graphics and my accompanying analysis, in conjunction with the theme that “it is not different this time.” The extreme degree of household asset inflation relative to incremental GDP wealth output is yet another data-point indicating the high probability that a nasty stock market accident will occur sooner or later. To compound the severity of the problem, household asset inflation has been achieved primarily through massive credit creation. The amount of debt per home sold in this country currently is at a record level.

During this past week, the bullish sentiment of investors continued to soar.  A record level of investor bullishness never ends well for the stock market. Speaking of which, there has been an interesting development in the Conference Board’s Consumer Confidence metrics. The headline-reported index showed an unexpected declined from 129.5 to 122.1 vs 128 expected. This is a big percentage drop and a big drop vs Wall Street’s crystal ball. However, while the “present situation” index hit its highest level since April 2001, the “expectations” – or “hope” – metric plunged from 113.3 to 99.1. It seems the current euphoria connected to the stock and housing markets is not expected to last.

The chart above shows the spread in consumer confidence between “present conditions” and “future conditions” (present conditions minus future conditions). A rising line indicates that future outlook (“hope”) is diverging negatively from present conditions. I’ve marked with red lines the peaks in this divergence which also happen to correlate with stock market tops (1979, 1987/1989, 2000).

The above commentary in an excerpt from the last issue of IRD’s Short Seller’s Journal.  I think retail stocks are going to be hit relentlessly beginning some time this quarter. In fact, one stock I presented as a short in early December was down over 12% yesterday after it released an earnings warning.  Some of the best SSJ short ideas in 2017 were retailers.  You can learn more about this short-seller newsletter here:  Short Seller’s Journal subscription information.

“Congrats on the [retail stock short] call. What a disaster. You have to love how the chart collapsed with the news. These algos are going to destroy people when they unless selling on stocks eventually. I made a 8X on my puts. Now I need to roll them into something else.” – SSJ subscriber who actively trades

How To Go Bankrupt: Slowly Then Suddenly

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.

In truth, the middle class continues to be hollowed-out from an increasing need to assume more debt in order to maintain its lifestyle. More debt is necessitated by an income level that is not keeping up with the ravages of the inflation that the Government can’t seem to find in its CPI report.  “Middle class”  includes everyone who requires a mortgage to claim “ownership” on their home plus anyone not rich enough to pay for self-enriching legislative policy at the State and Federal levels of Government.  If you fit either of those of those or both,  you are strictly speaking “middle class.”

2018 is going to be a difficult year for most Americans.  I have no idea how much longer the stock market can continue transmitting the illusion that every one is becoming more prosperous.  I have a gut feeling that real inflation, resulting from the inexorable devaluation of the dollar since 1971, will rip through the system sometime in the next year or two and drive interest rates to a level that could bankrupt a major portion of the economy.  It really won’t take much of a bump in rates for this to occur…slowly, then suddenly.

An Impending Economic And Financial Disaster


You’ve probably heard/read a lot lately about the VIX index. The VIX index is a measure of the implied volatility of S&P 500 index options. The VIX is popularly known as a market “fear” index. The concept underlying the VIX is that it measures the theoretical expected annualized change in the S&P 500 over the next year. It’s measured in percentage terms. A VIX reading of 10 would imply an expectation that the S&P 500 could move up or down 10% or less over the next year with a 68% degree of probability. The calculation for the VIX is complicated but it basically “extracts” the implied volatility from all out of the money current-month and next month put and call options on the SPX.

The graph above plots the S&P 500 (candles) vs. the VIX (blue line) on a monthly basis going back to 2001. As you can see, the last time the VIX trended sideways around the 11 level was from 2005 to early 2007. On Monday (May 8) the VIX traded below 10. The last time it closed below 10 was February 2007. The VIX often functions as a contrarian indicator. As for the predictive value of a low VIX reading, there is a high correlation between an extremely low VIX level and large market declines. However, the VIX does not give us any information about the timing of a big sell-off other than indicate that one will likely (not definitely) occur.

In my opinion, an extremely low VIX level, like the current one, is signaling an eventual sell-off that I believe will be quite extreme.

The true fundamentals underlying the U.S. economy – as opposed the “fake news” propaganda that emanates from uncovered manholes at the Fed, Wall Street and Capitol Hill – are beginning to slide rapidly.   The primary reason for this is that the illusion of wealth creation was facilitated by the inflation of a massive systemic debt and derivatives bubble.  Government and corporate debt is at all-time highs.  The rate of debt issuance by these two entities accelerated in 2010.  Household debt not including mortgages is at an all-time high.  Total household debt including mortgages was near an all-time high as of the latest quarter (Q4 2016) for which the all-inclusive data is available.  I would be shocked if total household was not at an all-time high as I write this.

The fall-out from this record level of U.S. systemic debt is beginning to hit and it will accelerate in 2017.  In 2016 corporate bankruptcies were up 25% from from 2015.   So far in 2017, 10 big retailers have filed for bankruptcy, with a couple of them completely shutting down and liquidating.    Currently there’s at least 9 more large retailers expected to file this year.   In addition to big corporate bankruptcies, the State of Connecticut is said to be preparing a bankruptcy filing.

The household debt statistics show a consumer that is buried in debt and will likely begin to default on this debt – credit card, auto, personal, student loan and mortgage – at an accelerated rate this year.  The delinquency and charge-off statistics from credit card and auto finance companies are already confirming this supposition.

In the latest issue of the Short Seller’s Journal, I review the VIX and the deteriorating consumer debt statistics in detail and explain why the brewing financial crisis will be much worse than the one that hit in 2008.  I also present a finance company stock and a housing-related stock as ways to take advantage of the crumbling consumer.   You can find out more about subscribing to the Short Seller’s Journal here:  Subscription information.   There’s no monthly minimum require and subscribers have an opportunity to subscribe to my Mining Stock Journal for half-price.

I look forward to any and every SSJ. Especially at the moment as I really do think your work and thesis on how this plays out is being more than validated at the moment with the ongoing dismal data coming out, both here in the U.K. and in the U.S.  – U.K. subscriber, James