A Financial System Headed For A Collision With Debt

The retail sales report for December – delayed because of the Government shut-down – was released this morning. It showed the largest monthly drop since September 2009. Online sales plunged 3.9%, the steepest drop since November 2008. Not surprisingly, sporting goods/hobby/musical instruments/books plunged 4.9%. This is evidence that the average household has been forced to cut back discretionary spending to pay for food, shelter and debt service (mortgage, auto, credit card, student loans).

I had to laugh when Trump’s Cocaine Cowboy – masquerading as the Administration’s flagship “economist” – attributed the plunge in retail sales to a “glitch.” Yes, the “glitch” is that 7 million people are delinquent to seriously delinquent on their auto loan payments. I’d have to hazard a wild guess that these folks aren’t are not spending money on the latest i-Phone or a pair of high-end yoga pants.

Here’s the “glitch” to which Larry must be referring:

The chart above shows personal interest payments excluding mortgage debt. As you can see, the current non-mortgage personal interest burden is nearly 20% higher than it was just before the 2008 financial crisis. It’s roughly 75% higher than it was at the turn of the century. The middle class spending capacity is predicated on disposable income, savings, and borrowing capacity. Disposable income is shrinking, the savings rate is near an all-time low and many households are running out of capacity to support more household debt.

I found another “glitch” in the private sector sourced data, which is infinitely more reliable than the manipulated, propaganda-laced garbage spit out by Government agencies. The Conference Board’s measurement of consumer confidence plunged to 120.2 from 126.6 in January (December’s number was revised lower). Both the current and future expectations sub-indices plunged. Bond guru, Jeff Gundlach, commented that consumer future expectations relative to current conditions is a recessionary signal and this was one of the worst readings ever in that ratio.

This was the third straight month the index has declined after hitting 137.9 (an 18-yr high) in October. The 17.7 cumulative (12.8%) decline is the worst string of losses since October 2011 (back then the Fed was just finishing QE2 and prepping for QE3). The expectation for jobs was the largest contributor to the plunge in consumer confidence. Just 14.7% of the respondents are expecting more jobs in the next 6 months vs 22.7% in November. The 2-month drop in the Conference Board’s index was the steepest 2-month drop since 1968.

This report reflects a tapped-out consumer. It’s a great leading economic indicator because historically downturns in this report either coincide with a recession or occur a few months prior.

Further supporting my “glitch” thesis, mortgage purchase applications have dropped four weeks in row after a brief increase to start 2019. Last week purchase applications tanked 6% from the previous week. The previous week dropped 5% after two consecutive weeks of 2% drops. This plunge in mortgage purchase apps occurred as the 10yr Treasury rate – the benchmark rate for mortgage rates – fell to its lowest level in a year.

Previously we have been fed the fairy tale that housing sales were tanking because mortgage rates had climbed over the past year or that inventory was too low. Well, mortgage rates just dropped considerably since November and home sales are still declining. The inventory of existing and new homes is as high as it’s been in over a year. Why? Because of the rapidity with which number of households that can afford the cost of home ownership has diminished. The glitch is the record level of consumer debt.

The parabolic rise in stock prices since Christmas is nothing more than a bear market, short-covering squeeze triggered by direct official intervention in the markets in an attempt to prevent the stock market from collapsing. This is why Powell has reversed the Fed’s monetary policy stance more quickly than cock roaches scatter when the kitchen light is turned on. But when 7 million people are delinquent on their car loan and retail sales go straight off the cliff, we’re at the point at which stopping QT re-upping QE won’t work. The stock market will soon seek lower ground to catch down to reality. This “adjustment” in the stock market could occur more abruptly most expect.

8 thoughts on “A Financial System Headed For A Collision With Debt

  1. 2019 – the year of the Wall ……… Donald Trump’s beautiful big border wall and the US economy’s ginormous ugly brick wall. It has been coming since everything failed in 2008 or rather was manipulated to line the pockets of the Wall Street fat cats and has been papered over ever since to squeeze the very last drop of wealth from the American people. Here in Australia as we follow slavishly the directions from our American bosses in the finance sector and the hallowed Canberra corridors (we aren’t grand enough to have hallowed halls) we are definitely not far behind the land of the free with our teetering real estate market, our stagnant wages and our soaring homelessness. I am so thankful that I discovered the alt media a few years back where truth and facts have given me enough time to get ready for what is coming. Sadly so many family and friends still roll their eyes when I mention gold, silver, Bitcoin and a fully laden pantry.
    Thank you for again for another well written and timely article.

  2. Great analysis of the “glitch” in today’s Dec. ’18 retail sales number and I believe, correctly ascribing “blame” to the tapped-out U.S. consumer, who by all accounts is ~70% of the economy. We now have credit cycles vs. business cycles. The Fed and other central banks can delay or extend these cycles via massive interventions, including QE (aka debt monetization), but they can’t be prevented. Once the “economy” reaches debt-saturation levels, it’s game over.

    The stock markets are now driven by liquidity, not earnings. Soon after the Fed started -$50B/mo QT while raising rates, Wall St. got the message. Less than a 10% reduction in Fed balance sheet led to almost a 19% stock market correction. Predictably, the Fed caved, and as you described, we’re now having a powerful bear market rally. How much higher? Unknown to me, but the end result won’t be materially different vs. 2000-2002 or 2008-2009 bear markets, IMHO. The Fed couldn’t prevent the market collapses then. There was never a reckoning of the GFC, only a doubling down on failed policies. How can it be any different this time?

    TPTB have gone all-in on promoting stock markets as THE single economic indicator for the U.S. economy. Trouble is, well, when you put all of your eggs in one basket, it can come back to bite you. Humpty Dumpty.

    “Insanity: doing the same thing over and over again and expecting different results.” – Albert Einstein (mis-attributed) – Narcotics Anonymous (how apropos!)

    “That men do not learn very much from the lessons of history is the most important of all the lessons that history has to teach.” – Aldous Huxley

    Breakingviews – Chancellor: A 300-year lesson in bubble inflation
    February 13, 2019 / 3:52 AM / Updated 16 hours ago
    Edward Chancellor

    LONDON (Reuters Breakingviews) – Just over 300 years ago, in early December 1718, a Parisian bank was nationalised by the French state. This marked the beginning of the Mississippi Bubble, which captivated France over the following couple of years. The aristocratic world of the “ancien regime” may seem impossibly distant to modern minds. Yet there are parallels between this saga and the modern age of quantitative easing, ultra-low interest rates and highly valued asset prices. As central bankers struggle to reverse their post-crisis monetary measures, the lessons imparted by the Mississippi Bubble are more relevant than ever.

  3. Incredible up stock market today, the ESF has trillions of unlimited money for the DOW to go up 1.74%. If all Governments have unlimited money to push up stock markets, then I guess there is no way for stock markets to crash or sell off unless it is all orchestrated. They are showing us that record climbing debt does not matter.

    I have officially thrown in the towel of stock markets crashing. They have finally defeated me. Everyone has a breaking point. When it is all rigged, it is rigged. It is what it is.

    1. So does that mean you would buy historically massively over valued stocks right now? Pile into Facebook, Amazon, Netflix, Google, Tesla?

  4. Trump says a trade deal with China is close at hand. I believe this is so since Trump has invited Schumer & Pelosi to the White House to lay out the terms to them to see if the Democrats would support it & vote for it. Trump would not do this if an agreement was not imminent.

    In Trump’s 145 trade list of demands from China, the U.S. has everything to gain & China nothing to gain because the last 45 years, trade was a one way street that benefited China. But now, Trump says free trade must be fair trade and reciprocal trade. So, what is China getting out of this trade deal for them.

    It’s possible that a secret part of this trade agreement is that China demanded that trade be settled with a Gold-Trade Note. This to prevent the bankrupt U.S. from issuing unlimited worthless digital USD & worthless Treasuries. In addition, all Gold & Silver exchanges must now be physical exchanges only. An entity cannot sell a gold futures contract unless they have the physical on hand to deliver. This would put an end to the Crimex & LBMA paper selling fraud price suppression scheme. China says this is it or no deal.

    Maybe this is why Central Banks around the world have reportedly been buying gold throughout 2018. Countries are getting ready for this transition in settling trade. Trump & XI would want to accomplish this while keeping stock markets high & elevated because both would lose if the stock markets crashed and all that wealth just disappears in thin air. Then they would be under heavy criticism. But this way they both come out smelling like a rose. This is the perfect opportunity for China to force something like this and no one would know until it is jointly announced.

    1. Debt service is different than interest payments. Debt service includes amortization payments. Longer terms on auto loans is one of example of how the financial wizards reduce amortization requirements which reduces “debt service.”

  5. Standard operating procedure, bozo buoyancy for billionaire Bezos. Alhttps://www.zerohedge.com/news/2019-02-19/amazon-paid-zero-corporate-tax-second-year-row

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