Tuesday, February 24, 2009

Loans loans everywhere and not a cent to spend

Before I even start, I want to be clear that I am not espousing a political opinion here. I hate politics. I'm not interested in them. But I do like investing (well, up until recently). And we all know I *LOVE* retail (well, up until recently). I want to go back to the good ole days of making and spending stupid amounts of money just as much as you do. But it would be disingenuous to suggest that it were possible to do so. I firmly believe that we are in the midst of a Great Adjustment not unlike that which our grandparents experienced... but different because we got here differently.

So, what I'm trying to figure out how we get out of this mire in which we're muddling. I'm all about common sense, or at least I'd like to be. The President just talked about 'new common sense rules of the road' (that's a direct quote from the President's speech... just a second ago), but then he's talking about increasing the lending again. He mentioned that it was only through borrowing that Americans could buy homes (okay), buy cars (can't we buy cheaper cars?) and attend college (a little help is fine, but those kids coming out of college with $110k in debt are in a world of hurt that will take YEARS to dig out from.)

Okay, the banks have shut off the faucet completely. For businesses. For consumers. For everyone. That's not good. We know what happens when there is no credit - there is no economy. I don't like that. You don't like that. Heck, no one in the world likes that. On the other hand, when there's too much credit, problems also ensue.

I am so very very concerned that all the talk is about getting lending moving again so that the consumer can bounce back. Our consumers have been consuming too much, have collected too much debt already, and they're going to be digging out for a long long time. I'm not saying I'm an expert, but I play one on TV. Every indicator I can find shows the U.S. consumer is tapped out, drowning in debt, swimming in stuff that they thought they needed but really didn't.

Let's think about this. Home mortgage default rates (delinquent loans as a percentage of total loans) are over 5%. Maybe that's because the long-term average percentage of Americans who own homes is 65%... and even with all the foreclosures we're still at roughly 67.5% owning homes. Too many people who couldn't afford a home were allowed to buy a home anyway, at least for a time.

We all know about the problem with subprime loans, but no one is really talking about the next pig in the python: the Option Adjustable Rate Mortgage problem that is staring us in the face. These Option ARMS are even more toxic than the subprime mortgages, maybe that's why no one wants to talk about them.

I gave a talk last weekend on the economy entitled "Fairy Tales Retold: Today's Economy Explained." In the case of consumer credit, my point is that you can wait for Prince Charming all you want, but he's not going to pay off your debt... he can't afford to pay off his own! Okay, we're a little off the highs, but consumer credit (not including mortgages, just credit card-like stuff) is over 21% of personal income. Back in 1974 we were closer to 15%. Of course, we didn't all have fabulous designer handbags and great technological toys back then either.

I can't tell you how many folks I've had tell me that their home is their savings account. Great thought until home prices fall 20%. A better place for savings might be, wait for it, a savings account. But as a culture we apparently don't believe in those either, maybe because they don't give you the rush that the stock or housing markets do. They also don't turn your stomach like the stock or housing markets.

In the graph above I've shown the personal savings rate as a percentage of disposable income since 1959. The average over that time period is indicated by the gold line across the middle: 6.9%. It doesn't take a statistician to see that the average is only that high because of the early years in the graph. In fact, since the beginning of 2005, the average is only 0.8%. No, that's not a typo. Less than 1% of our disposable incomes are being saved. No wonder we're living on debt, we don't have anything in savings for emergencies. And up until last quarter, a sale at Macy's qualified as an emergency.

So when the tap got turned off by the banks and it looked like they were really serious this time, is it any wonder that retail sales took a nose dive down the rabbit hole?

That little graph there shows the year over year change in retail sales since 1992. That drop-off on the right side? Unprecedented. Ugly too.

So we have no savings in our homes or savings accounts. We have lots of credit card debt. We have lots of people defaulting on their mortgages and more to come. We're a consumer economy (70% of the economy is consumer driven), and we're not buying any more... because we can't.

I'm not saying we won't get out of this, because we will. But anyone who's believing it's going to be quick or easy? Not so much. I don't have the answer, but I'm pretty sure we can't leverage ourselves out of it this time.

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