We thought we should provide some initial comments on the Fed's consumer credit report released on Friday, as we believe it may have contributed to the equity market's turnaround from triple-digit losses mid-day to a slight gain at the close.
Decline of $1.7billion in credit was much less than the $10.0billion decline expected by analysts. We believe this was driven by Christmas shopping and various government 'incentives.'
It is safe to assume that many consumers, now a bit more confident than last year, decided to treat themselves or loved ones to more or better gifts during Christmas season. In addition, the very slow improvement in the employment situation (although may not be maintained) and the government's lovely gifts for additional consumption (such as cars), may have convinced many to tap into their unbalanced balance sheets and, temporarily, slow down the deleveraging process.
To make it simple, we compared the Dec. '09 results to 2005, which was when the housing market peaked. Dec. consumer credit balance remained above the 2005 level. More specifically, the $2,456.8 billion was 7%+ more than the 2005 balance. The revolving credit balance remained 4%+ above 2005. In addition, the non-revolving balance is above that of 2007! This is alarming and demonstrates just how much further consumers levered themselves in only 24 months, 2005 – 2007, before attempting to correct their actions. We believe many are determined to reduce their debt further, but cannot do so while unemployed.
Thanks to the government and the lower rates, the average amount financed for a car continued to rise in Dec. to $30,598, from $30,506 in Nov. and only $24,133 in 2005. Of course part of this is explained by the fact that consumers were borrowing more for their homes in 2005, and that today's rates are more than 40% lower than rates in 2005. However, with lower unemployment and overall income per household, such increase in auto loans, in our opinion, is unsettling.
In addition, the loan-to-value ratio of such loans stood at 92 in December, significantly above 2005's 88 and only slightly below 2007's 95. Combined with not much growth in overall consumption and continuing decline in the housing market, this ratio demonstrates 1) consumers likely did not have more cash to put towards those loans and 2) the government’s success in convincing consumers to borrow more at the great low rates. We wonder what would happen if the Fed was forced to exit such 'stimulus' phase of the economy (or plainly - money printing) before any meaningful improvement in jobs all around the country. We must also note that although the average length maturity of these loans is 64 months (higher than 60 months in 2005), the more time for the borrower, the more likely that the borrower will hit the high-inflation phase of this great recovery (likely within the next 24 months).
Simply put, we believe that the lower decline in consumer credit in Dec. was only for the short term. We hope we are correct, because if not, then, with the help of the government's stimulus programs, we are only delaying the significantly negative impact of high debt. Actually, so is the government.
Decline of $1.7billion in credit was much less than the $10.0billion decline expected by analysts. We believe this was driven by Christmas shopping and various government 'incentives.'
It is safe to assume that many consumers, now a bit more confident than last year, decided to treat themselves or loved ones to more or better gifts during Christmas season. In addition, the very slow improvement in the employment situation (although may not be maintained) and the government's lovely gifts for additional consumption (such as cars), may have convinced many to tap into their unbalanced balance sheets and, temporarily, slow down the deleveraging process.
To make it simple, we compared the Dec. '09 results to 2005, which was when the housing market peaked. Dec. consumer credit balance remained above the 2005 level. More specifically, the $2,456.8 billion was 7%+ more than the 2005 balance. The revolving credit balance remained 4%+ above 2005. In addition, the non-revolving balance is above that of 2007! This is alarming and demonstrates just how much further consumers levered themselves in only 24 months, 2005 – 2007, before attempting to correct their actions. We believe many are determined to reduce their debt further, but cannot do so while unemployed.
Thanks to the government and the lower rates, the average amount financed for a car continued to rise in Dec. to $30,598, from $30,506 in Nov. and only $24,133 in 2005. Of course part of this is explained by the fact that consumers were borrowing more for their homes in 2005, and that today's rates are more than 40% lower than rates in 2005. However, with lower unemployment and overall income per household, such increase in auto loans, in our opinion, is unsettling.
In addition, the loan-to-value ratio of such loans stood at 92 in December, significantly above 2005's 88 and only slightly below 2007's 95. Combined with not much growth in overall consumption and continuing decline in the housing market, this ratio demonstrates 1) consumers likely did not have more cash to put towards those loans and 2) the government’s success in convincing consumers to borrow more at the great low rates. We wonder what would happen if the Fed was forced to exit such 'stimulus' phase of the economy (or plainly - money printing) before any meaningful improvement in jobs all around the country. We must also note that although the average length maturity of these loans is 64 months (higher than 60 months in 2005), the more time for the borrower, the more likely that the borrower will hit the high-inflation phase of this great recovery (likely within the next 24 months).
Simply put, we believe that the lower decline in consumer credit in Dec. was only for the short term. We hope we are correct, because if not, then, with the help of the government's stimulus programs, we are only delaying the significantly negative impact of high debt. Actually, so is the government.
No comments:
Post a Comment