Every once in a while you'll catch the mainstream financial news media letting a few kernels of truth slip through the bad news filter. Monday morning, CNBC (whose idea of "balanced and unbiased" is letting Rick Santelli shout for a few minutes and then promptly laughing at him) featured a story on U.S. credit card debt and household savings. The conclusion from Howard Dworkin, CPA and founder of ConsolidatedCredit.org was, and I quote,
The fact of the matter is that America is broke - whether it's mortgages, student loans or credit cards, we are broke. [emphasis mine]
This, of course, is a conclusion I came to some months ago and one that I shared in a piece appropriately titled "Outlook 2013: Americans are Going Broke." My analysis centered on inflation and wage growth, a point I will revisit below, but note that Dworkin's conclusion is based on a rather disconcerting statistic uncovered by BankRate: one quarter of Americans have more credit card debt than savings and an additional 16% reported having no credit card debt but no savings either. Ultimately then, "40 percent of the population [is] close to the edge of ruin."
The idea that a quarter of Americans have more card debt than savings might, in a kind of perverse way, be viewed in a positive light. That is, more credit card debt means more consumer spending and because the consumer drives three quarters of U.S. economic output, it might be acceptable for 24% of Americans to charge up more than they have in their savings accounts if it means boosting economic growth. This logic relies on a kind of utilitarian ethos: if getting the economy back on the historical 3% yearly expansion track means that 1/4 of Americans have more credit card debt than savings, then so be it.
The problem, however, is that the growth in total consumer credit outstanding (which, by the way, hit an all time high in 2012 despite persistent rhetoric about private sector deleveraging) is not currently being driven by revolving credit (i.e. credit card debt). Consider the following three graphics, the first of which shows total consumer credit outstanding, the second shows total revolving credit, and the third is a table from the Fed which shows the month by month and year by year breakdown of the growth in both revolving and non-revolving credit:
We can see from the above that even as total consumer credit outstanding continues to put in new highs, revolving credit has either declined or remained stagnant every year since 2008.
Even if we strip out the $150 billion decline in revolving credit which occurred from 2008 to 2009, we can still see that from the end of 2010 to December of 2012, the amount of total outstanding revolving credit rose by just .04% and yet, over the same period, the percentage of Americans who have more credit card debt than savings either rose or remained the same in 3 out of 4 income brackets as the graphic below shows. The red arrows also point to the fact that for two income brackets, the percentage of those with more card debt than savings rose markedly from February of 2011 to February of 2012 (a period during which revolving credit was basically flat) before recovering in 2013, according to the most recent survey:
If the people in question were saving more, paying down their card balances, or both, one would expect to see these percentages declining given that revolving credit is not expanding, unless of course most of those included in this group have such high card balances that getting the card debt-to-savings ratio under 1 is near impossible (which would also be bad). Here's CFA Gary McBride:
...the proportion of people with more emergency savings than credit card debt hasn't changed much...Given the poll's 3.5% margin of error, one can make the argument that consumers haven't moved the needle at all over the past 24 months.
The key here is that if consumer revolving credit were expanding, then one might reasonably be comfortable with these figures. That is, if people were taking on more credit card debt in order to spend and stimulate the economy, then a static percentage of the population with a high card debt-to-savings ratio might be acceptable since it would theoretically be accompanied by expanding credit and increasing consumer spending.
But this is not the case. Revolving credit is not growing and if we equate an expansion in revolving credit with economic expansion (via increasing consumer expenditures) then on balance, the absence of revolving credit expansion means we likely aren't getting any kind of economic boost as a tradeoff for having 25% of the populace with a card debt-to-savings ratio above 1. Put simply: Americans whose credit card debt-to-savings ratio is above 1 simply aren't saving enough or making high enough payments to put a dent in the ratio even when consumer revolving credit isn't expanding at all.
So where is the growth in total consumer credit outstanding coming from? The latest reading on consumer credit (for December) shows an expansion of $14.59 billion which, in ZeroHedge's words, would be great if "driven even remotely by actual short-term consumption demand as it would imply consumers have more faith in being able to repay their credit cards." Instead, revolving credit declined by $3.63 billion during the last month of 2012, the largest such decline since July. Non-revolving credit (think student loans) by contrast, increased by $18.22 billion during December, the largest such increase since 2001. This is particularly disconcerting given what we recently discovered about delinquency rates for student loans. As I noted in a ZeroHedge piece from last month,
...not only is the rate of subprime student loans 90 days or more past due rising (now at a staggering 33%), but the percentage of all student loans classified as "subprime" is also rising and, in an eery coincidence, also hit 33% last year.
Perhaps even more disconcerting is where these loans are ending up. Despite the dramatic decline in the issuance of home equity backed securities since the crisis, the securitization of student loans hasn't abated at all. In fact, the issuance of student loan-backed securities came in close to an all time record high last year:
Source: Deutsche Bank
In sum then, the percentage of Americans with more credit card debt than savings hasn't come down even as revolving credit expansion has been flat to negative for the past 48 months and the expansion in total consumer credit is entirely attributable to an increase in student loans, a third of which are seriously delinquent, and, to top it all off, the issuance of student loan-backed securities (affectionately called SLABS during the lead-up to the crisis) has never been higher. Can you say "Subprime Redux?"
Having examined consumer credit, it's worth revisiting wage growth and inflation for a moment for further signs that Americans are simply becoming poorer. When it comes to abysmal wage growth and inflation, "even the Wall Street Journal gets it," to use one of my favorite catch phrases. Here's the Journal's Paul Vigna:
Any time we see wage growth outpacing even the smoothed, massaged measures of inflation represented by the CPI, we're happy...But wage growth is a fragile flower, and we fear that any headwind, and there are several massing, may be enough to scatter it to the four winds. [emphasis mine]
Vigna is referring to the fact that inflation adjusted hourly earnings rose .2% in January from December and .6% from January of 2012. In the above passage, Vigna also alludes to the fact that the CPI is a pitifully inadequate measure of inflation and indeed he says so specifically later in his piece:
But let's not kid ourselves. Gas prices were $3.58 a year ago, they're $3.78 this week. Inflation may not be taking off, Weimar-style, but prices are not the consumer's best friend right now. The so-called "core" of the January report was a red flag. The costs of shelter and clothing jacked the core up to a 0.3% rise, noted BTIG's Dan Greenhaus, the biggest rise since May 2011, "and only the second time during the entire recovery."
The bottom line is that on an inflation adjusted basis, wage growth is pitiful and in fact has been negative in three of the last six months as the following chart from the Bureau of Labor Statistics shows (note also the steadily decline in the positive figures since November):
One can see, based on the chart above, why Americans whose credit card debt is greater than their savings have been unable to fix the problem -- people's wages are struggling to keep up with inflation meaning their purchasing power is barely being preserved. Under these conditions, paying down card balances and/or saving money is simply impossible.
Those who (like me) continually warn that the growing disconnect between economic reality and market fantasy will eventually result in a dramatic sell-off are persistently accused of "crying wolf" and are quite often branded "Chicken Littles." What critics of the bear position fail to understand is that this rally (in both credit and equity markets) is entirely engineered by central banks. My work isn't necessarily an attempt to rain on the proverbial parade as much as it is an impassioned plea for those unwilling to look deeper into the system to simply wake up.
Even Bill Dudley, the President of The New York Fed, recently referenced "the use of repo-funding to finance inventories of securities held for market-making purposes," reinforcing the notion that banks can and do repo their assets to fund inventories of stocks. Readers will recall that this is precisely what I and a few others have claimed is behind the rally in the U.S. equity market.
Since one cannot expect the majority of investors to delve deeply into the inner workings of the shadow banking system in order to understand how the whole ridiculous game (and believe me, that's what it is) functions, I will leave readers instead with two simple observations. First, equity mutual funds and equity ETFs had net outflows of $21 billion in 2012. How then is it possible that stocks rose 11% during the year? Second, in real terms, stocks are not anywhere close to their 2007 highs. In fact, when you take into account the growth in the CPI, the S&P 500 is 27% below its 2007 highs. Worse still, when priced in Swiss francs and gold, stocks are down 48% and 84%, respectively since 2007.
What then happens to the money invested in U.S. equities when inflation finally does take off thanks to years of misguided Fed policy? To those still heavily invested in U.S. stocks (NYSEARCA:SPY) (NASDAQ:QQQ) (NYSEARCA:DIA) and/or U.S. Treasury bonds (NYSEARCA:TLT) remember: in the fairy tale, the wolf finally came calling.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.