Breaking The American Consumer

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Includes: DIA, IWM, QQQ, SPY
by: Jeff Opdyke

Summary

Every bit of economic data is dished up for consumption.

Such data points are a one-off snapshot that says nothing about the true state of the U.S. economy.

An economic downturn is on its way, and the consumer won't be helping this time.

A Young Turk on Wall Street gets the chance to learn the ways of investing at the feet of his idol.

That is a key plot point in the movie Wall Street, one of my favorite flicks. But it doesn't really tell you very much about anything. Does the Young Turk go on to great success? Does he flame out spectacularly? Does he learn his idol is a sham or the greatest investor of all time?

So many unanswered questions just knowing one data point.

Which brings me to the single points of light that flood the business media these days...

They say nothing about the true state of the U.S. economy. It's only when you connect these individual plot points do you see the real storyline taking shape. And based on some plot points I've just connected, I'm willing to bet that the American consumer is soon to surprise Wall Street with unexpected weakness.

Every bit of economic data is dished up these days for our consumption, and almost always as a one-off snapshot of all that is good, bad or indifferent in the economy.

Last week, for instance, the jobs number was, if you believe the media coverage, so exciting you'd think you were watching Meg Ryan's famous Katz Deli scene from When Harry Met Sally. And, yet, just two months earlier, the number was so dismal you'd think you were reading in the media about Travis shooting Old Yeller.

The problem is that few in the mass media connect all these plot points into a cohesive narrative of our times. They don't dig into the numbers anymore. They just tell you we created 255,000 jobs in July, and they write glad-handing headlines, as CNN did, telling you that "America's job market remains one of the few bright spots in the economy."

They don't tell you that real estate, rental and leasing accounted for more than 7,000 jobs, that construction added 14,000, and we gained nearly 7,000 jobs selling cars and car parts - and that those jobs will all vanish in a blink in the downturn on the way.

They don't tell you that of the 70,000 professional jobs, more than 31,000 were in low-wage, low-skill admin work (and more than half of those were temporary).

They don't tell you about the more than 31,000 low-wage jobs in doctors' offices and in nursing homes... or the 45,000 jobs in the low-wage leisure and hospitality industry... or that local governments hired nearly 22,000 low-wage teachers (presumably for the new school year).

I tell you all of this to simply make the point that all is not as it appears when the business news media throw a single data point at you.

See, what I really want to tell you about is the American consumer...

Running Out of Credit


Headline from Reuters, August 2: "U.S. consumer spending exits second quarter with strong momentum."

That is a one-off data point without any context. It leads readers to believe the American consumer is healthy and happy and leading the charge to a bigger and more robust American economy.

Beneath the headlines hides a more troubling truth.

I was pulling a heap of economic data to build my case that we are approaching an abyss. In building some charts, two data points came together to tell me that our economy faces a challenge very soon because the consumer isn't as healthy as Reuters supposes.

For the last few months, I've wondered where the American consumer is getting all this money to spend on new cars (car and light-truck sales are robust) and other consumer detritus.

Turns out these two charts say a lot about that, and about where we're headed:

Revolving Consumer Credit

This first chart shows that revolving consumer credit - think: credit cards - is rapidly moving back toward $1 trillion in outstanding debt, a level it will cross this year, and a level it hasn't seen since the U.S.-inspired global financial crisis. That dependence escalated starting in February 2014, when, as the slope of the chart indicates, the pace of debt accumulation quickened.

So, Americans are clearly living on the good graces of American Express (NYSE:AXP) and MasterCard (NYSE:MA) - and they've done so at a quicker pace in the last two years.

Cash-Out Refinancing

This second chart shows that American homeowners are once again using their house as an ATM to access cash for consumption. We're not back at pre-crisis levels of insanity, but beginning in the second quarter of 2014, cash-outs really ramped up quickly.

Note, though, the last leg of this chart - a downward move. That, to me, is potentially troubling for the economy. If it implies that the American consumer has tapped into all their equity, then where do Americans get the cash they need to keep the economy alive?

The Economy's Last Support


At a deeper level, it raises questions about the near future, because houses hold only so much equity, and incomes - still depressed - can support only so much debt.

The American consumer is roughly two-thirds of the economy, and if they crumble, then the economy, already surviving on the life support of Federal Reserve interventions, will dive into a recession.

At that point, though, what interventions will the Fed have left, given that it cannot meaningfully cut interest rates that are already bumping up against zero, and given that the free-money binge of quantitative easing has proven to be largely impotent in every country that has tried it?

I'm not saying the downturn will happen tomorrow.

I'm just preparing you now for the great likelihood that the debt-dependent American consumer is not nearly as healthy as the data points suggest.

We're not looking at a Meg Ryan moment. Travis has a gun and Old Yeller is in his sights. When he pulls the trigger, Wall Street will collapse, led by discretionary consumer stocks such as Starbucks (NASDAQ:SBUX), Macy's (NYSE:M), Whole Foods (NASDAQ:WFM) and others that survive because consumers in high spirits feel good about spending borrowed cash.

Those days look numbered.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: As a lifelong world traveler, Jeff Opdyke has been investing directly in the international markets since 1995, making him one of the true pioneers of foreign trading. He is Investment Director for The Sovereign Society and the editor of Frontline Investor, a weekly trade alert, and Total Wealth Insider, The Sovereign Society’s exclusive monthly research newsletter.