After
the first weekend of the Holiday shopping season, there were jubilant members
of the mainstream press virtually jumping out of their skins at the news that
holiday spending was looking strong. The initial counts showed an uptick in
spending and that was all the MSM needed. Interestingly at the same time, the
‘bad cops’, namely the Fed and other central banks, were quietly
talking about more easing, the rotten labor market, and the debt crisis in
Europe, still bubbling beneath the surface. So what gives here? Is the
economy back off to the races or are we merely continuing to kick the can
down the road in spite of the obviously sour fundamentals?
Christmas Credit Binge
One
of the biggest questions asked during the course of the holiday shopping
season was where the money came from. Every month, BLS releases statistical
reports that show that more and more people are leaving the labor force, the
unemployment rate remains high, and the number of marginally attached workers
is not shrinking considerably. Translating this to English, the labor market
has been relatively stagnant. On another front, home prices have continued to
fall in most major markets. Personal incomes have not appreciated
significantly, yet there seemed to be plenty of money for excess holiday
spending.
On
February 7, 2012 we finally got the beginnings of some answers. Consumer
credit increased $19.3 Billion, the majority coming from auto and student
loans. Mainline economist automatically came out saying that the willingness
of consumers to take on more debt is indicative of positive expectations of
the economy. One of these ‘economists’ also went as far as to say
that since 2008, consumers have done a ‘very good job of repairing
their balance sheets’. While this may have been true from the last
quarter of 2008 through the beginning of 2010, the repair phase is over; at
least where consumer credit is concerned. The swipe until you drop phase
appears to be back in full swing.
Revolving
debt, which includes credit cards, increased by a whopping $2.76 Billion in
December. Fourth quarter profit at MasterCard increased by 24% and the
company’s stock surged 66% in 2011, ranking #4 in the entire S&P500
in terms of price performance. There was one minor encouraging sign in these
otherwise awful numbers; debit card purchases increased by 18% while credit
card purchases increased by just 6%. In absolute dollars, credit card
spending far outstrips that of debit cards, but a swing towards debit cards
means at least a portion of the population is starting to get tired of
getting jabbed for 15% (or more) by their banks for credit card purchases
while getting less than 1% for keeping their savings at those same banks.
Bravo to those who have had enough of the ‘making payments’
mentality!
Unfortunately,
this is a sword that cuts both ways no matter how one chooses to look at it.
On one hand, the accumulating of additional debt can be viewed as positive
since consumers believe that the economy is on the mend and they don’t
mind taking the additional risks. The flip side is that consumers are willing
to do whatever it takes to attain/maintain a standard of living and
don’t mind piling up debt to accomplish this fact. Of particular
concern is the student loan portion of the debt numbers. College kids are borrowing
veritable fortunes to finance their schooling and as many statistical surveys
have shown over the past couple of years, the payoffs just aren’t
there. This is certainly not a generalization because there are some very hot
fields right now, but there are many, many others that are as frigid as the
North Pole.
There
is a third possibility in here regarding debt too and it is the most
frightening. Unfortunately, the numbers won’t show it, but how much of
this increase in credit spending is not for convenience or foolish spending,
but being done as a last resort? In a country where tent cities are largely
ignored by the press, and food stamp usage continues
to increase every month, it also stands to reason that there are people who
are accumulating additional credit card debt simply because they have no
choice.
Perhaps
the most ridiculous statement made in any of the mainstream pieces on this
topic was that credit was likely to continue to expand along with demand.
This was said in a very matter of fact tone. Let’s think about what
this means for a minute. It means that the only reason demand is increasing
at all is because it is being monetized. Either by various government
programs, or worse: by credit. This is nothing more than a tacit admission
that our economy is hooked on credit. What’s the surprise? We’ve
known that for years now. The twist in all of this is the fact that the
accumulation of debt, once having had the shame removed from it, has now been
mainstreamed. It is cool to be in debt. It is cool to make $40K/year, spend
$60K and pay $50/month for the privilege of living beyond your means. The
joke must be on us, right?
The College Loan Bubble
Such
is not the case with the student loans though. The payments are much higher
than $50/month and the balances are enough to make a good accountant go
cross-eyed. Ironically, since the government essentially nationalized the
student loans industry (for the good of students we were told), borrowing to
go to college has absolutely taken off. Is there even one person reading this
article to thinks that there is no connection between the availability of
student loans and the runaway costs? Perhaps I might point those same people
to the situation with housing and what happened once the government started
essentially guaranteeing housing loans. The price of a home went sky high and
affordability went way down. The same is now
happening with college.
American Idle
Sadly,
the prospects for college graduates these days (again, not a generalization)
are about as good as those for folks who bought homes in 2005 and 2006
expecting to ‘Retire on the House’ as one rather obscene book was
entitled. Let’s just take a look at some of the employment numbers from
the last few months. We’ve seen discouraged workers leaving the
workforce in droves. 1.2 million of them in January
to be exact. Now let’s make sure we properly characterize these folks.
They do not have jobs. They don’t have job prospects, and are
discouraged to the point where they’ve stopped looking. Once this is
the case for 12 months, they no longer count. They are not part of the
workforce, and as such as not counted among the ranks of the unemployed. But
wait. These people don’t have jobs? Nope. They aren’t collecting
unemployment? No they aren’t. But the government just lets them fall
out of the statistics? Absolutely.
There
is no doubt that the ‘population’ adjustments, etc. will take
time to work their way through the numbers. There are a couple of things that
are particularly curious about January’s report. Obviously the biggest
is the shrinkage of the workforce and concomitant decrease in the
‘headline’ unemployment number (now at 8.3%), but what is extremely
disconcerting here is that the birth/death model was not responsible for
adding most of the 243K jobs that BLS says were added to the economy, it was
responsible for removing 367K additional jobs. Pundits could have run away
with that one, saying that there were really nearly 600K jobs added in
January save for the ramblings of a computer model, but what the model is
saying is that businesses are dying much faster than they’re being
created and this is resulting in the loss of jobs. The food for thought
nugget here is pretty simple. We certainly have had plenty of reasons to
doubt the accuracy of the model when it was adding jobs that nobody could
seem to find. What now to make of the fact that it is removing jobs, implying
that business deaths are outpacing births? This is not a one-off event
either. 4 of the past 5 reporting months have demonstrated this phenomenon,
although never to this extent. Obviously, BLS made some population
adjustments, which could be responsible for the huge swing, but if nothing
else, it gives us just one more reason to be skeptical of government
‘data’, especially when it involves politically sensitive areas
during an election cycle.
Conclusions
There are some concrete conclusions that may be drawn from the realities
detailed above. First, the accumulation of debt should never be confused with
economic strength. Borrowing is a reversible transaction, meaning that the
money borrowed must be repaid at interest. This is the case whether is
MasterCard, a municipal bond or a US Treasury note. Sure, the act of
borrowing puts money in your pocket and might make you feel
‘rich’ for a time, but that feeling is fleeting as many nations
are finding out. There is not one single instance in all of human history of
a nation borrowing its way to prosperity although I am told the folks at the
History Channel are working hard to revise the fate of the Roman Empire.
Secondly,
it only makes sense to accumulate the debt necessary to obtain a decent
baccalaureate degree only if there are good odds that employment can be found
to repay the debt and leave the borrower with a desirable standard of living
afterwards. After all, college is an investment, not a birthright, and we
seem to have confused the two in America. If you ran a burger joint, you
might consider adding another wing onto your restaurant, but you’d only
do so if you were reasonably sure that doing so would bring in enough
additional patrons to pay for the expansion and leave the business better off
in the long run. College should be a similar decision. Students who have
‘no idea’ what they want to major in might spent
a year or two at a community college until they can figure it out. Some kids
might opt to skip college entirely to go to a trade school. Not having a
college education has become such a stigma in this country and we have
forgotten our roots. We have forgotten our history. Was it Harvard MBAs who
powered the industrial revolution or guys (and girls) who knew how to work
hard and didn’t mind getting their hands dirty? Today nobody wants to
get their hands dirty. We’d rather import it from China and run
ourselves into debt so we can run off and study sociology at some upscale
liberal arts college.
The
2012 election cycle needs to be about these types of issues, not the pabulum
and tripe that has passed for ‘debate’ thus far. We need leaders
who are willing to roll up their sleeves and actually get their hands dirty
instead of outsourcing our precious jobs, and then borrowing money so we can
buy goods imported from the same places we sent our jobs. Really, does this sound
sustainable to you?
Andrew W. Sutton, MBA
Chief Market Strategist
Sutton & Associates,
LLC
Interested in what is going on in the markets and
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