The Consumer Crunch: Party Over? (click link for chart)

PrudentBear ^ | December 15, 2006 | Stephen Church

[GodGunsGuts]

...Our latest research shows that American consumers are out of cash and up to their eyeballs in debt. However, it is possible for consumers to keep pushing the economic envelope.

The growth of real-estate based debt is slowing and is causing lower consumer liquidity. The slowdown in household mortgage debt flow SHOULD lead to a recession - BUT the Federal Reserve is determined to prevent one.

The latest economic statistics show that consumers depended on new debt for 90% of their cash flow during 2006. Any decline in debt flow will constrain liquidity and should cause a decline in the growth of consumption and household investment....

[GodGunsGuts]

ping

[RockinRight]

This is a problem with no easy solution. Reducing consumer debt can hurt us multiple ways:

-reduced consumer spending
-job losses for those employed in finance/mortgage etc
-stock market

[Don Corleone]

Run for the hills...the dam has burst and the sky is falling.
This kind of scare crap comes up every year at one time or another.

[GodGunsGuts]

It does seem to be the inevitable result. We are already seeing significant slowing in all jobs that are real estate related. Unless the FED can find a new bubble to inflate, it would appear we are headed straight for a recession.

[Uncle Ike]

When we started paying off debt with more debt ("Refinance your home to pay off those credit card debts") we saw the beginning of the end of the ponzi-scheme economy.

That tomorrow that everybody said would never come is here....

[rightinthemiddle]

The Prudent Bear Fund makes money off spreading fear.

[GodGunsGuts]

Wall Street makes money off of spreading optimism.

[RockinRight]

Well, it's a good debt vs. bad debt thing. Went too far though, esp. in the high-cost markets.

[wireman]

"The Prudent Bear"

No agenda there.

[GodGunsGuts]

"Wall Street"

No agenda there.

[wireman]

At least they have the balls to admit it. Unlike some around here.

[Catholic Canadian]

My Ex has maxed out all three of her credit cards to the tune of about $20,000 on clothes and trips. Boy am I glad I got out of that relationship. I actually have money in the bank, and in precious metals, and no debt. All it took was getting rid of my woman.

[NeoCaveman]

Our latest research shows that American consumers are out of cash and up to their eyeballs in debt

This bad. Well then maybe they should cut back on their borrowing.

The growth of real-estate based debt is slowing and is causing lower consumer liquidity.

They are cutting back on their borrowing, this is bad.

Got to love the heads you lose, tails you lose economic analysis.

[Gritty]

What's the difference how much debt we have? We're now owned by Communist China anyhow!

[Uncle Ike]

" Got to love the heads you lose, tails you lose economic analysis. "

Got to love the heads you lose, tails you lose economy..

There -- fixed it....

Not so easy to "fix" the condition described, sadly.....

[SF Republican]

This kind of scare crap comes up every year at one time or another LOL and correct, glad to see it though before the cc bills for Christmas start to arrive in mid Jan.

[rightinthemiddle]

"Wall Street makes money off of spreading optimism."

_______

Investors across the country make money off optimism. The smart people on Wall Street make money either way.

David Tice make a living spreading doom and gloom; but his clients (who are a small minority of the market) get killed when the market is optimistic. So, no matter what, things are always bad in his book. Hoping for a crash is not "prudent."

I believe in balance. Since I've used the last few years to eliminate debt and invest in the market, I'm comfortable.

No doubt many consumers have made poor decisions regarding home financing and over-use of credit. But they are not the majority.

I find it amazing that all the goldbugs sit around hoping for the demise of the country just so they can have a few more bucks.

[upchuck]

I look around at all the supposed wealth these folks have and wonder, what trick do they have that I don't?

And then it hits me: DEBT!

[palmer]

Any decline in debt flow will constrain liquidity and should cause a decline in the growth of consumption and household investment

Then debt flow will be continued somehow, or liquidity will be expanded some other way, or consumption and investment will be funded some other way.

[Uncle Ike]

" Then debt flow will be continued somehow, or liquidity will be expanded some other way, or consumption and investment will be funded some other way. "

Now there's a plan for the future..

I feel better now.....

[rlmorel]

Part of it too, is people not living within their means. When they could take a reasonable mortgage on a ranch in a non-upscale neighborhood, they decide to leverage the hell out of themselves to live in a huge house with cell phones for them and all their kids, satellite television, wide screen flat panel televisions and so on.

Too many people go down that path. My wife and I take the approach of operating under the assumption that one of us could lose our job/paycheck/life on any given day, and the other must be able to support us both.

[RockinRight]

Part of it too, is people not living within their means. When they could take a reasonable mortgage on a ranch in a non-upscale neighborhood, they decide to leverage the hell out of themselves to live in a huge house with cell phones for them and all their kids, satellite television, wide screen flat panel televisions and so on.

It many areas, even the "reasonable mortgage" part is impossible when starter homes start at 400k.

[rlmorel]

And in a lot of those places, Liberal polices ranging from environmental and zoning restrictions to rent control are responsible for those skyrocketing values.

As an example, Southern California used to be an affordable place to live until the early seventies, when liberals began getting heavily involved at the local level in politics. They began passing local land use legislation and rent control policies. Everywhere you see these completely out of control land/home prices, there are liberal policies behind it.

[RockinRight]

Yup-

Expensive places:

California
DC area
New England
Hawaii


Interesting pattern...

Although, the areas that are now "up and coming" in the overprices real estate department are all red state areas:

Arizona
Nevada
Florida
Idaho
Utah
Colorado

And the reasonable areas:

Midwest
South (outside Florida and parts of coastal Carolinas)

[rlmorel]

Part of that, too, is:

1.) that they have managed to get environazi policies passed at the Federal Level

2.) People are trying to escape from liberal policies by going to these other areas you mentioned.

[GenXFreedomFighter]

I don't mean to suggest this as a panacea, but I think part of the solution is getting rid of the 80/20 PMI requirement. It causes people to get into more debt than they can afford by allowing them to buy zero-down mortgages, encouraging lenders to convince people to buy too much house too soon, and it puts up a barrier to those who wish to avoid those pitfalls. That, plus the fact that it's a damned expensive rip-off in the first place.

[CharlesWayneCT]

The latest economic statistics show that consumers depended on new debt for 90% of their cash flow during 2006

Only 1/10th of all spending was based on actually money earned? We spent 10 times as much money as we made last year?

If that is true, that is a bit alarming. You obviously can't keep spending 10 times your salary, and if the sales figures this year are based on people spending 10 times what they make, I don't see how you can keep selling more stuff, eventually people will run out of money.

[GodGunsGuts]

Bingo! It's not just low interest rates that have created the housing bubble, but extremely loose lending standards fostered by MBS/GSEs/Mortgage derivatives. Excellent summation BTW.

[verity]

Exactly.

Being up to my *** in debt is not a way to live.

[finnman69]

But but but you mean taking a out a 30 year mortgage to play for the new car, landscaping, and a 60" plasma tv is not a good deal?

The mortgage broker suggested I take out the equity I earned and put it to use!

[Fan of Fiat]

Think about it... The mean income is around 50K per year. This Jackass says that the average family spent 500K last year. Hoist up the BS flag.

[NeoCaveman]

Got to love the heads you lose, tails you lose economy..

There's no reasoning with the chicken littles of the world. When by any objective measure the economy has never been better (wether by measuring GDP per capita, to average sqare footage per house.) The middleclass has atleast 10 grand mer perchasing power per person than their European counterpart. But I'm done hearing well off people whine.

[upchuck]

My wife and I take the approach of operating under the assumption that one of us could lose our job/paycheck/life on any given day, and the other must be able to support us both.

A wise man you are. I'm sure you sleep soundly at night.

As Dave Ramsey constantly says, "You an spend your self out of debt." Amen!

[ex-Texan]

In the meantime, the Russians are negotiating to buy U.S. Steel as Americas corporations continue to fall victim of foreign buy outs. Foreign Ownership of U.S. corporations is increasing every year:

Sound recording industries . . 97%
Commodity contracts dealing . . 79%
Motion picture and sound recording industries . . 75%
Metal ore mining . . 65%
Motion picture and video industries . . 64%

Americans are Addicted to Foreign Goods:

Footwear . . 90%
Audio & Video Equipment . . 87%
Other Leather Products . . 86%
Leather and Hide Tanning . . 75%
Apparel Accessories . . 67%

Russia just purchased the only steel mill in Oregon last month. People were upset with Dubai owning 24 American port facilities. What is going to happen when we export all our vital industries overseas? Will be be able to purchase steel for military application from the Russkies? Already, Beijing manufactures bullets and uniforms for out troops.

Naysayers and free traders want to profit as America falls apart from the inside. Are you getting the picture yet?

[finnman69]

Hey but Goldman Sachs paid out $16.5 BILLION in bonuses this year.

Who cares if industry is gutted as long as the I bankers get their cut.

[Toddsterpatriot]

The latest economic statistics show that consumers depended on new debt for 90% of their cash flow during 2006.

90% of cash flow? What twisted definitions did they use to come up with this joke?

[Toddsterpatriot]

I find it amazing that all the goldbugs sit around hoping for the demise of the country just so they can have a few more bucks.

Fiat bucks.

[Mase]

This is a lot of garbage. What's most unfortunate about this article is that you don't possess the sense to know it's garbage. You keep whining about debt while ignoring assets. You believe this stuff not because it's based on facts but because it's what you want to believe.

Looks like our debt to disposable personal income ratio has increased a whole quarter point since 2001 and about 1% over the past decade. This meager increase comes at a time of record home ownership and record low interest rates. People borrow more when rates are low. Does that make sense?

With all those millions of people out there you say can't pay their bills, you'd expect the delinquency rate on consumer credit to be skyrocketing. It's not happening. Looks like America is paying their bills just fine.

What is it you're basing your projections of doom on again?

[GodGunsGuts]

Read the full report for yourself. He's dead-on correct--GGG

You need to sign up to read, but it's a painless process...and free:

http://www.piscataquaresearch.com/tracker/documents/documents_51.pdf

[GodGunsGuts]

See previous post. Check out the link, it's right up your ally. I'd be curious to get your thoughts on the subject--GGG

[GodGunsGuts]

Bottom Line...from the article (hope you guys can read a financial statemet):

Statement of Household Cash Flow ($ Billions)

---------------------------------------------------------2003-----2004

Cash Flows from Operating Activities

--------Personal Savings -------------------------------172.8---- 151.8

--------Depreciation and Other Non-Cash Items--------184.5-----213.6

Net Cash provided by Operating Activities--------------$357.3----$365.4

Cash Flows from Investing Activities

----------Purchases of New Residential Property-------(572.5)-----(673.8)

------------------Purchases of Savings Investments-----(196.0)----(277.1)

------------------Purchases of Other Investments------(373.9)-----(390.6)

Net Cash used in Investing Activities ---------------$(1,142.4) --$(1,341.5)

Cash Flows from Financing Activities

-----------------Repayments of Debt------------------(459.6)---(490.3)

-----------------Increases in Debt --------------------1,326.5--- 1,534.8

Net Cash provided by Financing Activities -------------$866.9-- $1,044.5

Net Increase(Decrease) in Cash and Equivalents---------$81.8-- $68.4

Cash and Equivalents at beginning of period--------$1,215.4-- $1,297.2

Cash and Equivalents at end of period-------------$1,297.2-- $1,365.6

(Short excerpt from commentary re: the above Statement of Cash Flows)

The Statement of Cash Flows is dominated by one number: Increases in Debt. The statement shows that “Net Cash provided by Operating Activities” is not sufficient to 1 Sources and Uses of Household Cash Flow provide for Repayments of Debt. Households have to borrow just to pay principal payments on debt. Effectively, no investing activity occurs without additional borrowing.

This Statement shows that on-going access to financing is the single biggest household concern. If the access to financing diminishes, it is likely to cause a nearly immediate reduction in either consumption or investment.

Until 1992, households usually generated over 50% of new cash flow from “operating” activities. Beginning in 1993, New Debt surpassed “operating” cash flow as the source of new cash. In 2005, new debt is expected to provide 86% of new household cash.

In 1992, “operating” cash flow provided enough money to cover repayments of debt and new residential investment with $82 billion left for other investing. In 2004, “operating” cash flow left households about $800 billion short of the cash needed to cover repayments of debt and new residential construction. In 2005, “operating” cash flow should provide $1.0 trillion less than debt repayment and residential construction needs....

Sources and Uses of Household Cash Flow © 2005 Piscataqua Research, Inc

[rlmorel]

I agree, completely missed that. WTF is THAT? 90% of their cash flow? Who are these people?

[GodGunsGuts]

==90% of their cash flow? Who are these people?

See post #42

[Fan of Fiat]

Thats funny!

We increase our investments by $200 Billion, and increase our debts by $167 Billion!

So, we fund 83% of our investments with debt. You say that's bad...

But you fund 90% of your gold purchases with margin (debt) and that's good?

Regardless, this report is complete crap, and I think if you really understood what a statement of cash flows is and how it is created, you would agree.

Just out of curiousity, the article states: Operating cash flows for a corporation is generally cash flows from profits plus depreciation

To test your very basic understanding of a cash flow statement, can you answer why depreciation is added back to EBIT to get Cash Flow from Operationing activities?

If you don't know the answer without looking it up, perhaps you should not rely on an article you don't understand to justify your investing decisions.

[GenXFreedomFighter]

Thanks. I thought I was getting close to home ownership with a 10% down payment. That was before I was awoken from my blissful ignorance about PMI. Now I have to save up for twice as long to avoid an extra $150/month on a house payment or piggyback loan, 'cause I'm not playing the moneylenders' game. Screw 'em!

[Toddsterpatriot]

In 2004, total US income was over $7 trillion.

[Fan of Fiat]

In 2004, total US income was over $7 trillion.

Its actually pretty funny. They take personal income, subtract taxes, personal consumption expenditures, interest payments, and personal transfer payments... and call that Cash flow from Operating Activites.

So basically, take income, subtract out all expenses, then complain because Cash used in investments is only 30% higher than cash received from debt.

http://www.bea.gov/bea/dn/nipaweb/TableView.asp#Mid

[Crusher138]

You forgot New Mexico...

[Toddsterpatriot]

So basically, take income, subtract out all expenses, then complain because Cash used in investments is only 30% higher than cash received from debt.

I wondered why we didn't take Gigi's sources seriously. I think it's because they're all idiots.