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Saturday, November 11, 2006 9:19 AM

Consumer Credit Plunges

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I have been waiting for the consumer to cave in for many months now. Given past reversals in consumer spending one must question if the latest downturn is the real deal or just another outlier. In case you are wondering what I am talking about..... Here goes:

MarketWatch is reporting U.S. consumer credit down by most since April 1992

U.S. consumer credit outstanding fell by the biggest amount since April 1992 in September as households took out fewer loans for items like automobiles and boats, the Federal Reserve said Tuesday. Total consumer credit fell by $1.20 billion in September, or by a seasonally adjusted annual rate of 0.61%, to $2.366 trillion, the Fed said. In April 1992, outstanding consumer credit fell by $1.78 billion, according to the Fed.

The decline was unexpected. Wall Street economists surveyed by MarketWatch were expecting consumer credit to grow by $5.4 billion in September. Most of the decline was in so-called nonrevolving credit, like loans for cars and boats. Nonrevolving credit fell by $4.05 billion, or by a seasonally adjusted annual rate of 3.21%, to $1.50 billion.
UK Credit borrowing

Interestingly enough this downturn in consumer credit is not just a US phenomenon either. Forbes is reporting UK 2006 credit card borrowing to fall for first time since records began.
UK credit card borrowing is set to fall in 2006 for the first time since official Bank of England records began 19 years ago, a leading high street bank said.

In its latest borrowing monitor the Alliance & Leicester PLC found that the rate of growth in credit card borrowing has fallen every month since May 2005 from an annual rise of 11 pct to an annual decline in September of 3.2 pct. In fact, annual growth in credit card borrowing has been negative since May.

Overall, A&L found that total unsecured borrowing, which also includes loans unrelated to mortgages, is growing at its slowest rate for the last 13 years.

A&L said the growth in borrowing in the year to September has slowed to 1.4 pct a year -- compared with an average of over 10 pct over the last decade. It's also less than average earnings growth and all measures of price inflation.

What is more, it found that consumers intend to reduce their borrowing, further but despite all this, A&L downplayed the economic repercussions.

"We have not seen consumer borrowing this subdued since the recession of the early 1990s," said Chris Rhodes, Managing Director of Alliance & Leicester Retail Banking.
UK Consumer Debt

Firstrung.com is reporting UK Consumer debt is falling for the first time since the early 90's.

  • Borrowing has slowed to just 1.4% a year compared to the level of an average of 11.7% over the last 10 years.
  • Borrowing is now falling in real terms for the first time since the early 1990s.
  • Credit card borrowing fell every month between February and August this year, the longest series of monthly falls on record.
  • Consumers intend to reduce their borrowing further. According to Alliance & Leicester's survey, people intending to reduce their credit card debt over the next six months outnumber those expecting to borrow more on their cards by a factor of five to one.
  • More than eight times as many people plan to reduce their other personal borrowing as those who intend to increase it.
Concern in Japan

Japan's Fiscal Policy Minister is Concerned About Weak Consumer Spending.
Nov. 10 (Bloomberg) -- Japan's Economic and Fiscal Policy Minister Hiroko Ota said she's concerned about weak consumer spending.Japan's economic growth probably failed to accelerate in the period, matching the slowest expansion since 2004, as bad weather and sluggish wage gains deterred shoppers.

The world's second-biggest economy grew at an annual 1 percent rate in the third quarter, according to the median forecast of 28 economists surveyed by Bloomberg News. Slow consumer spending, which accounts for more than half of the economy, may leave Japan vulnerable to a drop in global demand for autos and consumer electronics.
When was the last time we saw a simultaneous downturn in consumer spending in the U.S., the U.K., and Japan?

Black Friday Deals

Wal-Mart is responding with Black Friday Deals.
Black Friday discounts include a 42-inch Plasma HDTV for $998, $398 Compaq Presario desktop computer and more.

The world's largest retailer, already signaled its intention to be very price aggressive over the November-December gift-buying period by being be the first out of the gate to chop prices on toys and electronics. On Black Friday, the day after Thanksgiving, its deals get even lower.

CNNMoney.com first reported that Wal-Mart - after suffering some spooky October sales figures - wasn't waiting until Black Friday to unveil its holiday bargains and get people buying again at its discount stores.

Wal-Mart has already chopped prices on hot electronics and more than 80 toys. Some analysts speculate that Wal-Mart's rival Target could be pressured to match Wal-Mart's holiday prices although other merchants such as J.C. Penney might hold off on going head-to-head against Wal-Mart and set only moderate holiday discounts.
Wal-Mart has also announced We're not afraid to say Merry Christmas.
No. 1 retailer has decided to abandon its generic 'Happy Holidays' greeting in favor of 'Merry Christmas.' Wal-Mart has told its employees that it's OK to once again greet shoppers by saying "Merry Christmas" this holiday season instead of the generic "Happy Holidays."

CNN confirmed that Wal-Mart will announce Thursday that it plans to use the phrase "Merry Christmas" in products and around its stores this holiday season.
The results of this Christmas season's sales in the wake of deep discounts by Wal-Mart will be interesting to watch.

Golden Age of Finance

Although consumer credit is crucial, total credit is still keeping the wheels greased. Bloomberg is reporting U.S. Voters Approve Bonds by Boatload.
Welcome to the Golden Age of Public Finance.

That's the message voters sent to the municipal market yesterday, as they approved the majority of the record $78.6 billion in bonds placed on the ballot this year.

Voters in California approved all $43 billion in bonds they were asked to consider this year, and in the wee small hours looked poised to approve most of the $10 billion in local issues.

Of the $56.5 billion in bond issues totaling $200 million or more being considered nationwide, Bloomberg News this morning calculated that 97 percent had passed. The majority appear to be for education, the remainder, money to be used for infrastructure construction and maintenance.

The election of 2006 marks a watershed for the municipal market. Never before have voters had to consider so many bond issues. Never before had they approved so many.
Something for Nothing

Anyone voting in favor of those bonds wants something for nothing. Did voters think for one second about how all of this will be paid and what it truly means? The answer should be obvious. Californian's have no chance in hell to be able to afford this. Housing is slowing, there is an exodus of citizens from California, cities like San Diego are technically bankrupt, property taxes are capped, and the US economy is headed for a recession.

What California did is deeply immoral and economically suicidal to boot. But once again, as long as total toxic waste like this keeps getting a bid, things will appear to be OK. Inquiring minds may be asking "Who is buying this junk?" The answer is state and federal pension plans, all sorts of government bond funds, and hedge funds chasing yield without any regards as to risk.

Rest assured a massive "Credit Event" is coming. When it happens, no matter how bad it seems at the time, try to remember that it will be a good thing. Unless and until there is a total and complete repudiation of these excesses, the ultimate consequences will just keep rising. The sooner we have a debt purge the faster the recovery will be. Japan fought deflation for 18 years. Is the U.S. doomed to follow suit?

This topic was discussed Thursday evening on Howe Street in a podcast entitled "The votes are counted - Now what?" (A headline I blatantly stole from my favorite commodities trader Kevin Kerr).

No, this is NOT the golden age of financing, unless of course you have been investing in gold on account of it. Consumer credit did turn down, but the next question (assuming this is not an outlier) is: "Will total credit follow?" For a county so totally hooked on "borrow and spend" the consequences will be enormous when (not if) it happens.

This post originally appeared on Whiskey&Gunpowder. Sign up for free whiskey.

Mike Shedlock / Mish

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