Sunday, November 25, 2007

The US Consumer - Priced To Perfection

I am waiting for the New England Patriots versus the Philadelphia Eagles game tonight. Hard to picture it now, but just a few years ago, tonight's game was the Superbowl match up. I fully expect an ugly beating of another team by the Patriots as they continue their merciless charge towards history. Also back to work tomorrow, ouchie. Monday after a holiday is so tough, that 5am wake up is gonna hurt tomorrow.

Note to All Subprime Borrowers - NO Insurance for YOU!
Came across this nugget via the Implode-o-Meter and Housing Wire:

AIG Changes MI Eligibility Rules; Will Exclude Majority of Subprime Borrowers
by Paul Jackson
November 23, 2007
"From the update, it appears that anyone with a FICO below 575 will be wholly ineligible for mortgage insurance, while anyone under 620 FICO won’t be eligible for mortgage insurance unless they put up at least 5 percent in a down payment. I’ve checked the rate sheets of other mortgage insurers and don’t see anything similar in terms of existing or updated eligibility; most still show the availability of MI for borrowers under 620 at all LTV amounts."
AIG is in so much trouble they are just not going to do insurance packages for "subprime" borrowers anymore. I do not imagine it will take long for the other mortgage insurers to make a similar move. What will that do to the entry level home buyer market? It's not going to help it that's for sure! Imagine having to put 5% down to get into a home, Oh the humanity! This development should illustrate why anyone thinking about a housing turnaround is smoking the wacky tobaccy. This is pretty big news.

The US Consumer - Priced to Perfection
The following concept is one I touched upon a while back. I wanted to explore this idea a little further.
All the headlines and news was about the "amazing" start to the shopping season. Unlike many observers, I fully expect blow out numbers this season. It has long been a core belief here at Economic Disconnect that consumers will spend until they are forced to stop. In this way, looking at home prices, unemployment, and other indicators is a waste of time. As long as the consumer has access to any avenue of credit, they will use it.
From Yahoo finance today:
Retailers Buoyed by Strong Holiday Start
Sunday November 25, 4:57 pm ET By Anne D'Innocenzio, AP Business Writer
Retailers Have a Strong Start to the Holiday Shopping Season, but Shoppers Need to Keep Buying
"The nation's shoppers set aside worries about higher gas prices and a slumping housing market and proved their resilience over the Thanksgiving weekend, giving what the nation's merchants wished for -- a strong start to the holiday shopping season."
"The bargains are better this year, a lot better," said Theresa Calib, of Houston, Texas, who was at the local Greenspoint mall Saturday. "We always know what we want to get, and we get it." She noted she took advantage of Foot Locker Inc.'s two pairs for $89 sale."
"Lavielle noted that the turnout Friday was better than a year ago, and customer flow was steady throughout the weekend. Both Kmart and Sears sold out a significant inventory of its flat-panel TVs. Other hot items were Global Positioning System receivers, game consoles like the hard-to-find Nintendo Wii, and digital cameras."
Hard to even begin with this piece.
First off, note the headline "Need to keep buying". The US consumer must consume at an all out rate just to keep the retailers afloat. The often used term "resilience" was also offered in regards to the US consumer. If journalism existed anymore in the world, the article should have asked "In the face of high gas prices and depreciating home values, should the consumer be "resilient" or should they try and get their finances in order?"
And here lies the problem. With real world inflation running high and home prices taking a dive, spending should be going down. Not staying the same. Not going up. The negative savings rate the US has been running is not a sign of resilience, but one of total denial of economic reality. In older times, when the economic prospects of the average person went down, they reigned in spending. Not anymore. With access to a multitude of credit lines and serial refinance opportunities, spending never dies.
This brings me to a concept I came up with a while back in regards to the US consumer. Nobody actually "buys" anything anymore. Everything is financed. "Homeowners" of the past few years now see that they in fact own nothing but a debt. Pay cash for an automobile? Funny. Most people roll car balances forward every few years into a new car, with balances ballooning every time. Electronics and furniture are also financed. I could go on, but the point is clear; In order to support rampant spending on things one cannot buy, the US consumer stretches out their every penny of purchasing power through financing. This is the culture of "monthly minimum payment." The consumer spends not only everything they have on hand, but commits every pay increase in the future towards paying for their ongoing debt. This is a key point. When you finance everything right down to your gas and groceries, the escalation of debt makes everything two to three times more expensive. The US consumer in their current state are priced to perfection in that every single penny they make currently and in the future is already earmarked. That is why the consumer is resilient. When you do not actually have to buy anything with cash savings, you can pile on debt almost indefinitely and maintain purchasing levels.
Now you may be wondering what can possibly stop this freight train of consumer spending. I wish I knew. I am beginning to think that with the massive losses in the mortgage arena, banks and lenders are going to have to limit lending going forward. If this results in an actual reduction in credit available to the consumer, there could be problems. With the FED poised to again lower rates and continue fueling false money demand, I don't think the spigot will be turned off. And there is no way the consumer will reduce spending, not if they are at all able to get credit.

Phantom Insurance Is a Wild Card
With AIG probably exiting the mortgage insurance business for subprime borrowers, we get a hint at what could bring the whole game down. Right now there are many insurance companies that have agreements with mortgage lenders, credit card companies, furniture chains, auto dealers, etc. Insurance by nature operates under extremely thin margins. The first problem is obviously going to be a collapse in mortgage insurance. These companies are not even close to being able to pay out the money promised as home prices collapse and foreclosures soar. They are an industry that used their smart alek "models" to predict possible losses. Those models do not conform to current market reality. The next big problem will be with credit card losses. Again, the policies cannot be paid if losses are outside the historical models. This is THE wild card for the US economy. If lending institutions cannot pretend that they are covered anymore, lending is going to dry up real fast. Without access to credit, the US consumer simply cannot buy anything short of a bag of chips. That is the irony. Right now consumer spending is still growing, but the consumer cannot actually buy anything at all. They have no real cash. They still have credit though, and it remains to be seen how long that is the case.

Have a good night.


Anonymous said...

Survey from Consumer Federation of America

Consumer Debt Repayment Not an Important Factor in Planned Holiday Spending Cuts

Despite rising attention paid to the mortgage meltdown and general credit crisis, fewer consumers than
last year said they were concerned about making monthly payments on mortgage and consumer loans.
This year, 40 percent said they were concerned about making these payments, down from 43 percent last
Also, fewer consumers than last year said they were concerned about paying off credit card balances
from holiday-related spending. Only 24 percent indicated this concern this year compared to 33 percent
last year.
Low and lower-middle income and minority Americans, however, were much more likely to voice
concern about debt. Fifty-three percent of those with incomes under $50,000 expressed concern about
making monthly debt payments, and that concern was indicated by 55 percent of Hispanics and 49
percent of African-Americans.
Thirty-four percent of those with incomes between $25,000 and $50,000 said they were concerned about
paying off holiday-spending related credit card balances. That compared to only 24 percent for the
whole population

I agree not enough damage done to the vast majority yet to make spending fall off a cliff as long as obtaining credit is still easy.


Anonymous said...

The bro just got back from Chicago and said there was shopping (uh I mean use of credit/plastic) all over the place. Looks like we just can't help ourselves in this country.