Consumer Credit

Today's question of the day is on consumer credit.
Here are the facts (the question will follow).

• According to the Federal Reserve, consumer Credit rose $10.3 billion in June to $2.186 trillion. That rise followed a $5.9 billion Consumer Credit expansion in May. The increase exceeded Wall Street estimates for a $3.8 billion increase.
• Revolving debt which mainly reflects credit card financing, grew $6.6 billion to $820.7 billion. This increase was on top of a $7.4 billion increase in May, making this the largest two month increase since autumn of 2004.
  
• Nonrevolving credit grew $3.6 billion, following a reported $1.5 billion decrease in May.
• Consumer credit grew in June at a seasonally adjusted annual rate of 5.7% while Revolving credit grew at a 9.8% annual rate after rising at an 11% annual rate in May.

The question of the day, asked by Kevin Depew of Minyanville is:
Is this a bullish or bearish report? Kevin Depew himself provides the answer.
Let's tune in:

The Consumer Credit numbers show that once again it was revolving debt - credit cards - that led the way, up 9.8% in June versus a 3.2% rise in nonrevolving debt, such as car loans.

Meanwhile, last month's release showed that in May households increased their revolving debt by $1.9 billion, or 11%, the largest increase since October 2004.

A bullish slant: people believe they can sustain an increased level of debt service.

A bearish slant: higher energy costs, among other things, are forcing people to turn to credit cards to maintain consumption levels and lifestyles.

Which slant to take?

Well, if the war is between who stands to benefit from the revolving consumer credit pie - those who sell things we need versus things we want - it's pretty clear from these charts who the market believes will win: Chevron (CVX), ExxonMobil (XOM), Target (TGT), Tiffany (TIF).

These charts are saying which side really has the upper hand, and it's not those who sell things people merely want. It's those who sell things people really need.

Mish:

Consumers are strapped. They are reluctant to refinance, perhaps because they can not whether they want to or not (they are underwater on their houses), or perhaps because they are scared to death of rising interest rates. That leaves consumers with two choices: do without or charge it.

The latter of course only postpones the problem while increasing the carrying costs. Those that absolutely can not cut back (there is no more to cut unless they give up eating) simply have no choice. They will keep plowing into credit cards until the interest rates eat them alive.

For some reason the market thinks this is all good news. Well it may be good news until it isn't. The stock market has yet to factor in sharply rising bankruptcies (I can easily say that by looking at loan loss provisions at credit corporations). Loan loss provisions are at or near all time lows even as bankruptcies and foreclosures are soaring.

Yes, foreclosures are rising from an extremely low level, but the mammoth complacency regarding this increase is staggering.

Wall Street is not only NOT factoring in increased credit losses (perhaps on the assumption that the bankruptcy reform act of 2005 will protect them), they are not factoring in the possibility that the law will be reversed. As best as I can tell, the only difference is that the current law will prolong the agony while a reversal might make things a bit shorter.

Over the last 20 years (with Japan in deflation), how many times did we criticize Japan for failing to write off bad loans? Yet the bright minds in the credit industry who write US laws (you did not really think senators and congressmen write laws did you?), tried to prevent these writeoffs in advance by that bankruptcy reform act. It is as likely to work as I am to win the Illinois Lotto.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/