U.S. Consumer Credit

Brian Hicks

Updated June 30, 2009

You don’t see Nouriel Roubini on the financial news much lately.

Could it be that his views are spot on, too scary for CNBC to report to the naïve believers in Cramer’s "bottom" theory? (You can’t really depend on Cramer, in our opinion. When the market is up, he’s bullish; when it’s down, he’s bearish.)

Could be.

You see, according to Roubini, "recent data from the U.S. and other advanced economies suggest that the recession may last through the end of the year. Worse, the recovery is likely to be anemic and sub-par. . . The recession is not going to be over today. It’s going to last another 6 to 9 months."

Oil is quickly rising. Unemployment is worsening. Housing woes are far from over. And banking troubles are far from being solved.

"I see the risk of a double-dip, W-shaped recession. . . towards the end of next year," added Roubini. If by next year oil is heading towards a hundred US dollars per barrel, and the budget deficits are not controlled, "that could tip the global economy into another kind of relapse."

We do, in fact, see a silver lining to the economic disaster over the next two years. But it’s impossible to ignore the talking heads that’d have you believe the recession is over and that economic recovery is under way.

Even Christina Romer, a senior White House official, is "more optimistic" that the economy is stabilizing. Others believe we’ll stop contracting by Q3 or Q4 2009.

But how?

  • First of all, they fail to see a very important thing Brian Hicks, publisher of Wealth Daily, mentioned last week: "The U.S. economy can’t bottom until banks and financials bottom. . . and banks and financials can’t bottom until housing prices bottom." And with home prices expected to fall another 14%, according to Deutsche, recovery is a ways off.
  • Second, unemployment is still getting worse. Most economists now believe unemployment will hit 10%. . . with some, according to Hicks, predicting 12% and higher. Couple that with the fact that U.S. consumers are swimming in debt, and what you’re left with is a destructive downturn. That means consumers could still struggle to pay bills and be forced to dip into savings just to get by. And, as Peter Schiff will attest, savings are the "lifeblood of a healthy economy."
  • Third, the credit card crisis bubble continues to expand. In fact, credit card charge-offs just ballooned to a 20-year high, as Americans battled job and home losses, lost 401k value, and amassed mountainous debt.
  • Revolving credit is about $1 trillion, up about 60% since 2000. The charge-off rate — which measures card loans the banks don’t expect to be repaid — hit 10.62% in May from April’s 9.97%, according to Moody’s. And some expect that rate to surpass 12%.

Yep, it’s bad. And bank charge-offs could near $100 billion this year alone, cutting into loan-loss reserves and sending the financial community into a whirlpool of hardship. And it’d leave little room for losses on housing and commercial loans.

Check this out: if unemployment rates hit 10%, defaults could explode. At American Express and Capital One, for example, about 20% of the credit card balances are expected "to go bad this year and next."

As for Bank of America, Citigroup, and JP Morgan Chase, we’re talking about 23%.

And the last thing the financial sector needs to feel is further squeeze, as Americans have accumulated some $970 billion in revolving consumer debt since the end of September 2008, up 3.4% from the close of 2007.

Sure, the credit card industry is typically resilient during our economic slowdowns, thanks to pricing flexibility. And the traditional thinking is that as the economy sours and consumers become late on payments, credit companies can boost earnings through late fees and higher interest rates. But that’s no longer the case.

The jig is up.

Defaults are growing. Charge-offs have been pushed well beyond expectations. And losses are far out-pacing what companies were hoping to account for with extra card fees and higher interest rates.

And as a consumer-driven economy that has trouble saving money, coupled with the lack of available credit, the economy can do nothing but collapse.

But it won’t just hit the financial community. It’ll hit retailers hard, too, with many of them switching to survival mode.

So tell me, where’s this economic recovery going to come from?

Again, we may sound economically pessimistic, but we’re going to tell you how it is. We’re not going to pretend everything is okay and have you invest your life savings into a recovery pipe dream. I can say that we do see recovery. . . but it’s about two to three years off.

Right now, the best way to profit from this market is to be short financial stocks like the banks and credit cards. . . even the XLF, high-end retailers like Coach (COH), and credit card stocks, such as Capital One (COF) and American Express (AXP).

The talking heads will continue to tell you every thing is fine. But it’s not, at least not for the next two to three years. Fortunately, we’ll be honest with you and safely show you how to make money even in these challenging times.

Good Investing,

Ian L. Cooper

P.S. Think fears of commercial real estate fallouts and failures are overblown?

Reis Inc. — an impartial provider of commercial real estate performance data — says vacancy rates at strip malls, neighborhood centers, and regional malls are increasing at rates not seen in 30 years. "We’ve never really seen deterioration of this order in occupied space since 1980. We don’t see much in expectations for improvement throughout the rest of this year and next year."

But that Reis forecast assumes positive job growth and an increase in consumer spending. So, even Reis may be a bit off, as unemployment could continue to rise.

Truth of the matter, the problem could get much worse. Between now and 2011, for instance, about $814 billion in commercial real estate loans will mature, and will need to be refinanced — an issue that could make commercial real estate the next shoe to drop in this decline.

Be there when Options Trading Pit pulls the trigger on two commercial real estate put options this week.

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