Another edition of our new series: Blog Spotlight.
We put together a short list of excellent but somewhat overlooked
blog that deserves a greater audience. Expect to see a post from a
different featured blogger here every Thursday evening,
Next up in our Blogger Spotlight: Russ Winter’s Economic & Market) Watch. A brief background: Russ was a broker for major firms in the Pacific NW for fifteen years in the late 70s and 80s. Moved on to land development, and vintage apartment ownership. He is now semi-retired and a cashed out bear, hunkered down in the Portland, Oregon area, watching the world go around.
This week’s topic: Understanding Consumer Ponzi Finance
Ponzi’ finance units must increase outstanding debt in order to meet its financial obligations.”
Credit Suisse on a monthly basis puts out one of the most data filled reports in the biz on mortgage and consumer finance. A careful reading of the latest issue, enables one to piece together the nature of the American asset Bubble consumer financing Ponzi scheme. A look at the following chart on housing cash out refinancings, clearly illustrates Joe Soccer Mom’s (JSM) largely unrestrained ability (so far), to effectively service their old debts and continue spending, with new debt. That’s true even with the kind of extremely low levels of cash in the bank, that I pointed out in my blog on demand deposits, earlier this week.
What JSM has done throughout the whole post 911 period, is regularly
extract large amount of housing equity, both to live on, and also to
pay down more expensive consumer debt. Note in the next chart, that
consumer debt is now growing at a modest mid-single digit rate.
However, it is the final chart that gives the answer as to why, the
payment or pay back rate on consumer debt is at historically high
levels, because large home equity cash outs are used to pay it down,
with 2006 being the largest “liquefaction” year yet.
In 2006, Freddie Mac economists estimate a record $336.1 billion in
total cash out activity, with $26.9 billion used to pay off second
mortgages (or HELOCs). No doubt a chunk was also used to pay down
credit card and other consumer debt. But, that doesn’t mean total HELOC
and card debt is dropping, as other JSMs are building it back up as a
stop gap, until their next supposed refi, which for the average
consumer is now every 3.4 years. This wash, rinse, repeat refi cycle is
up from every 2.6 years just one year ago, which at first blush
suggests this gambit is fading? But not to be outdone, JSM just took an
extra large loan amount above his old balance to make up for any delay.
Note in first chart, that Credit Suisse estimates 4Q, 2006 and 1Q,
2007 cash outs, are going to be a modest 17% lower than the 2006
levels. Of course, this presumes that lenders will continue to ignore
declining collateral, and that the biggest wild-card of all, credit
spreads will stay minuscule. Incidentally, this is what five year
floating rate spreads looks like on credit card asset backed
securities, largely nonexistent.
On the micro level, Credit Suisse provided some October credit card
results from the large securitized trust pools. In case the holders
haven’t noticed, although not quite getting out of hand, because of the
residual of 2006’s cash outs, delinquencies are ticking up steadily
higher already. Perhaps these tiny, no foul smell spreads should be
called into question? Examples, and I’ve started first with Brazil
American credit cards, working down through mid-prime Bully Wannabee
and then prime Bully like cards. All, but First USA are slipping, but
the subprime Brazil American cardholders seem to be sliding the most.
That could be because the subprime mortgage market is getting tighter, as that first foot is dropping on Ponzi finance.
Metris: 2Q, 2006: 7.55% October: 8.59%
MBNA: 2Q, 2006: 4.19% October: 4.47%
Capital One: 2Q, 2006: 3.36% October: 3.82%
Discover: 2Q, 2006: 3.55% October: 3.77%
Citibank: 2Q, 2006: 3.03% October: 3.25%
First USA: 2Q, 2006: 3.19% October: 3.16%
Chase: 2Q, 2006: 2.90% October: 2.97%
American Express: 2.30% October: 2.56%
A glance at the three year fixed auto spreads, is starting to show
the subprime and mid-prime spreads slightly widen, but it still looks
like the Riskloves feel everything is well in hand. Delinquency and
foreclosures for one of the key Ponzi enablers, CFC is included to
gauge the merits of that.
And some recent 60 day plus auto delinquency numbers:
Westcorp: Oct. 05: 0.69% Oct. 06: 0.84%
Americredit: Oct. 05: 2.4% Oct. 06: 2.2%
Capital One: Oct. 05: 2.00% Oct. 06: 2.19%
The macro question is, how can this benign “risk free” environment
continue if Ponzi equity extraction from declining housing values
abates at all? And even worse, what happens if large layoffs spread
into the real estate and construction areas of the economy. And sorry
to repeat myself, but the chart on new housing permits and actions taken by Home Depot looks quite ominous on that score.