economy

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Consumer Credit Update

For those inquiring minds that like annual comparisons, consumer credit increased from $2,627.4 billions in 2011 to $2,778.2 billions in 2012. This is 5.7% increase. Almost of all of this increase came from non-revolving credit(auto loans). Non-revolving credit increased from $1,780.1 billions in 2011 to $1,928.4 billions in 2012. This is a 8.3% increase. The revolving credit(credit cards) had a 0.3% increase from 2011 to 2012.  This is good news for the auto industry and bad news for everyone else selling to the consumer.

The Federal Reserve likes to estimate annual rates using quarterly results. It is a different way to look at the same problem. Here is their statement.

Consumer credit increased at a seasonally adjusted annual rate of 6-1/2 percent during the fourth quarter. Revolving credit was little changed, while non-revolving credit increased at an annual rate of 9-1/2 percent. In December, consumer credit increased at an annual rate of 6-1/4 percent.

Consumer Credit – G.19

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Cutting Oil Subsidies

Cutting “oil subsidies” is an interesting subject. Most of the time when you ask for details on how the proponents plan to cut oil subsidies they are talking about altering depreciation schedules. The reason the depreciation schedules were altered in the first place was to encourage companies to increase their capital investments. This altered depreciation schedule is available to all companies not just oil companies. Increased capital investments are good for the economy and what is good for the economy is typically good for incumbent politicians. That is why the changed the depreciation schedules. This time we are seeing a different tax slant. Here is a quote from Representative Ellison in the Huffington Post.

Last week, I said that if Congress has to make cuts, we should embrace the idea of ridding ourselves of wasteful giveaways to the fossil fuel industry. Here’s an idea. Let’s cut the Master Limited Partnership loophole and fossil fuel subsidies.

Some years ago I invested in a Master Limited Partnership based on the recommendation of my broker. It was involved with “mezzanine financing” for small companies and it was a much more profitable venture for my broker than it was for me. In hindsight it was another way for brokers to sell me stuff I would not normally buy. Since I am older and wiser now, I avoid Master Limited Partnerships. Recently my mother-in-law invested in a Master Limited Partnership on advice of her broker. When I looked at its return on investment it was a lousy investment, too. Her broker does not like me anymore. There are more reasons to dislike Master Limited Partnerships. If you fill out your own tax returns, tax accounting for Master Limited Partnerships is a pain in the butt. As a person who lived in the oil patch for 18 years, Master Limited Partnerships are just another way to separate doctors, dentists, and lawyers from their money.

Although I would celebrate the demise of Master Limited Partnerships, Representative Keith Ellison’s argument that Master Limited Partnerships should be closed because they use a tax loophole is silly. This is the same loophole used by any partnership or sole proprietorship in which the income gets transferred directly to the partner or owner’s tax return. I doubt he is planning to change these areas, too. The biggest problem for Representative Ellison is that it is hard to get a bigger slice of the tax revenue pie when you are dealing with investments that do not generate much revenue. Oil companies are not offering their prime properties in this market. The properties in Master Limited Partnerships are tough investments to sell to the public. I suspect most companies will opt out of trying to make a market for these lower quality properties. If Representative Ellison was arguing that Master Limited Partnerships are lousy investments and should be avoided for the reasons I mentioned above, I would fully agree with him. In this case he is just making a purely political statement and the chances our country would get additional tax revenue by eliminating Master Limited Partnerships is between slim to none.

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What Bothers Me about the Latest GDP estimate

The thing that bothers me the most about the latest GDP estimate is not that it was negative although that was surprising. What bothers me is that our experts completely missed the reduction in government spending due to the winding down of the war in Afghanistan. I have read enough economic history books to say that increases in defense spending have been a reliable way of stimulating the overall economy. It worked in World War II in the 40s, Vietnam War in the late 60s, and Reagan years in the 80s. Defense spending had mixed results at stimulating the economy in the 90s with the first Iraq war and in the last decade with the wars in Iraq and Afghanistan. I think there is a very good case to argue that defense spending has historically a larger multiplier effect on GDP growth than all of the ideas to stimulate the economy in the last stimulus package. Even Paul Krugman argued on PBS that a fake alien threat was needed to stimulate the world economy. So how did our experts miss the downside of war buildups?

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Switzerland’s “Debt Brake” Is a Role Model for Spending Control and Fiscal Restraint « International Liberty

I agree with Dan Mitchell on many issues. I just found this piece he wrote about Switzerland’s “Debt Brake” in April of 2012. I originally read about the “Debt Brake” in his opinion editorial in the Wall Street Journal. As Dan mentions it is not really a debt brake but a spending restraint and it is only as good as our legislators are willing to let it work. Although it is unlikely that this type of spending restraint will be part of the fiscal cliff negotiations Part I, it make be part of the Part II or Part III negotiations. Ultimately our politicians would have to embrace the fact that our major entitlement programs, Social Security, Medicare, and Medicaid, have become “pay as you go” programs. Here is his chart that shows the problem with spending growing faster than the tax revenues or population.

Obviously spending growth is a fundamental economic problem for the United States and our legislators are willing to copy good ideas from other countries. Representative Brady with his MAP act and Senator Corker with his CAP Act  think a similar debt brake policy in the United States would be a good solution to control the growth of federal spending. Here is what Dan said about the “Debt Brake”.

Switzerland’s debt brake limits spending growth to average revenue increases over a multiyear period (as calculated by the Swiss Federal Department of Finance). This feature appeals to Keynesians, who like deficit spending when the economy stumbles and tax revenues dip. But it appeals to proponents of good fiscal policy, because politicians aren’t able to boost spending when the economy is doing well and the Treasury is flush with cash. Equally important, it is very difficult for politicians to increase the spending cap by raising taxes. Maximum rates for most national taxes in Switzerland are constitutionally set (such as by an 11.5% income tax, an 8% value-added tax and an 8.5% corporate tax). The rates can only be changed by a double-majority referendum, which means a majority of voters in a majority of cantons would have to agree.

He goes on to make the point that this policy becomes a de facto spending cap and that it has been a good policy for avoiding the fiscal crisis problems affecting the rest of Europe.

Switzerland’s spending cap has helped the country avoid the fiscal crisis affecting so many other European nations. Annual central government spending today is less than 20% of gross domestic product, and total spending by all levels of government is about 34% of GDP. That’s a decline from 36% when the debt brake took effect. This may not sound impressive, but it’s remarkable considering how the burden of government has jumped in most other developed nations. In the U.S., total government spending has jumped to 41% of GDP from 36% during the same time period.

He concludes with:

To conclude, we know the right policy. It is spending restraint. We also know a policy that will achieve spending restraint. A binding spending cap. The problem, as I note in my oped, is that “politicians don’t want any type of constraint on their ability to buy votes with other people’s money.”

Overcoming that obstacle is the real challenge.

Switzerland’s “Debt Brake” Is a Role Model for Spending Control and Fiscal Restraint « International Liberty

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Cliff Notes on The Age of Deleveraging by A. Gary Shilling

I just finished reading The Age of Deleveraging by A. Gary Shilling and I agree with his analysis and conclusions. I think that his book is the most important book on economics that I have read this year so I included some notes from the book for my future reference. Part of the reason I enthusiastically agree with his analysis is because it matches my own analysis. Over several posts I have been looking for signs that the consumer is actually deleveraging. Part of my curiosity stems from listening to Dave Ramsey try to convince people of the benefits of becoming debt free and wondering whether he is part of a larger trend. The other part is trying to figure out what the average American will do with their investments and disposable income in a slow growth environment. Mr. Shilling and I come up with the same conclusion. It is time for the American households to unwind the excess borrowing on credit cards and student loans that occurred over the last thirty years. Consumer spending as a driver for the economic growth is tapped out.

In a similar way I was fascinated with the problems that CALPERS and other pension plans are facing if our economy fails to grow at 4% per year. It seems many of the pensions plans are making big bets that the economy will grow at 4% and the stock market returns will grow much faster than that. The reality is that CALPERS recently announced that their 1-year return was 1%, their 10-year return was 5.7%, and they are spending about 6.4% of their portfolio on benefits. For kicks I charted the inflation adjusted returns for the GDP(blue line), S&P 500(red line), and our total debt(green line). From the chart you can see a pretty good correlation between the three indices from 1980 until 2000. For that time period I came to the conclusion that the growth in debt from was primarily responsible for the growth in the economy and the stock market. Traditional economic theory seems to be working. After 2000 the correlation falls apart. It is as if we passed a tipping point and the equation we use to describe the economy changed. Increased debt was no longer a good thing for the economy or the stock market. Debt soared but the economy hardly budged off of its long term trend line and stock prices went down on an inflation adjusted basis. For pension plans like CALPERS that really sucks! For those who think we can borrow our way to economic growth, you need a new plan. I was pleasantly surprised the Mr. Shilling noticed the same problem with inflation adjusted stock returns and debt.

Here are my cliff notes from the book and two posts about the book at BusinessInsider.

Slow Growth Ahead

Global slow growth in the next decade will result from the U. S. consumer retrenchment, financial deleveraging, increased government regulation and involvement in major economies, low commodity prices and the shift by advanced lands to fiscal restraint.

No Help from Anywhere

Four more reasons for slow global growth: Rising protectionism, continuing U. S. housing weakness, deflation and weak state and local government spending.

Chronic Worldwide Deflation

Deflation comes in several varieties, but is fundamentally driven by supply exceeding demand. Productivity-saturated new tech and globalization will drive the good deflation of excess supply while slow economic growth introduces the bad deflation of deficient demand. As the combine, I look for chronic price declines of 2 to 3 percent annually.

Twelve Investments to Sell or Avoid

#1 Big-ticket consumer purchases

Consumer discretionary spending is getting whacked as Americans grow debt shy. Moreover, consumers will have less money to spend.

Autos, appliances, airlines, cruise lines and leisure and hospitality providers will suffer.

#2 Consumer lenders

America could be finally, finally kicking the credit habit. Credit card companies, like Visa (V), and various financial firms will pay the price.

#3 Conventional home builders

Home prices are dropping (Shilling predicts a 20% drop). People are losing interest in giant McMansions. Add to that America’s newfound antipathy toward debt and you’ve got a bear market for home builders.

You might want to avoid PulteGroup (PHM), Beazer Homes (BZH), M/I Homes (MHO), Ryland Group (RYL) and KB Home (KBH).

#4 Collectibles

Collectibles are another casualty of deflation. That Rembrandt could be worth less in a few years.

#5 Banks

Home prices aren’t done crashing. When they do, banks will suffer from a wave of foreclosures. The financial system will be revived after the crisis with new profit-crushing regulations.

Mortgage heavyweight Bank of America faces the biggest liability.

Shilling also names Goldman Sachs as a potential target for CDO suits.

#6 Junk securities

Shilling calls this year’s rally in junk bonds overblown. Slow revenue and cash flow growth will make it impossible for many firms to service debts.

#7 Flailing companies

Companies with below-average revenue growth and high fixed costs and debt will be the first to drop in the coming era.

Shilling does not give any examples. We’re going with US Steel.

#8 Low tech equipment producers

US industrial production has stalled and won’t need many machine tools and parts. Besides, these products are made a lot cheaper abroad.

#9 Commercial real estate

Demand isn’t increasing as the US economy stalls. Moreover, loans made in the bubble come due in 2012, threatening a wave of foreclosures that will crater demand.

#10 Commodities

Slow global growth means there won’t be much supply pressure for oil and other commodities. Meanwhile, deflation will bring down prices.

#11 Chinese and other developing country stock and bonds

Emerging markets aren’t there yet, Shilling says, and won’t be able to pick up the slack from a languishing U.S. For overheating markets like China, this will lead to a sudden crash.

#12 Japanese securities

Shilling predicted the Japanese crash in 1988, and he says the slow-motion train wreck isn’t over yet. Bad demographics and lack of export growth are just now making their pretense felt.

Ten Investments to Buy

#1 Treasury bonds

Shilling says he has been a 30-year Treasury bull since 1981. The "bond rally of a lifetime" is going to continue as deleveraging causes deflation. Even Ben Bernanke won’t be able to stop that.

#2 Dividend payers

There won’t be much growth, so you might as well collect dividends. A few examples include Procter and Gamble (PG), Unilever (UN), Coca Cola (KO) and PepsiCo (PEP).

#3 Consumer staples

Consumer discretionary spending is getting whacked, but people still need to buy bread and socks. Stores like Walmart are well-positioned to grow.

#4 Small luxuries

People want to spend money on something. Shilling says items like snakeskin tote bags, five-blade razors and designer jeans could be the new type of conspicuous consumption, taking the place of big ticket items like sports cars.

#5 The dollar

With Europe and Japan drowning in debt and emerging markets verging on a crash, the dollar is going to start looking pretty good. Shilling says the dollar will remain the world’s currency, with no real competition from gold or the yuan.

Meanwhile, America will be mired in deflation.

#6 Investment managers and financial planners

Low investment returns will discourage day-traders and encourage the use of professionals.

#7 Factory-built houses and rental apartments

Cheap small homes are the order of the day, as old people look for a cheap retirement spot and young people look for a small mortgage.

Renting will be a more and more popular strategy.

#8 Health care companies

As America ages, the health care industry seems unstoppable. Even Obama’s health care reform ended up boosting earnings for many companies.

#9 Productivity enhancers

Anything that helps juice bottom lines will do well in the new era. This includes consulting groups, computers, internet, biotech and telecom.

#10 North American energy

Shilling is bullish on deepwater drilling and natural gas, as well as coal and nuclear. He has particularly high hopes for the massive Canadian oil sands.

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Calculating Average Credit Card Debt per Household

Recently I was puzzled by a debt service chart included in a presentation by Abby Joseph Cohen. The data for her graph comes from the Household Debt Service report produced by the Federal Reserve. My problem is reconciling the data with my belief that the average family is under a greater debt burden than is represented by the data. Although credit card debt is a small portion of the consumer debt, it is the most attractive debt to pay off as soon as possible.

Credit card debt is described by the Federal Reserve as revolving debt. The latest number from the Federal Reserve Consumer Credit report is 815.4 billion dollars. The Census Bureau’s Quickfacts says the number of households in the US is 114.2 million. When we divide these two numbers together, we get the average credit card debt per household is $7,140.

If we take the average credit card debt and plug it into Bankrate.com’s minimum payment calculator we get a minimum payment of $178.50 or $2,140 per year. For those who are curious this plan results in $10,133.07 in interest payments and 308 months(25 years) to pay off the balance. If we divide the annual minimum payment amount by the BEA nominal disposable personal income per capita, $37,976, we get 5.6% debt burden. This debt burden is a little higher than the 4.95% debt service burden reported by the Federal Reserve. Hmm… if debt service payments is a good indicator of financial pain for the “average” household then I would have to agree with Abby that with debt service at 1990’s levels, the households are not suffering from making their payments. Here is where I have a problem with Ms. Cohen’s analysis. My numbers imply that the consumer is making minimum payments on high interest loans. This is typically the sign of either a financially “dumb” consumer or a consumer who is maxed out. Neither situation will lead to sustainable consumer spending. With low inflation and wage growth the smart consumer should pay down credit card debt.

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Half of the particulate pollution in North America comes from other continents

According to a new study by researchers at the University of Maryland, College Park, NASA Goddard Space Flight Center, University of Maryland at Baltimore County and the Universities Space Research Association:

Roughly half the aerosols that affect air quality and climate change in North America may be coming from other continents, including Asia, Africa and Europe, according to a new study.

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Most of the pollution migrating into the North American atmosphere is not industrial emissions but dust from Asia, Africa, and the Middle East, , Yu found. Out of the total annual accumulation of foreign aerosols, 87.5 percent is dust from across the Pacific, 6.25 percent is composed of combustion aerosols from the same region and 6.25 percent is Saharan dust from across the Atlantic.

Although they did not discuss the ratio of dust to combustion aerosols from North America, I would not be surprised if the ratio was even larger for particulate pollution in North America. In a previous post, The Battle over Clean Air Standards, I found it easy to conclude from the EPA site on asthma that combustion aerosols have a weak link to asthma. If dust is the major contributor to our problem with particulates then the regulations on coal plants are a very small part of the solution. Every time I look at the science behind the increased coal plant regulations is I find the argument for stronger regulations is just not there.

Half of the particulate pollution in North America comes from other continents
Wed, 22 Aug 2012 23:07:07 GMT

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Comments on the Current Consumer Credit Report

Both James Pethokoukis and Cullen Roche made misleading comments about the growth in consumer credit after the G.19 report was released. Here is a quote from A weak recovery with a weak foundation built on credit card debt that highlights the problem.

A big leap in credit card debt in May. It surged by $8.0 billion, the biggest one month gain since November 2007.

Here is an updated graph from the Fed that shows both revolving and non-revolving credit from 2000 to the present. In the graph we can see that revolving credit(i.e. credit cards) is still depressed and growing slowly compared to non-revolving credit(i.e. auto loans). It is still down from its peak in 2008 while the non-revolving credit has already passed its 2008 peak. Using a one month change to describe a trend is misleading. Since last month’s G.19 report showed a decline in revolving credit and this month it shows a gain, I think it is a little early to make predictions on credit card debt growth.

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Why are Distribution Costs going up so fast?

In my last post of energy conservation, June Follow up on Green Technology that pays for itself, I was surprised to find that my energy savings were being overwhelmed by electrical rate increases. This bothered me on several different levels. Naturally I was disappointed I was spending more for the same amount of electricity while my wages stagnate. The more curious problem was why did my rate go up when the price of natural gas and coal go down?

Yesterday I went through my electrical bills and added up my delivery and generation costs for the first five months of the year. I divided these two numbers by the total electricity used to come up with an average delivery and generation rate. I did the same for the first five months of last year, too. My delivery rate went up 18.3% while my generation rate went down ”“17.7%. The lower generation rate makes since it was highly influenced by the higher winter rate in January and February of 2011. The higher delivery rate does not make sense. This increase is much higher than inflation. What did Duke spend the money on?

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Federal Reserve Reports That Revolving Credit Shrunk Last Month

Considering the paltry investment returns in the bond market and real estate, I am surprised that the average consumer has not chosen to continue pay down their credit card debt. Well, the latest report from the Federal Reserve says the consumer is back on the debt reduction track. If you believe that a financially stronger consumer is best strategy for long term economic growth and middle class wealth creation, it is time to celebrate. If you believe that our economy needs a consumer spending spurt to jump start this moribund economy, it is time to cry in your beer. For either outcome you should break out the beers. Heh, heh!

UPDATE:

It’s a miss!

Consumer credit only grew $6.5 billion in April.

That’s well below expectations of $11 billion. Furthermore, the month before was revised down from a gain of $21.3 billion to $12.3 billion.

MORE: The full report is here, and one thing that stands out is that revolving credit actually shrunk.

Overall, a pretty punk report.

Read more: http://www.businessinsider.com/april-consumer-credit-2012-6