Consumer credit keeps contracting faster

Consumer credit data came out about 2 weeks ago and the numbers are not getting any better.  Unlike my previous entries showing the very long term I thought I'd zoom in a little to show you how this recession is unlike anything we've seen in the last 40 years.  Consumer credit keeps going down and the rate of declining is increasing.  Call this an anti-'green shoot'.

The economy will not properly recover and the Federal Reserve will most likely not raise interest rates too much (if at all) until consumer credit and bank lending start rising.  Until then, get used to very low short term rates.

Mortgage Delinquencies -- A real hockey stick graph

Mortgage delinquencies keep rising nationwide as reported by Freddie Mac & Fannie Mae (via Calculatedrisk blog)

Until the delinquency rate starts to fall I seriously doubt home prices or new home construction will do anything beyond stumble along.

One hidden benefit from all the loans going bad is pre payment speeds have sped up for various mortgage backed securities.  I have noticed a bump in principal paydowns beyond normal and I think its all the mortgages being purchased out of pools by the GSE's.  Considering I own a wad of leveraged inverse floaters at below par I'm happy with that.

Home mortgage delinquency rates keep rising

Delinquency rates keep rising for home mortgages. Calculatedrisk blog provides the details and they are universally not good.  As you can see from the chart, delinquency rates have skyrocketed and are not slowing down. 

If you have sensed a bit of bearishness throughout my blog entries so far, this hockey stick graph is one of the reasons. (I'm not always a pessimist, really)  Rising delinquency rates are one of the impediments to a healthy growing economy.

Consumer credit, where art thou?

Consumer credit (consumer loans excluding home loans) was released today.  Consumer credit continues to contract further and faster.  Unlike my previous posting I have extended the graph back to the beginning of the data series so you can see the extent of the current decline in context.

Since World War II at worst consumer credit levelled off for a period of time before resuming its ascent.  Not this time.  While you may not be able to see it, the current rate of decline is getting worse each month and shows no sign of at least slowing down. 

Bank lending continues cliff diving

Here's the update on total bank lending and it is not good.  Total loans and leases at US banks continue to drop and is picking up speed.

I went back and looked throughout the entire data set available (back to 1973) for bank loans and loan growth has never been this negative, ever.  

If you notice on the graph, bank lending levelled off and slowly resumed growing after each of the two previous recession.    So far bank lending continues to fall and shows no sign of even levelling off. 

The year over year deceleration in US government securities owned by banks is curious considering loans dropped as well.  Are banks deleveraging their balance sheets or is it just seasonal noise?

Until bank lending stabilizes and starts growing again we will not have any meaninful recovery.

Home loan foreclosures keep rising

From Calculatedriskblog a great post and several charts on how the home foreclosure and delinquency rates keep rising.  Go over and read the entire post.

I agree with Calculatedrisk, until the deliquency rates start dropping we won't see any meaningful recovery in home prices.

Consumer credit continues falling

In my previous post I discussed all consumer loans outstanding.  The data is produced quarterly so there is a bit of a lag.  (Another possible post, the desire for high frequency data and how it can sometimes trip you up.)  Consumer credit (all debt but mortgage debt) is reported monthly so we can get a feel of whats coming down the pike.  As the chart shows it continues to fall.

The chart is only of recent history but the US has not experienced this since WW II.   Unfortunately the rate of decline continues to accelerate. 

I would personally feel more confident in this recovery if consumer debt at least stopped cliff diving.  Whether credit is falling due to less demand or bank restrictions doesn't matter at this point.  Until the consumer starts borrowing any recovery will be very tepid and most likely artificial.

Total consumer debt outstanding falling, not just revolving credit

After some rummaging around I finally found the data series showing total consumer debt outstanding. This series includes both home and non home debt.  I have blogged before (2009 October 7) about the year over year decline in non-home-debt outstanding but thought it would be prudent to chase down the TOTAL consumer debt outstanding to see if it is falling as well.

Yup, it is.  The data shows the same trend as the subset previously mentioned.  Like all the other credit/loan/debt outstanding I have recently presented the year over year numbers are negative, show no signs of stabilizing, and are unprecedented in their decline.

I usually dislike the term 'It's different this time' but this time, it really is!

Who is buying all the Treasury debt? a.k.a how bankers are bad traders

Like a worldwide version of Where's Waldo,  a lot of people want to know who is buying all the US Treasury debt being produced by a yawning budget deficit and when they will conversly dump them on the open market.  The Chinese and the Federal Reserve are the first people on everyone's list, but here's another. 

Presented is US Government Securities at all commerical banks.  The first graph shows the absolute change year over years, in billions of dollars.  As you can see US banks have added nearly 240 billion dollars to their portfolios in the last 12 months.   Unfortunately this has not absorbed the entire supply of new issuance in the last 12 months, but it takes a serious chunk of the notes out of circulation.  As this data series is released weekly, I'll be watching it closely to see if the bankers are buying more US debt in the near future. 

Here is the data in a slightly different format so recent events do not dominate the picture, it shows government debt holdings on a year over year percentage basis.  What struck me about this graph is how the banks seem to be adept at raising their treasury holdings as the recessions appear to be ending as shown by the gray vertical shaded areas. 

The bankers appear to consistently purchase US debt just as the recession is finally ending (remember the recession 'end' is backwards looking and it can take several months before a recession is declared as over) and from a trading perspective at exactly the antipodal time to reduce credit risk. 

Also, a bank loading up on US debt is less likely to be making conventional loans to consumers and corporations.  They only have so much room on their balance sheet to hold securities and with all things being equal (yes, I know they aren't)  US Government debt purchases crowd out the possibility of making conventional loans.

Hey, look at that.... Inverse correlation between (US debt) and (loans and leases) on banks books!  It appears the bankers are still running scared and loading up on US treasuries.  Also, look at how loans are declining on a year over year basis, something that has not happened over the entire time period in this graph.  Corporations can access credit via other means (commercial paper, debt markets, etc) but the decline in bank lending  is troublesome.

Inflation update

A little inflation update for you.  The CPI inflation numbers and its various components were released today.  Click on the picture at right to examine three sections of the inflation number:

The graph is of  year over year percentage change to reduce seasonal fluctuations. 

CPI for all urban consumer in blue

CPI less food and energy in red

CPI housing component in green

Both headline CPI and the housing component are in negative territory (that's deflation folks) and the CPI less food and energy continues the slow drop towards zero.  The housing component has never been negative until this current recession since the data series began in 1967.

Consumer credit continues free fall

Consumer credit outstanding results are not pretty.  Outstanding consumer credit continues falling with neither the first nor second derivative being positive.  As I have mentioned before the rate of decline is unprecidented.   It was World War II the last time consumer credit fell at such a rate and WWII is a pretty good excuse not to go out and borrow more money.  As you can see from the picture (click on it for a larger image) consumer credit before has fallen to a negative growth rate, but only for a short period of time and it quickly turned upwards. 

Since the US consumer is  approximately 70% of US GDP this does not bode well for growth in the near term.

Oil inventory levels

Oil inventory levels continue to rise on a year over year and absolute basis.  Considering the seasonality of energy usage I added a graph showing the year over year % change.

Numerous factors are keeping oil prices up (weak dollar, tension in the Gulf, predictions of a recovering world economy, oncoming winter, etc.) but the higher inventory levels rise the harder it becomes for oil prices to remain elevated.

Source:  http://tonto.eia.doe.gov/dnav/pet/hist/wtestus1w.htm

Mortgage delinquencies continue to rise

I was going to work up a nice graph and some commentary regarding mortgage delinquencies, but Calculated Risk beat me to it.  A picture is worth a 1000 words and the graph tells an ugly story.

Unfortunately the data it describes is millions of people losing their homes and it is getting worse.  It can be hard to remain analytical when you think about that.  Maybe that is another reason to call economics the dismal science?

Consumer credit continuing to fall

Data published yesterday shows the continued retrenchment of the U.S. consumer.

I extended the graph's time period so you can see the last time consumer credit outstanding has consistantly been negative is before 1950.

Until the U.S. Consumer starts to borrow again any recovery will be very tepid.

Home foreclosures and delinquencies accelerating

In my previous postings I may have appeared a bit negative on future home prices and suspicious of the optimistic feelings exuded in the popular media regarding the housing market. Here's some reasons why.

Both graphs show functionally the same data but from different sources and slightly different methodologies. The coming flood of home foreclosures will further erode consumer wealth, bank balance sheets, home prices and consumer confidence. That's just some of the primary effects.

Graph #1 is from Paper Economy blog and shows loans on Fannie Mae's books that are seriously delinquent.

Graph #2 from Calculated Risk blog provides a slightly more granular look at similiar data from a different source, showing both mortgages delinquent and in foreclosure. I recommend you check both blog entries.

Look at the graphs and you will see the foreclosure crisis is getting worse, not better.

Inflation - Numbers to live by

Not since the 1950's have we had deflation in America. Right now 'headline' inflation is running greater than negative 1% (thats deflation folks) and looks to accelerate downward.


Will we have consistent deflation for a long period of time? I don't know but lets examine some of the factors that go into inflation.



I am focusing on 3 charts; all show data on a year over year basis to remove seasonal fluctuations.


While headline inflation is decidedly negative right now, the 'core' inflation rate is still positive. 'Core inflation' excludes energy and food prices from the calculations. Some may argue one still needs to eat and drive your car to work so why look at a number that excludes these important parts of daily life? Since energy and food prices are highly volatile the theory is they will balance out over time and policy decisions (like raising short term interest rates) should not be based upon such volatile factors.

As you can see we still have inflation within the 'core' but the rate is sloping downwards. If / when this drops below zero and we have 'core' deflation it will hopefully make the news! Core inflation has not dropped below zero in the entire time it has been sampled. (since 1957)


Housing costs are also part of the inflation figure and as you can guess it is also trending downwards and may also start going negative in the near future. Housing inflation has not been negative in the entire data set as well. (since 1967)


Most Americans alive today have not had to deal with chronic deflation and I believe we are culturally programmed to only think in inflationairy terms. Life may get very interesting if the US consumer changes their mindset to one of chronic deflation instead of inflation.


Additional Reading:
WSJ: Worldwide deflation
Bloomberg: High real interest rates attracting interest

Source: Federal Reserve

Fill er up! Where's all the oil going?

The oil markets are always fun to watch and while the popular media concentrates on how much higher oil can go, I'd like to point out some bearish data.

Oil and oil products in America are on the rise and nearing levels not seen in at least 20 years.

While the I do not have access to the raw data for the OECD, graphs from the International Energy Agency show the same trend.

(If you have access to additional data on inventory levels in America, OECD or emerging markets I'd love to see it.)

I present this information not to buttress a prediction for lower oil prices but to highlight some info that contradicts the current outlook.

Some additional factors for oil:

+ Peak oil - We'll eventually run out of the oil we pump out of the ground. When production will fall off and how much is finally extracted is up to debate. LONG term I am of the opinion prices will be much higher than they are now, the path to those higher prices is unknown in my mind.

+ Geopolitical - The Israeli / Iranian situation could heat up at any time and if the missiles start flying oil prices will rise.

+/- Oil is priced in dollars - Concerns regarding a weakening US Dollar have played a major factor in daily oil price movements.

- Excess supply - OPEC has cut supply and has the capability of pumping more. The timing and extent of their supplies are entirely up to them but for now that excess supply is available.

- Cheating by OPEC members - Cheating does happen by the member countries.

- Floating storage - Oil tankers are being used to store oil and refined products throughout the world. While some of this storage is due to the contango trade earlier in the year, the profitablility of storing then reselling has dropped dramatically.

Additional reading: http://ftalphaville.ft.com/blog/2009/07/22/63186/nothing-bullish-in-crude/


Sources:
http://tonto.eia.doe.gov/dnav/pet/hist/wtestus1w.htm
http://omrpublic.iea.org/stocks/stkxs_oc.pdf

Disclosure: Personal account: long RDC, client accounts: short USO call spreads, long RDC

[edit 07/23/09 12:40pm: cleaned up the prose a bit, added position disclosure]