Back To Consumption Growth ...

The previous posts have been rather "technical" in nature, as I would describe the equity markets recently ... It is probably a time to re-visit the fundamentals?

Indeed, there is a big difference between the investing and trading, as Brett Steenbarger noted in his blog yesterday:

Mixing the mindset of trader and investor is hazardous to your wealth. As an investor, I can tell you that I remain very conservatively positioned with my retirement assets.
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All of that, however, is irrelevant to what I think about the stock market *today*.
...
Trading is about exploiting supply and demand during short-term intervals; it is not investing.

Last week the economists at San Francisco Fed (HT Mark Thoma) published a FRBSF Economic Letter: U.S. Household Deleveraging and Future Consumption Growth. I excerpt here the conclusion:

More than 20 years ago, economist Hyman Minsky (1986) proposed a "financial instability hypothesis." He argued that prosperous times can often induce borrowers to accumulate debt beyond their ability to repay out of current income, thus leading to financial crises and severe economic contractions.
Until recently, U.S. households were accumulating debt at a rapid pace, allowing consumption to grow faster than income. An environment of easy credit facilitated this process, fueled further by rising prices of stocks and housing, which provided collateral for even more borrowing. The value of that collateral has since dropped dramatically, leaving many households in a precarious financial position, particularly in light of economic uncertainty that threatens their jobs.
Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates. Alternatively, if accomplished through some form of default on existing debt, such as real estate short sales, foreclosures, or bankruptcy, deleveraging could involve significant costs for consumers, including tax liabilities on forgiven debt, legal fees, and lower credit scores. Moreover, this form of deleveraging would simply shift the problem onto banks that hold these loans as assets on their balance sheets. Either way, the process of household deleveraging will not be painless.

This is simply a reminder of my fundamental concern for fast (V-shaped) recovery, and keep in mind that U.S. is just some 30% of global consumption. As Paul Kedrosky noted yesterday, the "Green Shoots" look really amazing in U.S. retail. The latest report on U.S. retail sales by BNP Paribas is available here.

The latest data from Fed on U.S. consumer credit suggest heavy deleveraging going on. David Rosenberg, the ex-economist of BofA/Merrill Lynch(ed), noted in one of his latest reports:

Consumer credit contracted a record $11.2 billion in March (a 5.2% annual rate and down a total of $32 billion since last September. Revolving credit posted a large decline -- after sliding at a 12.1% annual rate (-$9.7 billion) in February, it fell another 6.8% SAAR (or -$5.4 billion) in March. This was the sixth consecutive monthly decline in revolving credit, and the YoY trend in credit card use is running at -1.2% -- a huge swing from the +7.7% trend a year ago and the first move into negative terrain ever People are cutting up their credit cards and extending the life of their durable consumer goods -- after all, the average household owns a record $37,000 of "stuff".
The fact that non-revolving credit is down $5.4 billion for the month in the face of the huge improvement in auto loan terms is a story in its own right. What is tough to square is the huge gap between the seasonally adjusted and non adjusted data - for example, credit card outstandings were down $17 billion for the month and $60 billion year-to-date unadjusted versus the 'smoothed' $5 bln and $16 bln drawdown respectively.

Click on chart to enlarge, courtesy of Bank of America/Merrill Lynch.


There are, of course, many other issues to climb the "wall of worry".

Many pundits are talking about "stabilization" in the U.S. housing markets, but there are many other housing bubbles around the world. The activity is one side of the coin, but for the financial world the housing prices may be more important than activity (that is probably indeed at very depressed levels already) ...

Societe Generale acknowledges today:

Foreclosures are the wildcard in timing the pace of inventory liquidation. Over the past year, foreclosures added about 200K housing units to the excess housing stock. The pace slowed somewhat in Q4 as banks put temporary moratoria on foreclosures in anticipation of the new government-subsidized foreclosure mitigation programs. These moratoria have been gradually lifted this year, and while many loans are being modified, foreclosures are likely to go up. We assume that about 250K units will be added to supply due to foreclosures in 2009. Even if we allow for further rise in foreclosures, the economy should be able to clear out the excess inventory stock within the next 12-18 months. With that, the bottom for home prices looks to be in sight.

Click on chart to enlarge, courtesy of Societe Generale.


What kind of glasses are they wearing? Or looking through a telescope?
But we are getting the latest U.S. housing data (starts and permits) right now, and WSJ.com reports:

WASHINGTON -- Home construction unexpectedly fell during April, brought down by a large decline in apartment groundbreakings that offset a modest gain in single-family housing starts.
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Wall Street expected an increase in April construction. Economists surveyed by Dow Jones Newswires forecast a 2.0% increase to an annual rate of 520,000.
Year over year, housing starts were 54.2% below the pace of construction in April 2008.
Despite the encouraging increase in single-family starts, the big overall drop was somewhat disappointing, given signs elsewhere of stabilization in the housing sector. New-home sales, for instance, are up from a January low. Builder confidence in the housing market is growing. The National Association of Home Builders' latest Housing Market Index rose to 16 in May, from 14 in April and nine in March.
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Tuesday's report on housing showed building permits in April decreased 3.3% to a 494,000 annual rate. Economists had expected permits to climb by 2.7% to a rate of 530,000. March permits fell 7.1% to 511,000.

Rotten shoots? Or a pause (of what)?