No two crises look the same but they often rhyme

The US Consumer is important. US transitioned from an industrial to a services economy many years ago,  and up until the global financial crisis (GFC) was the mainstay of global economics. Once the US consumer caught a cold the whole world caught the flu.

At the moment the US economy appears to be ticking along just nicely, not enough for people to be 100% confident in it but also not bearish enough to hit the panic button just yet.

If you follow the stock market you may have noticed that a lot of the better performing stocks currently all have a consumer edge to them. Nike have grown top line revenue at a staggering pace, Amazon, Apple, Netflix, Facebook, google etc etc etc all have been performing very well and sucking up cash so that even now Facebook can boast having a larger market cap than none other than JP. Morgan.

That is quite astounding, it is reflective of certain issues in the banking sector that are being ironed out but the thought of a social media company having a larger market capitalization than one of the oldest and most successful banks in the world is quite something and marks a radical shift in trends in financial markets. Not to be outdone,  Apple’s market cap is also roughly equal to the three largest banks in America. Simply amazing stuff.

Anyhow back to more prescient matters- this should give you confidence that the US economy is right on track and doing well but lets have just a brief look under the hood.

US consumer borrowing is now larger than it was before the GFC. Below is a chart of consumer lending and while volatile you can see an aggressive rebound from the GFC days in 08.

Capture

Now lets look at Visa’s Share price, not too shabby right, albeit they were IPO’d in 08 and markets have rallied strongly since, Visa has appreciated and rode the wave of consumer borrowing with barely a look in the rear-view mirror.

VISA

Bearing these two in mind lets look at this chart. This is the participation rate of employment in the US. i.e What percentage of the ‘able to work’ are actually working.

PT

Now you will see that although the US official unemployment rate has returned back to a more healthy level of circa 5% it has been done so as much less people are actually participating in the workforce.

It does not seem right to me that less people are working yet more short term credit is being extended to the US population. Remember that consumer credit is often high interest bearing credit if left un-attended. (I will dig into this i.e repayment rates in a future post)

What sectors are benefiting the most from this rapid extension of credit? Most are pointing to the US auto industry and student loan industry at the moment as over-indebted. This is good and bad, people need an education and often in US a car to work so it can be seen as a productive investment (that is rose tinted glasses way of looking at it).

If you look at the rise in consumer related stocks as noted above, you could also say that people are squandering money on what is known as Consumer Discretionary items, or in other terms, we are buying things we dont need but we like the look of.

For the final chart just have a look at US average hourly earnings and notice the trend, or lack thereof to be more precise. Although it looks volatile it effectively points to zero growth in earnings or wages for the average american.

HE.JPG

So to conclude we find ourselves in the following situation:

  1. The US consumer is borrowing more short term financing
  2. To buy things they dont necessarily need but do covet
  3. Wages/earnings have not grown to the extent that borrowing has
  4. Interest rates are starting to move up
  5. Credit Card/ direct lending and predatory payday lending companies are doing well.

 

I do not want to say we are in bubble territory as consumer purchases are often much easier to finance than mortgage repayments which caused the last crash but to me its a worrying trend, and proof that no two crises look the same but they often rhyme.

Jeff

 

 

 

 

 

 

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