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Friday, January 08, 2010

The Return Of The Christmas Club!

Consumer Credit (G.19) for November is striking.

Actual revolving credit (mostly credit cards) dropped from 885.5 billion in October to 882.9 billion in November. However normally consumers start charging Christmas presents on their cards in November, so seasonal adjustment converted this to a 13.7 billion drop from October to November, for an annualized drop of 18.5%.

Banks should start pushing Xmas Club accounts again and retailers need to work on their layaway policies.

Non-revolving credit dropped as well at 2.9% annualized, seasonally adjusted.

A massive shift in consumer spending habits:

And this is what it means. (Note that I helpfully made this one all Christmassy for you, dear readers.)

It means that real retail sales ain't going much of anywhere until our incomes improve or our expenses drop!!! It will be quite some time before that red line drops enough to really boost the green line.

Higher fuel bills and the resulting inflation of basic costs in this economic environment certainly kicks retailers in the teeth.

PS: And they still can't get a clue. See this Bloomberg article discussing the G.19 figure, and look at this quote:
“Double-digit unemployment is eroding consumer confidence and the uncertainty is prompting consumers to pay down their credit card debts,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “We have not seen such a wholesale reduction in consumer credit since the last time we had double-digit unemployment rate following the early ‘80s recessions.”

The series of 10 straight declines in consumer credit was the longest since record-keeping began in 1943.
I have never read a more witless statement.

There's more going on here than consumer confidence, which is improving. In December (the tenth) the RBC Cash Index reported a very nice jump. It is not consumer confidence - it is credit card rates and terms. Only the persons who have no options keep charging when their interest rates are more than double their savings returns. A lot of consumers who don't charge much now would be paying 20% or more to charge and carry balances even if they have plenty of cash. You have to be really stupid to do that.

As soon as consumers start treating their credit cards mostly as payment vehicles instead of casual financing vehicles, the whole game changes because the consumers' mentality changes. If you are going to pay them off every month, they're just another type of debit card and your spending habits change. If you charge 2K, you think you spent 2K and you expect to have 2K in the bank to pay the bill when it arrives. Before most consumers were unconsciously thinking about whether they could afford an extra $100 a month to deal with that 2K purchase - now they are thinking they SPENT 2K.

Congress keeps reforming without paying much attention to what is going on, and this last bit of credit card reform really jammed a collective stick up consumers' collective anuses. By prohibiting "retroactive" rate increases, Congress is forcing all credit card issuers to go to variable rate cards. Because the interest rate environment is extremely abnormal, everyone has to expect a huge jump in interest rates in a few years. Further, high unemployment and lower wages is inflicting extraordinarily high loss rates on credit card portfolios. It is unsecured debt, and in a lot of cases you do well to collect 50% of the balance after default. You can easily lose 90% or more, and the ugly truth is that a lot of people can just stop paying and you will never collect much and it isn't worth it to go to court and get a judgment - they are judgment proof.

Therefore, not only do you have variable rate cards with an index and a margin, the margin has to be incredibly high right now to cover credit losses.

Only the desperate who are going to default anyway are going to be charging AND CARRYING at these new rates and terms. I expect credit card losses to keep climbing; the financing portion of the business for consumers is DOA.

There were parts of the credit card reform bill which were needed and should have been passed long ago. In fact, if Congress were not a bunch of mangy no-good critters, these reforms would have been incorporated into bankruptcy reform in 2005. Practices such as changing payment dates, raising rates for payments one day late and then charging consumers $5-$10 to process their payments electronically were outrageous violations of fair business practice and should NEVER have been allowed. Oh, sure, you can get a customer to pay you $10 for the favor of electronically processing his payment if the alternative is a late charge of $40, but the practice is unconscionable. Processing electronic payments is the cheapest way to get your money. And I'm sorry, but the cost of processing payments is really a part of account servicing costs and has to be figured into original account terms. IMO no creditor should be allowed to charge a penny to process a payment

But the reality is that revolving consumer debt is not at all the same as fixed debt. The cost of funds keeps changing and can't be compensated for at the time the credit line is granted; nor can credit risk be accurately gauged at the time the credit line is granted.

So what Congress did when it forbade "retroactive" rate increases was to throw even people with good credit into the barrel with people with bad credit; a good credit rating combined with controlled spending has abruptly ceased to have that much correlation with credit risk on credit card portfolios figured over a longer time. Therefore most people are being charged considerably more to finance spending with credit cards.

Didn't Walmart reinstate their lay away program ?
Might as well put the money in the Christmas club
since it pays as well as CD's.
Spork - layaway programs are a gap in my retail knowledge. The modern equivalent are those cards, but adding a card one could purchase and add to at the register would really help some of the larger retailers.

I know Kmart's is still alive and well.

Seriously, this is a return to the spending habits of a few decades ago, and retailers that get out ahead of this will do much better than those who don't.

The ability to securitize credit card debt is not really that good any more, so another avenue has to be found.
There's already a trend in on-line retailing toward installment plans. Paypal is offering that service now.

There are other shopping cart services that will assist small online retailers with this. My guess is that somebody eventually will figure out how to securitize the operation, but for now the retailer just takes the slower cash flow and the risk of default. It does make sense for some business models to do it that way.
Return of the Christmas Club --- that's what I feel like when I look at the interest earned lately on my savings account.

I suggest that you replace the phrase "Congress keeps reforming" with "Congress keeps meddling."

Also, one way to view the new rules against the credit card issuers is that Congress is outlawing good faith.

If only the Contracts clause of the Constitution had not been killed by the New Deal much of this problem would not exist. I'd like someone to sit on every Congressctritter's shoulder whispering "The Founders knew better, the Founders knew better." And when the Critter started to doubt, the little someone on the shoulder would get heavier and heavier ...
NJCommuter - Congress keeps destructively meddling. I wouldn't mind if they could constructively meddle a bit.

JohnB - That's part of the problem. When your return on savings is less than inflation (just about to happen), any consumer who can pays down debt because it gives a much better return. But this contracts the money supply and inserts a deflationary element into the economy that is somewhat intractable.
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