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Saturday, April 04, 2015

So Here's The Underlying Problem

Most families are running out of money. This is the mid-year update for the Consumer Expenditures Survey. It runs through mid 2014, which tells you a lot of about the delay function in consumer inflation indices. The ugly:

I'm sure this doesn't surprise many of you. But, for those who are confounded, dropping incomes (before tax incomes), and rising expenses for basics, including health care, imply that people are running out of money. While that's what I had figured inductively last year, it's nice (in a bad way), to see another way of calculating it.

The drops in expenditures on cash contributions confirm it. And really, a ten percent increase in health care costs in one year is rather difficult. Higher deductibles and copays also imply the need to set aside more cash. But food costs have been increasing as well. So people cut where and as they can, run up the CCs a bit, and try to get by. 

The drop in fuel/gasoline costs came at a great time for the US, and helped offset the summer blahs. But it isn't clear that it is enough to offset the winter blahs and the continuing health care cost problem.  We will just have to see.

The fact that a cash crunch is beginning to show up for manufacturing and service industries (again, looking at CMI that's rather clear) is a sign of some correlation. Spring cures a lot of ills, but last year the economy arced up in March, and this year it did not, and you can't expect April to be a renaissance. 

Regarding consumer credit's ability to carry us through a rough patch, I have my doubts. A look at the delinquencies and chargeoffs reports will explain them. Consumer credit is being tightly managed, with historically low delinquencies EXCEPT for residential loans, which still have delinquency rates roughly three times the 90s interrecession norm. Chargeoffs, however, for residential mortgages are quite low. So I would say there's some artistry involved. Artisanal portfolio default projections may be things of baroquely statistical beauty, but they tend to induce an overall caution in the architects.

Of course plenty of non-banks extend consumer credit, and they are happy to do so generally. The only signs of stress with rising delinquencies seem to be in subprime. This subsegment showed pretty darned bad performance in 2014 early delinquencies, which makes me suspect moderation must hit some time this year. At least in banks, which have troublesome regulators who started making snorty noises about this year. Normally the regulators make the banks pull back and there's one last party among the nonbanks which goes on far longer than you think it ever could, so who knows? 

I started reading through some financials of the normal culprits, noting that Capital One was apparently seeing some degradation towards the end of last year. Consumer non-performings were down but delinquencies were rising significantly. There were also signs of a little trouble in commercial - their criticized performing rose significantly while their average yield on loans held for investment dropped from 3.88% to 3.42%,. while net chargeoffs rose over the year.  

Ally Financial  is huge in auto finance - both dealer and consumer. One interesting note is that the off-lease inventory of vehicles is rising very rapidly while the gain per off-lease vehicle is dropping quite rapidly. There was degradation in the consumer auto metrics, but I'd be more concerned about dealers. 

If we don't pick up in May, I can see where the diffusion could set in. A pullback in consumer credit would have consequences. So I don't know. A segment of business has to be cut. A critical summary look at the overall from January can be found in this article.  Loan terms can't be stretched further.

I don't see how the Fed can meaningfully raise interest rates this year, to be honest. I just don't see it. They do have kind of a track record of "rationalizing" when they shouldn't, though. And if they want to do that this year, or begin it, they may. I look at financials like CIT and I think that the business world is all levered up again and maybe it's time to knock some of the air out. Currently we don't have the huge accumulation of excess that we did on the last two go rounds. 

And, if you look at it from the Fed's perspective, if they don't start the process this year, how can they next year? It's an election year! 

Again, another Great Post! Glad your back, you were missed
It's true, and this table doesn't really illuminate the extent of the problem.

It depends on the cost of living in your region, but for a family of four living in suburbia in a region with roughly average cost of living, ACA-compliant health insurance is precisely calibrated to eat up every last penny of disposable income. Deductibles rise as premiums fall with the "cheaper" plans, and subsidies fall as your income goes up. For household incomes up to maybe $90K, the ACA pretty much eliminates savings for retirement and the kids' education. Or any large luxuries like family vacations, a boat, a nicer house, etc.

That means that most people are going to be entirely reliant on the government for emergency funds, retirement, and education. And in education, at least, government help is phased out rather drastically with income.

As more and more people get dragged into the exchanges, it's going to be an economic disaster.

@Neil "That means that most people are going to be entirely reliant on the government for emergency funds, retirement, and education"

I think that is a feature and not a bug to the current crowd in the White House.

MOM, some of what you are seeing in Ally is the cyclical impacts in the car market. Leasing almost went to zero in the crash and has been increasing since so the flow of cars coming off lease is ramping pretty good y/y. And used car prices are coming down as the supply of recently traded in cars ramp vs where it was a few years ago when model years 09 and 10 produced little supply. Avis and Lithia noted a drop in used prices as hitting their earnings in Q3.

I think we had a boom in dumb car loans in 12/13 as a lot of PE funded shops ramped originations and underwriting slipped (Exeter, a Blackstone funded start up took a shotgun as collateral in one case). When some of the securitizations showed EPDs, some of the worst offenders tightened the screws a little. That said, car loan lengths are increasing and I wouldn't characterize what's going on in the car realm as tight. New car lending to subprime clients is the big change in this cycle and the captives are really leading the charge there.

Experian does a quarterly slide deck that has pretty good data.

Brian - but from a credit perspective, it is entirely that used car cycle and the relative changes in used car prices that is important!

Everyone has some defaults, the question is: "What is our average loss per default?" Most insure, but as the insured losses rise the cost of the insurance has to rise.

I like car gurus price trends:

If you look at the recent uptick in used car prices, it's too high.
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