Tags: bubble | credit | goldman sachs | lehman brothers | loans | stock | margin

Personal, Corporate Debt Threats Are Real: How Scared Should We Be?

US personal and corporate debt

(Mirko Vitali/Dreamstime)

By    |   Friday, 05 October 2018 08:30 AM EDT

The 800-pound creature lurking in the marketplace room can be labelled with a two-word phrase, a descriptor not boisterously voiced in contemporary discussions about both current and projected states of the U.S. economy.

Tellingly, this creature (of one’s choosing) receives token business reportage.
As the equities markets’ party caravan rolls on, the Wall Street Bulls seem not likely (at least for now) to tip over, crushing investors large and small — clearing the way for Bears.

If anything, many individual and institutional investors seem quite willing to go along for wherever this boom (or boomlet-based) happy hour ride takes them — questioning little along the way.

It’s been an appreciably bumpy journey, but why trouble oneself with petty details about the U.S. economy, especially personal or corporate finance during a rise in share prices?

Pesky, burdensome factoids enough to ruin the mood of even the most battle-hardened, optimistic equities-markets investors.

What goes up, must eventually go down. Yes, an obvious irritant, though one always bearing repeating, and one solidly remaining as a market truism no one likes contemplating  — ever.

It won’t take much for such passengers (a’ la 2008, not c. 1968) to tune out, turn in, and altogether drop out — to haphazardly paraphrase that dynamic, dysfunctional sociological guru of the 1960s — Dr. Timothy Leary.

The bottom line is that it may not even take much of a "crash" of any kind for giddy equities markets’ passengers to not only get, but quickly jump off, this current stock market-driven, ever-upwardly-spiking trip.

If further proof is needed, look at what the trade news roller coaster does for — or rather to — the markets. It’s not that investors could only sell, they eventually could also lose interest in the core (individual shares) markets.

They’ll ultimately become more focused on matters close to home, such as the very integrity and survival of their wallets, bank accounts, and yes — jobs. They’ll also continue to discover the all-to-convenient, luring options of index funds, ETFs (a volatile investment vehicle better suited for day traders?), and mutual funds.

At the end of the day, will a sprint to such one-size-more-or-less-fits-all investment products really be enough to carry Wall Street to and through sufficiently sustainable, stable growth?

And perhaps, this time, we should not count on such "dropping out," taking shape as the fast, mad dash to bonds (of varying public and private sorts) as a way to soften a likely coming economic and personally financially devastating blow. Even a rush to cash may not be enough to stop the negative effects of the next episode of "Falling Out of Love With the Markets."

During the late 1990s, there was the Business Week columnist, (out of a sense of decency, who won’t be named here) actually writing that there was no end in sight to what was then the market boomlet of that crazy time; the .com bubble, the 10,000 Dow, etc.

The same was said, with varying words, during the heady, vacuous, halcyon-like 1920s. Even the most under-informed, armchair, amateur historians can recall that much; some generations since have even well-learned the hard financial lessons taught by the resultant Jazz Age crash.

This time, however, that 800 pound creature is not taking the shape of the buying of stock on margin, the .com bubble (unless you count the FAANG stocks as such), Asia, or mortgage-backed securities. Yet, the list in this regard remains pitiably endless, which includes the boorish fixation with tech and social media, as well as mortgages (increasingly from non-bank sources): all disturbingly still in the mix of risk-taking/long-term indebtedness offerings.

The aforementioned "creature" has rather taken on the appearance of a pile of dirty laundry, sometimes aired, but most frequently not. And if the unmentionables are not talked about in polite (or other) company, they at least make their ugly presence known — eventually — in very financially painful ways; doing so in an unattractive manner affecting the health of our nation’s overall economy.

It’s America’s personal and corporate debt levels. Indenturing obligations belonging to individuals, entire families, or larger commercial concerns.

In appreciable individual instances, its amounts owed burdening both nuclear and extended families — for generations, enough to get the attention of the AARP, according to Politico.com.

For businesses, according to a USA Today story last month, the drama unfolds thusly, "UBS estimates there’s a record $4.3 trillion in lower-quality corporate loans and high-yield bonds — up from $2.4 trillion in 2010 — that could begin to see rising defaults if the healthy U.S. economy starts to wobble. Mark Zandi of Moody’s Analytics added in the same USA Today account, “I view this as the most severe threat to the economy and financial system."

Humankind is driven by, alas, human nature, inclusive of an addictive proclivity (especially in our consumer driven materialistic age), one thriving hedonistically on the obtainment of "acquisitions," "collectibles," "gadgets," "real property," "things," "toys," "trophies," "victories," all on varied forms of credit. And credit coming with an interest-rate price tag varying by personal and/or corporation credit scores.

For individuals credit-challenged to begin with, this is not at all pretty — in good times or bad.

Must have it the day before yesterday, we’ll pay for it later, maybe — if ever.

In 1997 the New York Fed warned in "Debt, Delinquencies, and Consumer Spending," "The sharp rise in household debt and delinquency rates over the last year has led to speculation that consumers will soon revert to more cautious spending behavior. Yet an analysis of the past relationship between household liabilities and expenditures provides little support for this view."

Thus, 21 years later, can we continue to rely on an economy which, at the end of the day, is largely driven by purchases on individual and institutional (vis- a-vis corporate) credit?

One could view a very recent report on CNBC, "U.S. Durable Goods Orders Rose 4.5% in August, Versus 2.0 Percent Increase Expected," in either a totally favorable light, or ask if this latest number is driven by purchases at the wholesale and retails levels on credit at work again --- but in 2018, comparable, if not to 2008, to 1929?

For the second quarter of 2018 the New York Fed’s Center for Microeconomic Data noted, that household debt continued to rise: " . . . total household debt reached a new peak in the second quarter of 2018, rising by $82 billion to reach $13.29 trillion. Mortgage balances, the largest component of household debt, rose to a total of $9 trillion during the second quarter. Auto loan balances increased by $9 billion to reach $1.24 trillion, continuing a six-year upward trend."

The hand-writing on the wall, warnings, harbingers of things to come, or however one wishes to describe the soothsaying foretelling of the past few years (and now) are destined to come home to roost.

The gallows-humor pun says you can take that one to the bank.

Worn out phrases markets and marketplaces also despise contemplating.

Indeed, cautionary words about the average American’s personal debt-levels run the Internet gamut. A simple search engine query reveals as much: from CNBC, to the Federal Reserve, to The Washington Post, to Experian, to Yahoo Finance, to Forbes, to Goldman Sachs.

Here too the list is endless, and if not pitiably, disturbingly so.

And such warnings didn’t just begin in 2018.

In comparatively recent history they can be found in and for specifically the years 2010, 2014, 2015, 2016, 2017, and 2018. Cherry picking of one’s Internet search in this regard is not needed, nor mandatory. The stories of the chilling levels of consumer and corporate debt post 2008 are there and plentiful for those willing to take the time to view and read them.

One could even argue that the pattern of such hard news-based narratives; the very structure of their wording resemble pre-2008, and 1929. That is, the warnings in successive years repeat. In a 2017 Lombardi Letter story is this, "As of June 30, 2017, the total amount of household debt was $12.8 trillion. This was an increase of $114.0 billion from the previous three-month period. On a comparable basis, the $12.8-trillion debt is 15.1 percent higher than what it was in 2013 and higher than its peak in 2008 by $164.0 billion."

The same Lombardi Letter article also points out that the last "peak" figure was reached in 2008, just prior to that financial crash (emphasis added).

If 2017, and years prior, are too old for financial news bugs, there is this from theamericanbanker.com, of July 30, 2018, "But 10 years later, what's remarkable is how little the financial crisis changed Americans' relationship to debt and savings. We still borrow more and save far less than prudence would dictate." The same report by Kevin Wack adds, “U.S. household debt, which declined between 2008 and 2013, has rebounded sharply. By the first quarter of 2018, it was at an all-time high of $13.2 trillion." . . . "But the crisis did not teach us a lesson about the perils of borrowing too much."

Perhaps equally, if not more troubling, is the literal placement, that is priority such stories about debt of a more private and individual nature in the U.S. are given in the larger story about the national debt.

One sees such a structuring in a U.S. News and World Report account, from July of this year, one giving this token mention in this way, "Most pressing on Capitol Hill, however, is not the collective $4 trillion U.S. consumers are expected to owe to creditors in non-mortgage debt by the end of 2018 – representing more than 26 percent of their annual incomes, per a May report from the LendingTree online loan exchange."

If we’re not now worried about this monster under the bed, writing it off as a specter seen only by small children, just before bedtime — guess and think again. This means, whether it upsets our collective stomachs, now or later, the alarms need to be sounded — very loudly — now.

Hopefully fright and the fear of God combined kick in on Capitol Hill, well-before Wall Street even begins to sense the perils of escalating U.S. individual and corporate debt levels. Given the investing, betting, and spending foibles of fallible humans, don’t count on it.

If another Lehman Brothers reverberating implosion won’t kick-in to trigger an equities markets and real estate panic, will (the quintessential epiphany moment) that alas Americans and American businesses have, with credit, extended themselves way too far, with no hope of paying it back, quickly emerge as something much more than that which simply goes bump the night under the bed?

Whether the debt is credit cards, real-estate (mortgages), or student loans-based doesn’t matter. All of these bundled makes for highly combustible kindling for our economy, whether we acknowledge this harsh reality or not makes not one whit’s worth of difference. Sooner or later, the U.S. personal and corporate consumer debt monster grows large enough to come out from underneath that bed and roars, quite loudly, enough to be heard globally; panicking academics, bankers, historians, journalists, market investors, veteran market players and watchers — and politicians alike.

By the time the fear factor reaches polls and pols — will it be too late?

Again, from the americanbanker.com, "In a gloomier future, U.S. consumers will continue to borrow freely even as rates climb. The ability to make their debt payments will erode with time, which will leave them vulnerable to the next economic shock. And then the same cycle that has unfolded over the last decade will begin again."

There is the famous quote by George Santayana, purportedly reading originally as, "Those who cannot remember the past are condemned to repeat it."

But with the stock market at records why burden oneself with another quote no one can ever bring themselves to contemplate at the moment?

© 2024 Newsmax Finance. All rights reserved.

Many individual and institutional investors seem quite willing to go along for wherever this boom (or boomlet-based) happy hour ride takes them, questioning little along the way.
bubble, credit, goldman sachs, lehman brothers, loans, stock, margin
Friday, 05 October 2018 08:30 AM
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