More On The Consumer

This article: Credit-Card Pinch Leads Consumers To Rein In Spending in the Journal Friday was spurred by a fall-off in consumer borrowing, which seems more reasonable in the current environment that what we saw last month and I discussed a few week ago.

A few friends and I had a healthy debate about what this means. Some suggested we are reaching a bottom...I disagreed. Here are my thoughts:

Consumers have already maxed out their credit cards. Judging from this Fed data: Consumer Credit data it looks like revolving credit hit a peak in November... (or look at any macroeconomic data on household debt-levels). There is just no more room for borrowing at the household level.

As incomes decline and the ARM's continue to reset (yes, there are still billions of dollars worth of ARMs out there yet to kick in) more and more people will feel the pinch.

Couple this with the tightening credit, and they will no longer be able to roll-over their zero-percent introductory rate balances as their mini-consumer-ARMs kick in (nor will they have HELOC's to supplement their spending habits).

And as defaults continue to rise on credit cards, this will only exacerbate the household crunch as late-payment penalties and ridiculous APR's kick in. (note: in my mind these people in the article should file for Chapter 7).

And that is before taking into account the job losses from: mortgage origination firms, mortgage brokers, home builders, home-suppliers, wood processing firms, construction workers, investment bankers, etc. etc.

A scary statistic I heard recently: the median LTV for homeowners filing for bankruptcy thus far in 2007 is 90%. Think about that...that is on the "market value" of the home as they headed into bankruptcy, not on the value as it has declined since then. Projecting one year out, one can easily assume that the median distressed homeowner is underwater on their mortgage. This paints a pretty clear picture of continued overhang in the residential real estate market (ignoring the ridiculous squeeze on mortgage credit which further crimps demand).

The latest word amongst those with half-a-brain is that the housing market won't bottom until 2010.

I think Buffet mentioned today that in his opinion it isn't so much that there is a credit-tightening going on as much as a repricing of risk. Stupid money isn't as available in plenty as the leverage has been sucked out of the system from collapsing CDO's and SIV's (not to mention the rising default rates in consumer finance of all shapes and sizes)...oh, and don't forget the CLO/Leveraged loan market.

I am a little more bearish than Danny's new friend, Warren, (I think this IS a tightening of credit in addition to a repricing of risk as asset values force us to collectively "mark-to-market" at values below our underwriting, forcing collective liquidations), but then again, he is smarter than me.

So take your pick on what you want to see as the driver but the reality is: consumer spending is going to continue to decline.

That said, I am a bull on technology. There will be some cool gadgets and sweet toys in the world once we get out from under this cloud.