Household Debt Service and "Parabolic Debt"
Submitted by
CalculatedRisk on Mon, 12/12/2005 - 2:00pm (29 comments)
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Bought some shares into a gold MF today
This guys views are ultra bearish- but what he says does make sense.
Anyone see or hear anything reliably solid on the holiday sales numbers?
I asked the same question over on CRs post of the same topic at AB. I know it isn't EXACTLY the same topic but debt & holiday spending go hand in hand and I'm wondering if debt burden is approaching critical mass, will it show up in sluggish holiday sales?
I haven't heard much pro or con... anyone else?
CR -- "However, recently the portion of disposable personal income dedicated to debt service has risen steadily. As interest rates rise, and with the new credit card minimum payments, the DSR and FOR will probably continue to rise, putting more pressure on household finances."
CR, any more words of wisdom on what you are observing?
How does this play out?
--
Cool graphs!
Seems like the effect of FED hikes can be clearly seen in DSR.
I wonder how pre 2001 6%+ rates worked out in the DSR.
Seems like the USA has gotten addicted to low interest rates therefore low inflation.
So the single biggest enemy is inflation.
But will inflation ever increase, with 700 million Chinese peasants waiting to get industrialized?
But will inflation ever increase, with 700 million Chinese peasants waiting to get industrialized?
Thats a good question.
From Bloomberg:
China's Nov. Output Rose 16.6%, Most in Five Months (Update3)
Dec. 13 (Bloomberg) -- China's industrial production rose in November at the fastest pace in five months, an unexpected acceleration that may aggravate stockpiles and price declines for manufactured goods.
The 16.6 percent gain was higher that the 16.1 percent in October and beat the median 16 percent forecast among 22 economists surveyed by Bloomberg News. Vehicle production jumped 21.6 percent, the statistics bureau said today.
``This is clearly a result of the buildup of excess capacity and the massive investment over the past three years,'' said Ben Simpfendorfer, China strategist at Royal Bank of Scotland in Hong Kong.
The government says a surplus 2 million vehicles a year are being produced in China, and carmakers such as Volkswagen AG have slashed prices this year, eroding earnings. Premier Wen Jiabao this month decided to maintain controls on investment in 2006 to curb overexpansion that strained supplies of commodities in the world's fastest-growing major economy.
[...]
Vehicle output rose 21.6 percent in November from a year earlier after rising 13.2 percent in October. Car output rose 52.1 percent following a 67.6 percent gain in the previous month, today's statement said.
Chinese carmakers may be left with inventory of 200,000 unsold cars this year as Volkswagen AG and other automakers produce more sedans and pickup trucks than they can sell, according to a report published yesterday by China Automotive Information Net, a government-run Web site.
Renault SA, France's second-biggest automaker, may suspend a three-year effort to build cars in China as increasing competition and manufacturing capacity hurt profitability, people close to the company told Bloomberg News on Dec. 1.
Production has also been spurred by companies such as handset maker Nokia Oyj who turned to China to take advantage of low wages costs and tax breaks. Output of telecommunications equipment and electronic products rose 22.3 percent in November, today's statement, the same pace as in October.
Top IT Exporter
China last year overtook the U.S. as the biggest exporter of information technology products, selling $180 billion of goods such as digital cameras and laptop computers compared with U.S. exports of $149 billion, according to a report published yesterday by the Organization for Economic Cooperation and Development.
Prices are falling by a large degree, company profits are sliding and losses are rising,'' Ma Kai, head of the National Development and Reform Commission said on Dec. 3.If we don't address the problem, companies could go bankrupt and job losses could increase remarkably. B
Inflation will have to work overtime to keep up with the recent increases in Chinese output.
Tice is a professional short seller, and not a particularly good one at that. And that is being kind. Exceedingly kind. 2002 was I believe his best, year. He was feeling his oats, certain of his standing as a Master of The Universe (MOTU).
From December, 2002:
"The Prudent Bear, David Tice articulates, 'The economy is imploding, the consumer is retrenching, the real estate bubble has been recognized, and corporate profits are evaporating .. Fasten your seat belt!'"
His public comments about the economy have been as hyperbole-filled as they have been flat wrong.
The data graphs? If you can look at those graphs and cream your knickers, much less see anything resembling parabolic, you are far too easily aroused.
dryfly, when I see something on retail, I will post it. Hopefully soon ...
DoctorWho, hence my comment: Although mortgage debt has grown substantially, both nominally and as a % of GDP, I wouldn't call it "essentially ... parabolic". I think Tice was resorting to hyperbole, but I share his concern in general about the amount of debt - both consumer and government.
MovieGuy, I wish I knew ... but I'll keep guessing!
Best to all.
The advent of a financial instrument, HELs, postponed his forecast. He is tame by the gold bug standards. PrudentBear is a wide sample of mostly bearish sentiment that I always find interesting if not prophetic.
PrudentBear is a good site to check out stuff not in the media, that can be understood by lay people. BUT realize that there are points of view and that colors whatever is there.
I think Tice was resorting to hyperbole, but I share his concern in general about the amount of debt - both consumer and government.
Dont let me stop you.
Lets see, the DSR was at 11.12% in 1980, and 13.75% today, after twenty five years and the biggest RE bull run in history. The FOR? 8.13% in 1980 and 10.76% today.
Sure, that and 6.25% interest rates and 4.9 months of inventory will launch the biggest economic disaster since the Great Depression. Now, if only those pesky jobless figures and default rates would fall into place
Fundamentals are easy, it's the timing that's the bitch.
Shorting would be easy... if only there were no contract close dates. In that biz missing the timing is missing it all.
In 2002 it did look like a train wreck... but few anticipated the conundrum... the continued flow of funds from offshore keeping rates low... easy money we gobbled up to finance RE & vacations & wide screen TVs.
Those funds are still flowing in keeping rates relatively low... the debt is still building as a result.
This could go on for quite a while longer until something brakes the loop...
Lets see, the DSR was at 11.12% in 1980, and 13.75% today, after twenty five years and the biggest RE bull run in history. The FOR? 8.13% in 1980 and 10.76% today.
What was the interest rates on newly originated mortgages in 1980... about 12%? Something like that. I bought my first home in '82 and paid 11% and rates were declining from their earlier peaks. My frinds all had higher rates.
So today we have interest rates half of those in 1980 and yet debt service as measured by DSRs are higher.
If the Fed keeps raising and I'd guess it will... and considering all the new exotic loan packages... it will get interesting.
Through periods of both higher and lower than current rates, the DSR and FOR have remained remarkably stable, and there is nothing to indicate a substantive change in that save one's own tremulous nature.
If you are waiting for the new Fed to raise rates much more than 0.75%, you will wrinkle up doing so.
the growth is more parabolic if you put it in nominal growth or even real growth (adjusted for inflation).
Because put it this way : with a 4% growth, people should be able to repay debts.
And in fact it's the opposite, debt growth is fueling economic growth.
Another reason why your growth is not parabolic is because you measure it on 5 years by trimester. Make that a 30 year graph with annual numbers and there you'll have a parabolic curve.
May be my first post was not clear enough.
If you truly want a parabolic curve, just compine your two last posts.
Make a debt/GDP growth curve, with GDP growth adjusted without mortage extraction ...
Gift cards have little impact on holiday sales: report
Because those cash register receipts are delayed until January or even later, some analysts and company executives are quick to blame the gift card phenomenon for lower-than-expected December sales, Kozloff wrote.
"Sure, it's an interesting topic in that these plastic cards are changing the gift-giving process somewhat, but as investors, it is the bottom line that counts and here gift cards do not make a material difference," Sanford C. Bernstein analyst Emme Kozloff wrote in a note to clients.
U.S. weekly retail chain store sales up 0.9%
WASHINGTON (AFX) -- Sales at major U.S. retail chains increased 0.9% last week, the International Council of Shopping Centers said Tuesday. Sales slipped to a 3.2% year-over-year increase from 3.5% the previous week. Holiday sales are still on track for a 3% to 3.5% gain over last year, said Michael Niemira, chief economist for the shopping center industry group. "With only 13% of holiday shopping totally completed, the final push will come over the next few weeks," he said
This story was supplied by MarketWatch. For further information see MarketWatch - Stock Market Quotes, Business News, Financial News
For more information and to contact AFX: Home - Thomson Reuters and http://www.afxpress.com
Holiday sales reports rarely the final word
There's something you should know about the recent flurry of holiday retail sales stories: No one knows -- really knows -- how much we're spending this season.
Depending on whose estimates you're looking at, holiday spending is either shattering records or breaking retailers' hearts. That's due to a number of factors: Some estimates of cash-register receipts are better than others. Some rely on shopper surveys instead of hard sales numbers. And electronic-payment trends cloud some of the data.
"I don't think these problems are entirely intentional, but I do think that some of these reports come from organizations that tend to be cheerleaders for the industry in hopes that people will spend more," said Dave Brennan, co-director for the Institute of Retailing Excellence at the University of St. Thomas College of Business in Minneapolis.
I posted something about this, I don't remember how many months ago, but here is a repost of the data portion of it for those interested in debt growth relative to income growth with a longer time frame:
US Personal income, per capita; total IRS collections, per capita; total residential mortgage debt outstanding, per capita; total federal debt, per capita:
1960: $2,283.15\t$507.79\t$779.31\t$1,606.32
1970: $4,082.37\t$950.32\t$1,424.51\t$1,897.85
1980: $10,091.33\t$2,285.73\t$4,215.65\t$4,093.78
1990: $19,225.99\t$4,234.53\t$10,481.65\t$12,961.02
2000: $29,872.19 \t$7,430.81\t$18,156.16\t$20,107.49
2004: $33,077.20\t$6,873.71\t$27,517.96\t$25,128.27
2005: $34,496.54\t ?\t\t$28,677.85\t$26,968.18
(2005q2 only.)
Your Mortgage Debt as % of GDP graph is an amazing metric, but I would really like to see sources. I am not meaning to imply that I think you are purposely misleading anyone... but maybe there is some simple mistake such as this showing the sum of mortgage originations or something. Maybe put "Flow of Funds L.100" or just "economy.com-data buffet" if you have some vendor that you get it from.
If you are waiting for the new Fed to raise rates much more than 0.75%, you will wrinkle up doing so.
It's good you know the 'new Fed' won't raise rates more than .75%... I think it is going to continue to raise some more but I don't even pretend to know how much.
Regardless, with the current conditions of growing debt and flat incomes for middle & low income workers (the bulk of the citizenry) will result in increasing DSRs with or without rate increases by the Fed.
If the Fed were to raise by 3/4 percent more, that would bump fixed mortgages up to 7% or so (ARMs less obviously but not a lot and not for long). My guess is that would be enough to tip the markets.
DFs point about inflation... especially wage inflation... dead nuts right on. In 1982 I got a 20% pay increase that year without even getting a promotion. Unbelievable by today's standards. It made it pretty easy to dig out of debt with that kind of inflation... assuming you didn't go deeper buying stuff that was going up in price almost as fast as your paycheck.
So far we've seen little inflation and what we have seen appears to have by passed wages to a great extent. I don't think debtors can hope inflation will 'save them' like it did those in the 70s & 80s. And if we did see inflation hinting at anything like the 70s & 80s... I'd better get wrinkling fast because the 'new Fed' would blow through that 3/4 percent in no time.
The current debt loads are troubling. The growth of debt is even more troubling.
??
Deflation is an easy bet if history is to repeat itself 30's like.
"I don't think these problems are entirely intentional, but I do think that some of these reports come from organizations that tend to be cheerleaders for the industry in hopes that people will spend more," said Dave Brennan, co-director for the Institute of Retailing Excellence at the University of St. Thomas College of Business in Minneapolis.
Entirely intentional... I love it.
vader, I met Dave Brennan once... St Thomas is where I got my masters... he gave a talk I attended. Interesting guy.
Generally the folks at UST come from business, are very conservative, and are not 'academics'... Yet surprisingly they distrust the corporate 'special interests' as much as anyone. The jab at the 'cheerleaders' sounds exactly like what he'd say.
Interesting link - thanks.
Deflation is an easy bet if history is to repeat itself 30's like.
But if there is anything we know about the 'new Fed' is that Bernanke isn't going to allow 'deflation' if he has any control... I mean that is where the helicopter money stuff comes from... they'll throw money out of helicopters if they have to to avoid deflation.
But that doesn't mean we will have growing output & low unemployment here as a result of all that stimulus... it could end up offshore supporting Chinese over capacity instead (Bloomberg had a great article on that yesterday - output rocketing up & prices falling in China).
I don't know how it will look but I doubt the 30s will be an appropriate model.
I have a "stupid" question about the methodology. "Debt service," is that the interest only or interest and principle? Important because I treat my 30yr fixed as if it were a 17yr fixed. Are the extra $700 of principle part of why my debt service is so high and is this a good thing? Extrapolate this to so many other consumer choices; the loss of most of the consumer interest deduction may have pushed people into HELOCs which in both practice an impact are merely deductible car loans.
i'm also in the dark about how much of the -added- debt is asset backed. We hear about the Hawaiian vacations and such but in my case I will be tapping my HELOC for a new "granny flat" to use as an office as my growing children need another bedroom. I'll probably spend $80k and see the value of the total property rise by double that but it will look like I'm more in debt on this graph.
Like I said, I may be stupid about this but my low HELOC is an opportunity to do the things that need to be done anyway but sooner which is definitely an economic stimulus. I have no idea how much of the added debt burden isn't like my example.
Robert, please see the FED's site for a vague description of methodology for DSR and FOR.
Best Regards.
Will, The Mortgage Debt as % of GDP is from B.100 for the
FLow of Funds (pdf) report, line 32.
GDP is from the BEA.
Household Mortgage Debt was $8.196 Trillion at the end
of Q3.
GDP is running at about $12.6 Trillion annual rate in
Q3.
That gives Mortgage Debt as % of GDP = ~65%.
Best Regards.
Dryfly.
1 Bernanke so far has had a big mouth, but he's not walked the talk. No central banker ever has.
Preventive pro inflation policies remain to be seen.
So far Bernanke is in a team that boosts debt and private money creation, not in a team that boosts helicopter money through public money creation (monetisation of federal deficit by the fed and sterilisation of private money creation).
The % of FEderal money in M1, M2 M3 or just any agregate is still falling.
In short I don't think Bernanke has any control. In the past central banks controlled directly up to 30% of money emission. Now it's below 1%.
2 Trade talks are falling, protectionism is mounting, and China is way down in the overinvestment frenzy. It's easy to see booming China is in a worse shape to face a failing US consumer than booming Germany and USA were to face failing british and french consumers ...
So again, I see no reason to dismiss the 30's.
We have the same past of debt and asset bubble and international trade expansion and the same future of debt and asset based deflation and international trade contraction.
Hey calculated risk, could you mix your two graphs and present debt ratio to GDP without MEW from 1996 onward.
That might be interesting.