The Market Ticker - Consumer

October Retail Sales / Empire Report

nospam@example.com (Karl Denninger) — Mon, 16 Nov 2009 08:44:00 -0500

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for October, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $347.5 billion, an increase of 1.4 percent (±0.5%) from the previous month, but 1.7 percent (±0.5%) below October 2008.

That doesn't sound so awful, but...

The August to September 2009 percent change was revised from -1.5 percent (±0.5%) to -2.3 percent (±0.3%).

Oops.

building material and garden equipment and supplies dealers were down 15.0 percent (±1.8%) from last year.

Uh, I thought that construction had turned the corner? Uhhhhhh...

The internals are interesting. Cars rebounded from the cratering that occurred in September (expected), while there was a material weakness in Electronics (also expected; back-to-school is now over.) But building materials dropping significantly is a yellow-light warning on the claims that construction and housing have turned. Really? Hmmmm..... yes, I know, seasonality - but remember, permits/starts were claimed to be up. Where's the material coming from?

Food purchases were up, which leads one to question whether the so-called "inflation" numbers are real or not (grocery demand is typically stable - so dollar amount typically translates quite cleanly through to inflation in food prices.)

Ex-autos the gains were about half of what was anticipated. My read on the report is that it isn't a disaster, but the year/over/year comparisons are quite weak - more so than I expected, given that October of last year was well into the "shock collapse" period.

The Empire Index came in significantly under expectations, down to 23.5. Forward expectations, however, remain buoyant. We'll see. One troubling sign is that both prices paid and received are expected to move strongly higher - is that a whiff of "inflation expectations" I smell?

Don't Do It! (Cashing Out 401ks)

nospam@example.com (Karl Denninger) — Mon, 09 Nov 2009 08:44:00 -0500

Grrrrr....

As the last of his severance pay dwindled away in March, Brad Cleghorn of northwest suburban Marengo cashed out his 401(k) plan in order to pay his mortgage and feed his family.

Cleghorn is not alone. A Hewitt Associates study shows that 46 percent of workers with 401(k) plans who lost or switched jobs cashed the plans in, a trend that could lead to serious problems when younger generations of people working today reach retirement.

That's not the real problem folks.

Let me make this crystal clear:

Your 401k or IRA has near-absolute protection in a personal bankruptcy. As a qualified retirement plan it cannot be seized by creditors if you file a Chapter 7 or Chapter 13.

The absolutely worst thing you can do is to cash out those plans. This is not just about sabotaging retirement, although that's serious.

This is the "human face" on the games our government has played with bailing out banks and other big financial institutions. You, "Joe Six Pack", hasn't been helped at all, and bill collectors and others will even "suggest" that you cash in retirement funds so you can pay them!

Don't do it!

Go see a qualified CPA and/or Bankruptcy Attorney. Yes, they'll charge you $100 or so to spend a half-hour going over your circumstances and personal situation.

But it is almost never the right move to cash in a qualified retirement plan to get through an unemployment circumstance, especially given what is going on now with the official policies of our government - policies that have been and continue to intentionally damage the purchasing power of your earnings and savings.

Our nation has succumbed to short-term thinking to an extreme degree. Here is what one of the people said in the article:

"So we made a decision it was necessary for us to keep the lights on, to keep food on the table for the kids. We have to do what we have to do, and whatever penalties we face on next year's tax return, we'll worry about that next year."

Except that your tax hit is due in April. Where will the money to pay it come from? Even if you find another job, will you be able to come up with the penalties and clawback on the tax exemption you got on the gains and contributions? That's unlikely, and yet it will be due in April, and the IRS will come after you if you don't pay them.

Your credit card company will call you incessantly and ruin your FICO score if you don't pay them. Eventually your mortgage company will come foreclose on your house, although these days they're not even bothering with that as most of the time the house isn't worth as much as the mortgage - there are people who are living in their house without making a mortgage payment for more than a year!

But if you don't pay the IRS they will not only trash your credit they will come after you, and they don't play nice. They can and will intercept any refunds you get and even freeze your banks accounts.

Six out of 10 employees in their 20s took the money, compared with one-third of those in their 50s, according to the study.

Six out of ten?!

This is a freaking disaster folks.

Don't do it.

Consumer Credit: Awful

nospam@example.com (Karl Denninger) — Fri, 06 Nov 2009 15:22:00 -0500

Where are my green shoots?

Consumer credit decreased at an annual rate of 6 percent in the third quarter of 2009. Revolving credit decreased at an annual rate of 10 percent, and nonrevolving credit decreased at an annual rate of 3-3/4 percent. In September, consumer credit decreased at an annual rate of 7-1/4 percent.

Yuck.

Here's the graphical representation.

Nothing good in here. The non-revolving flattened out some in September (gee, you think "cash for clunkers" might have influenced August and September?) but revolving credit - that is, credit cards - continues its base jump without any appreciable change in slope.

Here's the longer-term view:

We are a credit-based system, as are all modern monetary systems. No meaningful economic recovery can or will occur until the consumer has purged his balance sheet of the inappropriate debt he has and is once again able to earn and borrow.

If we supposedly exited the recession on or before September, it sure isn't apparent in this report. You can put a fork in that line of garbage - it's done.

PS: The next update of the Z1, due out in a couple of months, should be interesting..... especially the "Ponzi Finance" indicator....

Consumer Confidence? Ha!

nospam@example.com (Karl Denninger) — Tue, 27 Oct 2009 10:27:00 -0400

Gee, this is a green shoot....

NEW YORK, Oct. 27 /PRNewswire/ -- The Conference Board Consumer Confidence Index®, which had declined in September, deteriorated further in October. The Index now stands at 47.7 (1985=100), down from 53.4 in September. The Present Situation Index decreased to 20.7 from 23.0 last month. The Expectations Index declined to 65.7 from 73.7 in September.

The kicker....

In fact, the Present Situation Index is now at its lowest reading in 26 years (Index 17.5, Feb. 1983). The short-term outlook has also grown more negative, as a greater proportion of consumers anticipate business and labor market conditions will worsen in the months ahead. Consumers also remain quite pessimistic about their future earnings, a sentiment that will likely constrain spending during the holidays."

Let me guess - Citibank's decision to jack rates to 29.9% didn't have anything to do with that?

Neither does the gross and outrageous under-reporting of jobless rates by the government?

Neither does the incessant attempts to jack up taxes by state and local governments (instead of cutting spending back to, for example, year 2000 levels)?

Neither does the fact that the very banks who managed to play the "end of the world" card just one year ago, effectively stealing government guarantees and handouts worth some twelve trillion dollars, are now paying record-level bonuses?

Neither does the fact that Bwarney Frank and Chris Dodder are "furious" about the credit card companies rate-jacking people, but they in fact wrote the bill to allow it to happen?

Neither does the Federal Government's outrageous and insane refusal to acknowledge that we have too much debt, including at the federal level, and you can't fix a drunk's problem by giving him a bottle of whiskey?

Many people consider The American People to be "sheep."

It appears that The Sheep have watched a cadre of a dozen foxes (the billions of "campaign contributions") and five sheep holding a vote on what's for dinner, and realized that in such a rigged game the best choice is not to play, kneecapping the foxes' ability to feast.

Beware if your thesis of "economic recovery" requires consumers to "go out and shop", for it is damn hard to do when you have no job, your credit card interest rate was just jacked to 30%, you were laid off yesterday afternoon and you just got a foreclosure notice in the afternoon mail.

Mobile Phone Wars!

nospam@example.com (Karl Denninger) — Mon, 26 Oct 2009 09:13:00 -0400

Verizon reported results this morning:

Profit, excluding severance and other costs, amounted to 60 cents a share, New York-based Verizon said today in a statement. That compared with the 59-cent average of estimates compiled by Bloomberg. Sales rose 10 percent to $27.3 billion, compared with the average $27.2 billion projection.

Yeah, but....

Verizon added 1.3 million wireless customers in the quarter, including customers obtained through acquisitions. That surpassed Fritzsche’s 1.13 million projection. Sales of data services rose 48 percent and accounted for about one-third of customers’ bills. Customer turnover rose to 1.49 percent from 1.33 percent a year earlier.

A bit of hair on that dog - acquisitions tells you nothing about organic growth. The other interesting component is the data services pricing and growth - this has been a push for a long time, and remains so. The surprise is that 1/3rd of customer billings is now data, and that it continues to accelerate.

On the worrisome side is the growth in churn - that's a 12% increase and definitely not going the right way. It's showing up in the internals of the firm's performance too:

Net income attributable to Verizon fell 30 percent to $1.18 billion, or 41 cents a share, from $1.67 billion, or 59 cents, a year earlier.

Verizon said in July it planned to cut 8,000 employees and contractors in the second half, with additional cuts to come in the next few years. AT&T reported last week it had almost 19,000 fewer employees as of Sept. 30 than a year earlier.

I hope Verizon likes competition, because there are two potential cannibalization effects staring them in the face.

The first is "Straight Talk" from WalMart, which is Tracfone's latest foray. It is a "you buy the phone" plan with the price of the phone being anywhere from ~$40-100 (depending on device) with service plans being either $30 or $45/month - the latter being unlimited voice, text message and (on-device) data. There are no contracts - and Tracfone runs on top of Verizon's service as an MVNO (essentially a bucket shop that buys blocks of time and resells.)

In the "more conventional" carrier arena T-Mobile launched "Project Black" Sunday. This is a direct assault on Verizon and AT&T, and comes in two "flavors" - a subsidized contract-style agreement (2 year) as with everyone else where the phones are cheap, and then a second, non-subsidized plan that is $10 cheaper per month.

The "gotcha" here is the non-contract plans for places like Verizon. Now you can buy from a national carrier unlimited talk and text (SMS, MMS) service for $60 - if you bring your own handset. Being SIM based, this means you can buy the phone you want from anywhere, including on eBAY, have no contract commitment (get upset, you leave!) and pay $60/month (plus taxes of course.)

The same plan from Verizon is $119 - twice as expensive.

Yes, you get a handset subsidy. So? That handset subsidy costs you $60/month, or $720 a year! If you want the handset subsidy (and contract) from T-Mobile it is available - for another $10/month.

If you don't need unlimited talk the contrast is still striking. A 1,000 minute plan from T-Mobile on their new plan is $50/month, while the same thing from Verizon (900 minutes, as close as they get) is $80.

Eek.

Now Verizon will counter, I'm sure, with "the nation's largest 3g network." And this means what, when the price is nearly double?

What's even worse for Verizon is what will happen to them when people figure out that "Straight Talk" (sold only at WalMart) offers the same network for $45/month - unlimited use, or $30/month for 1,000 minutes and 1,000 text messages.

Sprint started this price war several months ago with their "unlimited everything" plans in an attempt to halt what had become arterial bleeding in their subscriber count. It doesn't appear to have worked all that well, but it has put incredible pressure on the other carriers, with the MVNOs (Straight Talk, Boost, etc) coming at everyone from the bottom end and now T-Mobile coming at them from the "nationally-recognized carrier" side.

I can't get excited about Verizon, given the pricing realities.

The question for T-Mobile is whether they can build out enough 3G capacity to matter. I've been a customer of theirs since 2000, and one of the maddening realities of their service is that in many areas their data is still GPRS (~40kbps), even though EDGE (~160kbps) is only a software upgrade and backhaul capacity improvements. Yet despite EDGE being available essentially nationwide on AT&T for several years, T-Mobile has simply refused to put the (relatively small) amount of money into that network upgrade. When you're in a 3G service area (which isn't much of the landmass, but does cover a fair number of people) the higher speed is nice - but the fallback once you drive outside of a major city is severely disappointing.

Data service is nice and profitable for the operators, but how much monetization of their claimed "best network" Verizon can accomplish given the pricing pressure is another question entirely.

I'd stay away from all of the carriers right now - placing bets in an industry where price wars are active is a dangerous game, as it is difficult to determine what the internal cost structure of the various players really look like, and therefore, who can wield the longest knives and yet not cut their own throat.

Disclosure: No position.

Consumer Credit: Disaster, Down $12 billion

nospam@example.com (Karl Denninger) — Wed, 07 Oct 2009 15:24:00 -0400

*U.S. AUGUST CONSUMER CREDIT WAS FORECAST TO DROP BY $10 BILLION
*U.S. AUGUST NON-REVOLVING BORROWING FALLS BY $2.07 BILLION
*U.S. AUGUST CREDIT CARD, OTHER REVOLVING DEBT FALLS $9.91 BLN
*U.S. JULY CREDIT FALLS $19 BLN, REVISED FROM $21.6 BLN DROP
*U.S. AUGUST CONSUMER CREDIT FALLS $12.0 BILLION, FED SAYS

Without "cash for clunkers" it would have been significantly worse of course. Best guess non-revolving would have been down close to $10 billion, so roughly equal to July.

There's no possible good way to spin this. There is no sign that credit expansion has reappeared, there is no sign that we have seen a turn in employment, and there is no evidence that we are seeing real improvement in final demand.

To those who have said that "the recession ended this summer", how do you make that case when the consumer is not spending? When credit continues to contract even with programs like cash-for-clunkers?

This is not a "trivial amount of money" either, especially when one considers that historically this has been positive by roughly the same amount, meaning that the swing is roughly double that, or about 2% of GDP.

The real economy is effectively dead. What's worse is that the idiots at The Fed the Washington are still refusing to force the insolvent to take their marks and clear the credit markets.

As a consequence there is no meaningful evaluation of what constitutes a reasonable credit risk being made - the answer is simply "no" both for borrowers and lenders, as borrowers (correctly) see a deeply deteriorating economy while the government continues to lie.

This is not how to build confidence, yet confidence is everything. Confidence that the numbers you see printed every month in statistics are truthful. Confidence that when things suck, you'll be told they suck so you can prepare and try to do your best for your family, your employees, and your friends.

Instead we keep hearing cries of a false dawn, but these cries are not errors - they are intentional acts designed to do the same thing George W. Bush did after 9/11 - "Go out and SHOP!"

What the government and media crooners forget is that you rarely get to screw the same person more than once, and unlike the circumstances of the 1930s, the people who got hosed in 2001 are still alive and remember it.

Wake up folks; there's a hard rain coming and it's time to put up the storm shutters.

Reality Strikes In Retail?

nospam@example.com (Karl Denninger) — Tue, 06 Oct 2009 08:57:00 -0400

The National Retail Federation threw some cold water on the holiday:

WASHINGTON--(BUSINESS WIRE)--The National Retail Federation today released its 2009 holiday forecast, projecting holiday retail industry sales to decline one percent this year to $437.6 billion.* While this number falls significantly below the ten-year average of 3.39 percent holiday season growth, the decline is not expected to be as dramatic as last year’s 3.4 percent drop in holiday retail sales nor as severe as the 3.0 percent decline in annual retail industry sales expected for all of 2009.**

No, really? Gee, who saw this coming?

On the Pearl River Delta, China's major export base, orders at many shoemakers were already low as the situation has gone from bad to worse. According to China Business News, a European customer's sudden cancellation of an order for original high-end shoes at an unnamed company might cause that company's bankruptcy as it has already bought materials and entered production.

And what foreshadowed this report? Why this Ticker and the article that spawned it.....

Remember, this is the time when Christmas goods are on the way. You can't order something from China, have it produced, and then have it sent in a ship in a week. Uh uh. Those goods have been ordered now, they are in the pipeline for delivery now, or they're not coming.

They're not coming.

Flat to down 1% is insanely optimistic folks.

"Hoofs on the ground" say its even worse than that.

The facts are that in order to get product here you have to order it and it has to be manufactured. There is simply nothing to indicate that final demand, which is the ultimate arbiter of whether the economy is turning around, has begun to swing upward.

The problem remains clogged credit systems, which cannot be unclogged until the defaulted debt and fraudulently-inflated asset valuations are recognized for what they are and written down to actual value, forcing those defaults through the system and clearing the excessive debt load.

But every action our government has taken thus far has been hell-bent to do exactly the opposite - "extend and pretend" - in the hope that a magical fairy will appear and make it possible for borrowing to restart.

The error in this approach is that credit demand requires that there first be an unpledged asset that one can post as security.

But most of the assets are not only encumbered, they're underwater.

Oops: "Pulled Forward" Demand Really IS False!

nospam@example.com (Karl Denninger) — Wed, 16 Sep 2009 16:54:00 -0400

"I told you so"

Sept. 16 (Bloomberg) -- Chrysler Group LLC, the U.S. automaker run by Fiat SpA, said nationwide industry sales are off 19 percent so far this month after a government purchase- incentive program ended.

“We are going to see harsh reality in September,” Sergio Marchionne, the chief executive officer of Fiat and Chrysler, said at the Frankfurt Motor Show. He described the U.S. industry results as a “disaster.” Fritz Henderson, CEO of General Motors Co., said the market is “very weak” this month.

Disaster eh?

But but but I thought all those "cash for clunkers" buyers were people who wouldn't have bought a car otherwise?

Looks like that was a load of BS out of the administration.... just like all the other so-called "stimulus" programs.

Just another example of pulling forward demand, which works exactly once per application, but then leaves a gaping, sucking hole where demand would have been in the subsequent months.

PS: Expect them to try some sort of BS similar with the expiring "Home Clunker" $8,000 rebate program that is ending in a couple of months. The two problems with it are the same as the problems here - the consumer is tapped out and can't afford to buy (witness the FHA default rates in excess of 20%!) and those who DO buy anyway find themselves in a financial position they cannot really afford and didn't think through.

In addition you further drain the demand pool and thus when the "stimulus" ends (and all must eventually end) you find yourself with no real buyers left!

All this faux "demand" being generated by the so-called "stimulus" is just doing more damage to the economy - damage that is accruing and will come to the surface with devastating effect.

60 Day Insurance-Only Lease Program (GM)

nospam@example.com (Karl Denninger) — Tue, 15 Sep 2009 12:34:00 -0400

Since our nation is now one of grift, fraud and corruption, reaching to the heights of our government including Congress and certain "favored" organizations, I am coming around to the idea that individual consumers should avail themselves of every opportunity to act exactly like Wall Street and Congress!

Specifically, you can drive a brand new car for the price of insurance only for 60 days.

All you have to do is buy a GM car and be "dissatisfied" with it between 31 and 59 days after the purchase.

Don't trade in another vehicle, and you'll have to pay the registration fees, but even sales tax is refunded.

You can't wreck it, you can't lease it, you can't put more than 4,000 miles on it (in two months that's unlikely), you can't have more than $200 in damage to it, you can't trash it and you must provide insurance for it but heh, this is a hell of a deal - and a real economic stimulus.

After all, driving a free new car for two months is a real "steal", right?

That beats HERTZ on a per-day basis by a country mile, no?

The Consumer Credit Game Is OVER

nospam@example.com (Karl Denninger) — Thu, 10 Sep 2009 13:19:00 -0400

We recently got an updated G.19 from The Fed that contained "revised" consumer credit numbers that showed the top in consumer credit (all but mortgages) was in fact in July of 2008, not January of 09 as previously reported.

This morning the US Census released its update with per-capita income numbers for 2008 being released.

Here's the updated "big picture" chart - click for a bigger copy, and please note that I have updated the file repository, so Tickers from the previous couple of weeks that used this "benchmark" chart will update as well.

* Chart note: The Federal Debt and Consumer credit numbers are updated as of 9/10/09; all other figures are as of 12/2008 as 2009 numbers are not yet available in comparable formats.

Let me be crystal-clear so nobody can say later they weren't warned: If any part of your economic thesis going forward requires that consumer borrowing expand in order to foster economic growth you are wrong and everything you believe that depends on that is also wrong. Further, any belief that per-capita income has not SHRUNK from the flat-lined 2006-2008 levels in 2009 is also wrong, although the Census numbers for 2009 will not be out until September 2010.

This chart shows you clearly what happened and why we cannot simply borrow our way out of the box - despite unprecedented decreases in Fed Funds and unprecedented "liquidity programs" all of mortgages, consumer credit and household assets either flat-lined or fell dramatically while at the same time there has been effectively no growth in per-capita income.

In other words we hit the wall even through the cost and availability of funds received unprecedented "support" from both the government and Federal Reserve.

There is no more borrowing capacity among consumers as a group. Contraction of this magnitude and rate-of-change is NOT occurring by choice; consumers are being forced to either pay down or default debt they cannot afford to carry. It is no longer possible to expand outstanding consumer credit - that is, we cannot "pull forward demand" any longer, as the consumer's per-capita income, even with short-term interest rates at ZERO, is insufficient to support further credit issuance.

The Greenspan gambit to avoid a "Kondratiev Winter" has failed.

Mr. Greenspan is said to have once remarked during the 00-03 market implosion that this was indeed exactly what he was trying to prevent, strongly implying that he was well-aware of where we were in the credit cycle (that is, he had the up-to-2000 version of the above chart and understood it) and that should he fail the results would be catastrophic.

I cannot verify that conversation took place (and I've tried), but it does make sense - after all, Greenspan may be many things, but stupid isn't one of them.

We have continued to pretend that the above graph does not represent reality. We have shifted borrowing from citizens to the Federal Government in a (futile) attempt to keep the credit-expansion game going. It can't and won't work - the evidence is, at this point, irrefutable that what I laid forth as our destiny in 2007, like it or not, is occurring.

The character of what was attempted in 2000 is obvious from this chart: Boost borrowing against homes and by the government. When the home borrowing scheme failed and started to self-destruct The Federal Government has attempted to pick up that piece as well, a trend that is clear starting in 2007 and has continued since.

There is no way out of the box via this method; we are in fact headed for a sovereign credit, monetary system and thus GOVERNMENT failure if we don't stop! WE MUST accept a contraction to sustainable levels of economic activity and STOP trying to substitute for consumer demand with government borrowing or we WILL witness the collapse of our governing funding model when those who loan the government money realize that the US consumer is INCAPABLE of resuming their former credit-expansionist way of life.

Do not be fooled by the talking heads on TV - the above graph proves what is really going on and what is at stake. It is not possible to "restart" credit demand among consumers as we have failed in our efforts to boost consumer income, the means by which one pays debt. The consumer has hit the wall as ever-increasing demands on income for the necessities of life - the price of which (food, fuel and medical care in particular) has risen much faster than their income and they are trapped.

At the same time the claims of "lower interest rates make it easier to pay debt" have been proved false. Interest rates on consumer debt have gone up, not down, as banks have effectively stolen the lower short-term funding rates to paper over and hide their losses while raising interest rates on consumer borrowing. At the same time the housing bubble was formed during a time when long-term borrowing rates for consumers (mortgages) were at or near all-time lows, and as a consequence there has been no meaningful relief there either - nor can there be.

Finally, the insane ramp in Federal Borrowing has resulted in a precipitous decline in the value of the dollar - a decline that is now threatening to become disorderly.

In other words, policy actions have had and will have no impact on the group that must recover for a durable economic recovery - the consumer - as those lower borrowing costs either can't be or haven't been passed through but instead are being STOLEN to cover up bank insolvencies and are CAUSING upward pressure in the price of necessities.

Nobody in the "mainstream media" is talking about this chart but it is in fact the key to literally everything. The market has been on a tear since March precisely because the banks have been able to cover up their insolvency and are gambling with that Federal "put" to them but in doing so they have further damaged the consumer's balance sheet. Not only have interest rates spiked higher on consumer revolving credit (credit cards) but in addition the banks have plowed money into commodities (oil in particular) doubling its price over the last few months and putting a further twist on the thumbscrew of consumer budgets via gasoline prices!

This is now showing up in the outstanding credit numbers - the consumer's balance sheet and health is deteriorating fast as consumers simply are unable to afford their existing debts, say much less taking on any new ones. There is zero evidence of stabilization in this regard, irrespective of Geithner's claims to the contrary.

Ignore the above graph at your own considerable peril.

And So It Begins (Debtor's Revolt)

nospam@example.com (Karl Denninger) — Wed, 09 Sep 2009 08:23:50 -0400

Without comment..... none necessary - she's spot-on, in my opinion, and if you, through no fault of your own (you're NOT a deadbeat) have had this happen to you, then I fully support doing exactly what she is - tell 'em to get stuffed.

Do realize that civil disobedience has consequences, but it also brings a huge breath of fresh air into your life!

I have been contacted by a couple of people who claim that various institutions have mis-reported accounts as "over limit" when they are not, or who have cut lines to the outstanding balance without notice, waited for one more charge to go through (which they honored), reported that account "over limit" and then used that as justification to jack interest rates to a "penalty" rate.

I am assembling evidence for an "expose-style" report on this practice.

If you have proof of such shenanigans and are willing to provide it to me please contact me through the email links at the bottom of this page.

Is The Light Flickering On?

nospam@example.com (Karl Denninger) — Thu, 03 Sep 2009 12:58:00 -0400

Article in the WSJ regarding college costs....

New numbers from the U.S. Education Department show that federal student-loan disbursements—the total amount borrowed by students and received by schools—in the 2008-09 academic year grew about 25% over the previous year, to $75.1 billion. The amount of money students borrow has long been on the rise. But last year far surpassed past increases, which ranged from as low as 1.7% in the 1998-99 school year to almost 17% in 1994-95, according to figures used in President Barack Obama's proposed 2010 budget.

Oh oh. 25%?!

Also, the rising levels of borrowing may ironically be contributing to the accelerating cost of college, say some college-finance experts. Loans can give colleges an artificial sense of a family's ability to pay tuition. To some extent, that false sense of security gets built into the assumptions schools make when setting prices, say experts. The idea is that as prices rise, families borrow more and more, spurring prices to rise further, which in turn requires more borrowing. Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, says this phenomenon is playing a role in why tuition grows at about twice the rate of inflation. "Instead of imposing tougher choices" on college costs, he says, it's "easier to raise prices...because this additional loan amount is made available."

Really?

Anyone need to see the "rate of change" graph again? Oh sure, why not:

Just so it's clear what this graph represents - it is a straight numerical plot of both population (blue line) and total outstanding consumer credit (consumer borrowing, including student loans, but not including mortgages secured by real estate nor any commercial and industrial borrowing such as bank debt issuance, corporate finance, etc), with both "starting points" set to the same origin in 1970 through the use of a simple divisor on the credit number sequence (red line.)

How do you think that the average house price (inflation adjusted) went from $65,300 in 1970 to $119,600 in 2000 (latest available in this inflation-adjusted series)? Why has the average price of a car gone from (not inflation adjusted) $3,176 in 1970 (Ford Galaxie 500) to $17,499 (Toyota Camry)? Why has college increased in price at far more than inflation? Medical care?

You can go on and on and on - the fact of the matter is that "easy credit" - the ability to "pull forward" demand and make people feel "wealthier" than they really are results in a price spiral that then feeds back into a demand for even more credit.

The result is on display up above, and while this seems a dandy idea for a while the fact remains that all such schemes like this are in fact Ponzi schemes.

All Ponzi Schemes mathematically will collapse; we are only arguing over "when."

So as your kid goes off to "higher education" this fall make sure you consider that by allowing this charade to continue in signing that "federal financial aid" form (FAFSA) you are in fact indoctrinating your young adult in the meme of Ponzi Finance, as well as supporting your "higher education" institution in practicing a mathematically and ethically bankrupt form of it.

When you apply for that $8,000 "tax credit" to buy a new house or the $3,500 "cash for clunkers" stimulus you are likewise engaged in the promulgation of Ponzi Finance in the desperate attempt to find just one more sucker in a long (nearly 40-year long!) line of suckers that has pumped our economy not through organic growth but through an out-and-out pyramid scheme layering debt upon debt.

Realize this folks: If I or anyone in private business ran a Ponzi Scheme like this we would do 20 years of hard time. The government, on the other hand, has been and is running literally thousands of these schemes all predicated on Ponzi Finance, all tied back to The Fed and banking non-regulation, and all of which would be FELONIES if practiced by purely-private citizens or enterprises.

Folks, we are at the end of this rope. Students are literally coming out of college with more debt than they can ever reasonably hope to amortize over their working lives, making their education a negative net equity position - that is, a guaranteed losing investment. This is out-and-out fraud committed upon our young adults by the millions each and every year, and you're a part of it.

CFC and "Homebuyer Credits" are the same thing - the auto dealers loved it, of course, as supply tightened and they simply screwed you with a higher price. But in fact you got screwed three times - you almost certainly overpaid for the car outright, you indisputably overpaid for the car if you financed it (when one considers the interest paid over the life of the loan) in addition and you got rid of your paid-in-full and cheap-to-operate vehicle and saddled yourself with more debt - yet another building block in the Ponzi Finance wall.

The accumulation of pain that we continue to pile up by doing this cannot be avoided through even more leverage - even more credit. It cannot, in fact, be avoided at all. Each and every machination intended to delay the recognition of the damage that must come simply accumulates more and more harm that our economy must and will recognize.

Back To School? Where?

nospam@example.com (Karl Denninger) — Tue, 01 Sep 2009 08:18:59 -0400

Uh, what back-to-school sales?

That's nasty - one week before school starts in most of the country, and both weekly and year-over-year changes are deeply negative!

Note that the week/over/week change was expected to be strongly positive, which correlates well with the "back to school" surge.

No dice - that's a miss of 1.1%, enormous by any standard.

The reason is simple: The consumer is tapped out.

Those "green shoots" are in fact hallucinogenic weeds.

Government (And Car Dealers) Hose You Again

nospam@example.com (Karl Denninger) — Tue, 25 Aug 2009 13:11:00 -0400

This is hilarious:

But many of those cashing in on the clunkers program are surprised when they get to the treasurer's office windows. That's because the government's rebate of up to $4500 dollars for every clunker is taxable.

"They didn't realize that would be taxable. A lot of people don't realize that. So they're not happy and kind of surprised when they find that out," Nelson said.

The amusement here is how most (if not all) states compute sales tax (charged when you register the vehicle.)

When you buy a new car you pay tax on the difference between the new car's purchase price and the trade-in you present to the dealer. This is an intentional distortion in the law that is intended to favor dealers over private-party used car sales; if you sell your used car privately the new buyer pays sales tax but you do not get the offset on the purchase of your replacement vehicle - the only way to get that is to trade the car.

Dealers use this, of course, in negotiations, effectively pocketing the sales tax - and why not? It's a real difference to you!

But the "cash for clunkers" is not a trade-in. That's a $4,500 check from the government, basically.

So you get nailed at least once and possibly twice. Specifically, you pay sales tax on the full vehicle price (effectively paying sales tax on the $4,500!) and what's worse those states that tax income (that would be most of them!) might wind up counting this as income for state income tax purposes too, effectively taxing you twice.

I should have probably done a Ticker on this originally, but I (naively) believed that most people understood how the tax system works when it comes to new and used car transactions. Apparently, from the referenced news article, this is not the case, and I bet the car dealers, incredibly ethical people that they are, were fully informing their suckers, er, clients of this little "feature" of that government handout too.

PS: I have also received several emails informing me that dealers had customers so giddy over the "free cash" that they were selling cars at full sticker price besides - effectively, in many cases, turning the entire "cash for clunkers" money into pure dealership profit and managing to charge you tax (twice) on it as well. Ain't car dealers grand (several grand out of your pocket, that is!)

August Confidence and Richmond Fed

nospam@example.com (Karl Denninger) — Tue, 25 Aug 2009 10:25:00 -0400

Let's start with the confidence numbers:

The Conference Board Consumer Confidence Index ®, which had retreated in July, rebounded in August. The Index now stands at 54.1 (1985=100), up from 47.4 in July. The Present Situation Index increased slightly to 24.9 from 23.3 last month. The Expectations Index improved to 73.5 from 63.4 in July.

Nice spike. But let's look inside the numbers:

The proportion of consumers expecting an increase in their incomes increased slightly to 10.6 percent from 10.1 percent.

That's the key "inside number" in the index; with only 10% of consumers expecting an increase in their personal income, and a tiny change internally, expecting major shifts in consumer spending behavior (necessary in order for the economy to rebound) is fanciful.

The Richmond manufacturing index was expected to rise to 16 from 14, but didn't - it instead came in flat. The Philly Fed index, of note, did rise dramatically (reported a few days ago) but one must wonder what people are smoking over there, given the Philly CITY budget problems and their lack of a prospect for fixing them. Richmond tends to be a decent index against national activity, and it remains in the dirt.

I remain convinced at this juncture that unless something major changes in actual employment and personal income over the next three months that retail will be absolute disaster come this holiday season, and that will put the spike in the heart of those claiming "green shoots", along with the collapse in both autos and home sales given the expiration of both "Cash for Clunkers" and the $8,000 home-buyer credit.

Both have pulled forward demand and attempted to continue the Ponzi debt-accumulation bubble of claimed "economic gains." Neither of these programs, however, has or will produce durable changes in economic activity.

As I have pointed out repeatedly history on this point is clear: You can pull forward demand with such programs, but you cannot create true economic progress. The "Drive America" 2001 0% financing bubble urged by the Bush Administration arguably caused the failure of both Chrysler and GM by pulling forward demand and conning both firms into producing cars at a twenty million unit annual run-rate. This in turn created a need to allow 100%, 120%, even 150% "rollover" financing which took the place of 0% interest once that expired, which created monstrous embedded and inevitable losses for these firms when the consumer hit the wall on ability to pay.

If we had learned ANYTHING from the 2001-2006 debt bubble it should have been that such "programs" make the inevitable collapse WORSE.

But we learned nothing - absolutely nothing - from the mess, and indeed are instead trying to once again replicate the stupidity of 2001-2003!

It won't and can't work folks.

Fasten your seatbelts: The road ahead has a NASTY dip just around the corner and while there are 60 of you on this bus there is only one door, five parachutes, and the Goldman Sachs guys up front near that door are not wearing knapsacks.