An excellent read, I'd say Doug summed it up pretty well! <vbg>
mortgage aps, thanks to Les
Message 17360453
and a few lines from ContraryInvestor.com,
As with the previous chart, household debt levels relative to after tax income have accelerated significantly. As we have pontificated a time or two, we believe a crucial characteristic of the current environment is the possibility that refinance opportunities ahead may be at a multi decade low. After possibly the greatest 20 year bull market for interest rates in history, refi opportunities ahead must be nearer a secular low than not. And not just for real estate, but all other forms of consumer credit. Although not totally out of the question, we cannot count on a strong refi mechanism to increase the consumption possibilities of consumer cash flow ahead as has been the case during the past two decades. Once again, this relationship potentially highlights the importance of income growth in the years ahead to further drive consumption. The fact is that no one will ever really know when consumer credit will peak in terms of rate of change relative to consumption until the secular peak for this baby boom generation has already been seen. In the meantime, this economy will be counting on the household to significantly serve two masters simultaneously - present consumption and debt repayment. As you know, unless wanting to face credit and greater financial problems, one of these payments is a must. The other, ultimately discretionary.
We've heard many a time that current household debt service as a percentage of DPI is where it stood near the highs in 1986. The major difference at the moment is that year over year personal income growth in 1986 was growing closer to 6% as opposed to 2+% as is now seen. Likewise, the general level of consumer interest rates was higher at that time, implying that equivalent debt service was occurring on a lower total leverage basis. Lastly, in 1986, the consumer was facing multiple refi opportunities in the decade and one half that was to come. As you can see in the chart, the last time year over year growth in personal income was anywhere close to what is now seen (the early 1990's), household debt service payments as a percentage of DPI was at a two decade low, not a two decade high. Again, reinforcing the importance of income growth ahead as a primary driver for "continuing the games". The games being both further leverage possibilities and consumption.
The following chart is a longer term view of household financial assets as a percentage of DPI. Remember, we have just lived through two decades where the public has accumulated paper in one of the greatest stock and bond bull markets ever seen. And just what do they have to show for it?
Certainly the bear market in stocks has taken its toll on household financial net worth. This is clearly not a new concept. We have reviewed the numbers in each Fed Flow of Funds piece we have written in the past few years. What it does suggest is that as alternative financial assets dwindle in value, ongoing income becomes more important in consumer decision making. Or at least should become more important. Makes it a little tougher to just monetize some unrealized stock gains when a lot of those unrealized gains have melted. We truly believe that if it were not for the recent refi cycle, retail sales would have looked a whole lot different over the past few years.
There you have it. A pretty long winded comparative using personal income as a marker or benchmark. Conclusion? We are very sure that the consumer is going to require accelerating personal income growth to continue the spending, or borrowing and spending, patterns so well established over the last decade at least. Who knows, maybe employers will be more than happy to hand out raises directly ahead. After all, headcount at places like GE Capital (7,000 to go), Corning (4,000 to go) and Novellus (undetermined to go) have shrunk on a pro forma basis over the last week alone. More payroll to go around, right? With relative income comparisons as seen above, it's no wonder every one is shopping at WalMart. |
