Have Americans gone broke?
After years of trudging along, repaying debt and rebuilding credit, U.S. consumers are facing new headwinds.
The evidence is building that U.S. consumers are feeling the pinch once again. They may not want to admit it -- with measures of consumer sentiment remaining buoyant -- but the underlying data suggests otherwise.
None of this is surprising, given the headwinds we face from a combination of stalled job growth, stagnant wages, higher costs for fuel and other necessities, higher taxes, and now, the prospect of furloughs for federal employees as the sequester kicks in.
Households just absorbed their largest hit to income in 20 years as all those end-of-the-year bonuses and dividend payments, designed to get around 2013's higher tax rates, came to an end. The question is: Will the drop continue?
First, it's worth mentioning that American consumers have yet to fully reverse the fallout from the last boom-bust cycle. Household debt loads remain high, by historical standards, as shown in the chart below of the ratio of household debt to inflation-adjusted disposable personal income.
This is because while overall debt levels have been falling slightly (mainly due to mortgage defaults and foreclosures) real disposable incomes have stagnated, as shown below, and will likely get worse as taxes rise and job growth stalls in the midst of a weakening global economy.
Add in the fact gas prices recently set a record high for February, rental housing rates are moving steadily higher, and the relentless rise in health care costs, and consumers are being pinched from all sides.
For now, households are trying to maintain their current spending levels by tapping into savings (pulling down the savings rate to just 2.4%) and are turning to credit again. In fact, household debt increased $31 billion last quarter to $11.3 trillion -- which is only the second quarterly increase since the 2008 financial crisis as credit card balances turned higher.
Unless the job market improves and wages start growing again this is unsustainable. Consumers will soon have no choice but to cut spending and hurt retail sales, which was the one area that kept the economy out of the ditch in the fourth quarter.
I'm not at all confident. And while stocks seem to be in their own reality these days, commodities, currencies, and fixed-income markets are all suggesting trouble lies ahead.
Today's drop in crude oil is especially notable, with the U.S. Oil Fund (USO) gapping lower. I've recommended my clients take advantage via the ProShares UltraShort Oil & Gas (DUG) -- which is in my Edge Letter Sample Portfolio -- as well as the ProShares UltraShort Crude Oil (SCO).
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There are a lot of people who would be broke regardless of how much money they made. I was fortunate to have a father who taught his four children the value of money and how important it was to save first and live below your means. I was in banking for 36 years and can't tell you how many people who completed financial statements and who made $100,000 to $200,000 and more in income who had virtually nothing in savings or retirement but would have $30K tp $100K in credit card debt. The sad thing is this debt was for things used like eating out, vacations, etc.
The worst thing that ever happened to the American middle class was the Tax Reform Act of 1986. - no more deducting interest on credit card debt, auto loans etc. The advent of the Home Equity "ATM" loan. Consumers felt rich using their home equity to live a lifestyle they really could not live. A home use to be something a person purchased to actually own outright and retire in. For many it has become a status symbol to live a fake lifestyle to impress their friends.
Did we run short of metal to make cars? Did a house that was built and sold for 16K back in the 60's all of the sudden turn into gold? Are we out of gas for the cars? what the h*** has changed?
I used to rent a 4 seat cessna for $54 an hour wet, meaning with full tanks. Now it's $155 an hour.
What the h*** has changed? Seems like there's still plenty of plane gas available. Except that it used to be $2.10 a gallon, now it's $6.50 a gallon. What the h*** had changed to make the prices go up on everything? Nothing! Not a D*** thing. Except somebody is making a s***load of it while raping everyone else.
A little history!!!!
Between 1776 and 1912 we had a deflationary economy. If you had a dollar in 1776 that dollar would buy 4 times more stuff in 1912 as it did in 1776. 140 years.
Today it takes 2 dollars plus to buy what 1 dollar would buy in 1912. 100 years.
What happened in 1912 to cause this change? The federal income tax and the federal reserve were created.
Real inflation is about 15% and that is eating up consumer spending. Inflation is the same as a tax.
As a high school sports coach in my 40's, I met another coach in his 60's who had been a well-paid electrical engineer at Westinghouse (now Northrup). He remembered me from my teenage years in the the late 60's when I was working my way through college working at a fast-food restaurant. He would bring his family there every other Friday. THAT was their typical restaurant eating - and the meal was typically a 1/8th pound cheeseburger, small fries and a 12 oz Coke.
A return to that kind of thinking wouldn't be kind to the economy, but we need to start realizing that the current system is contributing to draining the middle and lower classes of their wealth: both because of spending and increasing income inequality unique to the the advanced nations ( for a shocker see: http://www.motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph). Perhaps if the average citizen stops spending, the powers that be will realize the current unbalanced sharing of wealth has redistributed things far too much in the wealthy's favor.
In a society where many care not to be informed, things have changed. Not always how and why we are told. We use to have a National Debt of under a Trillion, now it's well over 16 trillion. We once had news you could somewhat trust, now it's hard to trust any of them. It can cost just as much to buy a used car of the same make an model of a new one because of higher interest cost. The more crude we produce, the more we export it overseas and the less we refine it here via refiner shutdowns to keep supply tighter. Asia is building a ton of refining capacity while our guys are starting to get out of the refining business quoting profit issues. A lot has changed, people just don't seem to want to take the time to find out why.
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All hail the bull market, which ended the week with a big rally. But it also is starting to look a little like 1987, which suffered an epic blow-out.
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