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Home Equity Loans Fall of the Cliff

Alan Abelson, in this morning's Barron's, quotes Macro-Maven's Stephanie Pomboy on why the consumer is soon to be spent-out:

"Whatever those worthies were smoking, it must have smelled pretty good because the investment mood until this past week was happily, giddily upbeat. The sentiment readings were almost uniformly bullish. Those blue skies were virtually cloudless: The economy was headed for another solid gain and corporate profits would continue on their merry way. Oh, rising oil prices could be a nuisance, but oil really didn't matter all that much any more. Retail sales weren't exactly robust -- but not to worry, the consumer would come through as usual. Etc., etc., etc.

The trouble with fantasies is that no matter how pleasurable while they last, they leave a distinctly bitter aftertaste when they go "poof." And last week they went "poof." The economy obviously has been slowing, as will be evident when we get the first reading on GDP. Inflation may take an occasional breather, but it's very much alive and malign. And is there any sentient -- or should we say sober -- soul who can't hear the air finally oozing out of the housing bubble?

But sorriest of all is that the greatest consumer buying binge ever is starting to fade. And the reason why can be discerned in that simple but eloquent chart on this page, courtesy of MacroMavens. And what it shows unequivocally is that home-equity loans, which have been one of the great springs of the growth in the consumer-driven economy -- the source, as MacroMavens' proprietor, Stephanie Pomboy, puts it, of the "marginal consumption buck" -- are going south for the first time since the last recession in 2000.

The downturn in home-equity loans, she further notes, is part and parcel of the recent overall sharp retreat in consumer borrowing, which has suffered its first quarterly contraction since the recession of 1991. And credit, she notes, "has come to replace wages as the driver of consumption. Last year, the $375 billion gain in disposable income fell way short of the $500 billion increase in consumption."

Yet Wall Street doesn't seem to care, she observes. It's a bit like the ground is gradually giving way under your feet but you'd just as soon not hear about it."

Couldn't agree more. We addressed the correlation between home prices and consumer spending at RM back on January 10; for those of you w/o subs, I just moved that post here. 

Also, I am compelled to point out that the August 31, 2005 WSJ piece,  Shopped Out? is starting to look pretty good. I took an inordinate amount of grief over that one.

In trying to guess what remotivates the consumer, all I can come up with are these 5:

• Surge in hiring
• Decrease in inflation
• Rise in real wages
• Drop in Gasoline prices
        or lastly
• A cut in interest rates.

Barring any of those of 5 -- or even better, some combination -- I do not see how consumer spending moves appreciably higher any time soon...

Source:
Jihad Jiver
UP AND DOWN WALL STREET 
ALAN ABELSON
Barron's, MONDAY, JANUARY 23, 2006   
http://online.barrons.com/article/SB113780094391852533.html

Saturday, January 21, 2006 | 06:59 AM | Permalink | Comments (25) | TrackBack (3)
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Comments

Many of us bears have been predicting the end of the debt funded boom for some time, but the constant upbeat chant from Wall St. has often made me think, "They can't all be liars, maybe, just maybe, I'm not seeing something that they are seeing."

It seems more and more likely that what the bull spokesmen and financial TV pundits have been seeing over the last year is the prospect of no more pay cheques for themselves, and seeing cheerleading as one way to delay the inevitable.

Posted by: John East | Jan 21, 2006 7:25:31 AM