The Untold Story of the Tapped U.S. Consumer

Consumer Debt Posts Biggest Quarterly RunOne of the most important lessons I have learned over my investing career is to go back to the basics when I’m unsure about something and see if it all makes sense.

Remember 2007 and the important year it was for the stock market? Investors bought stocks that year without paying much attention to the fundamentals. Then in 2009, the stocks of some of the most well-known companies in the world got punished for no apparent reason; but investors didn’t buy stocks in 2009, because they thought the bottom would fall out of the economy.

Yes, I know the above are two extreme examples of investors being too greedy or too fearful, and thus, they made the wrong investment decisions; but a few years from now, I think we could be looking back at 2014 and making the same comparison.

Here’s what I’m talking about…

These days, no matter where you look, the general census among economists is that the U.S. economy is witnessing economic growth. We hear stock advisors defend their bullish positions with arguments of increasing auto sales in the U.S. economy, jobs creation, and companies posting great profits (all fallacies).

But as I have argued many times in these pages, the U.S. economy is stressed and fragile. Auto sales are strong because we have sub-prime loans for auto buyers coming into play; jobs growth in the U.S. economy has been meek and concentrated in low-paying service jobs; public companies are posting per-share earnings growth because of record stock buybacks; and Americans are increasing their spending by either tapping into their savings or by borrowing money.

Something very important to look at during any economic cycle is consumer income; personal incomes are supposed to increase as an economy improves. But this isn’t happening in the U.S. economy right now! Real disposable income per capita in the U.S. economy dropped to $36,941 in the fourth quarter of 2013 from $37,265 in the fourth quarter of 2012. (Source: Federal Reserve Bank of St. Louis web site, last accessed March 3, 2014.)

Another important economic indicator—the personal saving rate—is also going the wrong way. Between September 2013 and January 2014, the personal saving rate in the U.S. economy has dropped by an alarming 16%. (Source: Ibid.)

In the meantime, consumer debt has been increasing. In the fourth quarter of 2013, consumer debt in the U.S. economy saw its biggest quarter-over-quarter increase since the third quarter of 2007! (Source: Federal Reserve Bank of New York, February 2014.)

It’s quite simple: if consumer debt continues to rise and consumer incomes continue to decline, there comes a point when the consumer won’t be able to return what they have borrowed. At the end of the fourth quarter of 2013, $820 billion worth of consumer debt was delinquent and $580 billion of that was seriously delinquent. In the fourth quarter of 2013, 332,000 Americans filed for bankruptcies in the U.S. economy, very close to the number that filed for bankruptcy in 2012. These numbers suggest the situation in the U.S. economy is not improving!

Dear reader, don’t buy into the mainstream idea that the U.S. economy is improving. The stock market you see making all-time highs is a mirage of economic reality and the final chapter of the 2009–2014 rally will not end well!