This from an email Ron sent Dan on Tuesday after the market closed (hat tip, The S&A Digest ):

Source: Investment News Briefs Thursday, July 9, 2009

This from Money Morning:

U.S. consumers are already losing their jobs at an accelerating rate.

The same thing is now set to happen to their credit lines.

But with so many Americans already losing their main source of income – their jobs – at an ever-spiraling rate, will an economy that derives two-thirds of its power from consumer spending end up mired in its worst funk in decades because those same consumers are now losing their charge accounts?

Before you dismiss the possibility, consider this: The U.S. economy weakened across all regions since the middle of October as it became tougher to get loans and demand for credit shrank, the U.S. Federal Reserve said in its regional economic survey report yesterday (Wednesday). The so-called “Beige Book” report – published just two weeks before central bank policymakers are to meet and consider interest-rate changes – said that retail sales, tourism spending and manufacturing declined in most places, labeled housing markets as “weak” and concluded that the commercial real estate sector “weakened broadly,” Bloomberg News reported.

“We are looking at an economy that is not only in a recession, but a recession that is deepening rapidly,” former Fed Governor Lyle Gramley, now senior economic adviser at Stanford Group Co.,
told Bloomberg Television. “It certainly is a gloomy report, but not, I guess, worse than what you would expect given the data [we’ve seen] coming in.”

The United States has already been in a recession for a year, the National Bureau of Economic Research (NBER) reported this week. This economic one-two punch could generate a much-bigger financial crisis “aftershock” than many experts realize. Only two of the last 10 recessions to take place since the Great Depression have lasted a full year. But this one could last well into 2010.

$2 Trillion in Credit Lines on the Chopping Block

More than $2 trillion in consumer credit could be cut in the next 18 months, as credit-card companies pull back credit lines in anticipation of credit funding problems and regulatory changes, said Meredith Whitney, an Oppenheimer Holdings Inc. (OPY) banking analyst who’s well-known for her gutsy and prescient (and ultimately correct) market calls.

Throughout the week, Whitney has warned that the entire mortgage market will contract for the first time ever in the months ahead. More importantly, however, Whitney says the credit card market will be 18 months behind, as credit-card companies pull back more than $2 trillion in credit lines, taking away consumers’ second major source of liquidity, following jobs.

“What you haven’t seen yet digested by the market is banks pulling lines from consumers,” Whitney said in an interview with CNBC. “And across the board you saw the big banks that command so much of the market share of key products like mortgages and credit cards start to pull lines in the third quarter and that’s going to continue in the fourth quarter. And that’s going to continue into 2009.”

Although some experts note that consumers reduce their spending during recessionary periods — and, needless to say, after they lose their jobs — it’s important to not confuse spending and credit. During dire times, many consumers can boost their use of credit even as they cut overall spending, using the credit cards, home-equity lines and other forms of borrowing as a lifeline to tide them over. For those consumers, a credit line cut can be disastrous personally, and can aggregate into an even-steeper downturn in spending.

Roughly 70% of U.S. households have access to credit cards, and 90% of those people use those credit cards as a cash-flow management vehicle, or revolve payments at least once a year, Whitney says.

A surprisingly small number of national companies dominate the major lending arteries – including credit lines, mortgages and credit cards – that have sustained the U.S. consumer for so long, including mortgages and credit cards. Mortgages have already hit a wall with the collapse of the U.S. housing market and wave of subprime defaults. But credit cards could be next as companies raise interest rates, tighten lending standards, cut credit lines, and even close millions of accounts in an effort to insulate themselves from consumer defaults.

Bank of America Corp. (NYSE:BAC), Citigroup Inc. (NYSE:C), and JPMorgan Chase & Co. (NYSE:JPM) – which controlled more than half of U.S. credit-card lines at the end of the third quarter – have all discussed reducing their credit-card exposure or scaling back growth, according to Whitney.

“You’re going to start to see the consumer get really strained on their credit card lines,” said Whitney. “People think the next shoe to drop is the credit card credit costs – the charges going up. No, it’s the credit card lines being pulled by bank lenders in anticipation of worsening credit funding problems, and then regulatory changes on the horizon.”

Whitney expects the credit-card market to begin to shrink by mid-2010, a time when the unemployment rate could be as high as 9.0%.

“Just when the consumer is losing their job that’s their first source of cash, their first source of liquidity, then they lose their second big source of liquidity, which is their credit card line,” she said.

Indeed, as unemployment rises, so too will credit-card delinquencies. David W. Nelms, chief executive of Discover Financial Services (DFS), told Reuters that card write-offs could be in the mid-5% range in the fourth quarter and near 6% in the first quarter of 2009.

Delinquencies “will tend to track with unemployment,” Nelms told Reuters after a speech to the Executives Club of Chicago. “Most agree that things will tend to get worse next year.”

Lenders, still reeling from losses tied to subprime mortgages, can’t afford another round of defaults on credit cards. So they’ve begun pulling lines of credit, leaving the consumer out in the cold. And it’s only going to get worse, Whitney says.

Crisis Expert Sees Change in Consumer Psychology

Investment expert R. Shah Gilani – a retired hedge fund manager who’s been chronicling the credit crisis as a Money Morning contributing editor – isn’t surprised by Whitney’s predictions.

“This is already happening in a big way,” Gilani said referring to Whitney’s assertion that credit lines have been put in jeopardy. “I have already talked to people who have had their credit lines reduced, even cut in half. So I wouldn’t be surprised if $2 trillion turns out to be an accurate figure.”

And according to Gilani, the evaporation of $2 trillion in credit could be the death knell for the American consumer.

“A number that high makes you gasp, just considering the quantitative effect on consumer spending,” Gilani said. “There’s a strong chance that the American consumer is not just down on the canvas, but has been knocked out of the ring.”

American consumers cut spending by 1% in October, the biggest drop since the last recession in 2001, the government said last week.

U.S. retail sales plunged 2.8% in October – the largest monthly drop since the Commerce Department began tallying monthly retail sales in 1992. The sales drop marked the fourth consecutive monthly decline and the first retrenchment since 1992. And few have any hope left for the Christmas season as consumer confidence is also waning. The Reuters/University of Michigan consumer sentiment index clocked in an ultra-low 55.3 for November, down from 57.6 the month before.

The reading fell well short of the projected 57.7, Reuters said, and – even worse – had deteriorated since the middle of the month, even though lower gasoline prices were seen as a bright spot for consumers. The University of Michigan confidence index dates back to 1952. Its record low was 51.7, which it hit in May 1980.

Once again, jobs, liquidity and confidence were the key issues, the survey report said.

“Consumer confidence fell in the last half of November due to mounting job losses, falling incomes and the evaporation of household wealth,” the report said. “Consumers were unanimous in their recognition that the economy was in recession, and nearly three-in-four expected the recession to deepen in the months ahead.”

However, Gilani, who is also editor of the Trigger Event Strategist – a trading service specifically designed to help investors maneuver through this economic malaise – also believes that what investors are witnessing is yet another “aftershock” of the ongoing global financial crisis.

“What is actually taking place is a shift in consumer psychology that has been driven by factors such as the socioeconomic climate – as well as the environment – and that’s now being compounded by credit conditions,” Gilani said. “This is about banks and credit companies de-leveraging and forcing the American consumer to do the same.”

The trouble is, he said, this can become a cycle that’s hard to stop once it takes hold.

“Whether Americans have lost confidence in the market or simply can’t afford to repay loans, money flows have simply dried up” Gilani said. “So banks have been forced to raise their lending standards to a point that many Americans are now unable to meet. It becomes a vicious cycle.”

PS. This is an excerpt from the latest installment in Money Morning series on the “financial aftershocks” of this crisis.

Source: Will the Loss of Consumer Credit Serve as the Next Economic Aftershock to Further Fuel the Financial Crisis?

As such, last week’s report showing that consumer credit grew by $15 billion was widely heralded as proof of America’s economic strength and resilience.

The reality is very different, however: We’re already suffering from the after-effects of too much debt, meaning that our salvation cannot be found in more of the same.

Death by a Thousand Charge Slips

Credit card debt, which now stands at whopping $957 billion nationally (approximately $3,000 for every U.S. citizen) has, in recent years, taken on a different role in the life of American consumers.

In the past, credit cards were used primarily to purchase big-ticket items, enabling consumers to spread the costs out over many months, making goods a bit more affordable.

Now, however, charge cards are increasingly being used to bridge the gap between cost of living and the diminishing purchasing power of Americans who have been taxed mercilessly by inflation. By buying with available credit instead of unavailable cash, consumers are not simply postponing the pain of higher prices, but compounding it by packing interest expenses into the costs of everyday purchases. In addition, as home equity credit is now unavailable to fund large purchases, many consumers are turning to non-deductible, higher-cost credit card debt as their last remaining lifeline. As such, credit card debt compounds steadily, and for many borrowers, becomes increasingly impossible to pay down.

The statistics tell the tale. According to Equifax Inc. (EFX) a credit card analysis firm, people have been buying more with their credit cards but paying down less. As a result, average balances jumped nearly 9% in 2007 and delinquency rates recently hit a four-year high of 4.5%.

Also, the reliance on credit cards is preventing some of the market’s salutary forces from working. With credit always an option, domestic demand remains strong – despite rising prices. Absent the option of putting more costly gasoline on their credit cards, Americans might have actually been forced to cut back on their fuel consumption, taking some of the upward pressure off gas prices.

It should be painfully obvious that expanded consumer credit is actually evidence of deterioration – not improvement. Unfortunately, when it comes to understanding the economy, there is little common sense on display. By going even deeper into debt just to make ends meet, American consumers are digging themselves, and our entire economy, into an ever-deeper economic hole and laying the foundation for the next major credit debacle. It’s fitting that just as both U.S. Treasury Secretary Henry M. Paulson and JP Morgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon declared that the worst of the crisis has past, we are on the verge of kicking this credit mess into a much-higher gear.

My guess is that many Americans continue to run up massive credit card debt because they have little intention of ever paying it off. Since many who are underwater on their home loans, and behind on their auto and student loans, too, see bankruptcy as a foregone conclusion, they see no reason not to just go ahead and pile on as much debt as possible while the taps remain open.

Those choking on credit-card debt may also be taking cheer from the gathering government campaign to bail out over-leveraged homeowners. The sheer numbers of consumers who are afflicted with spiraling monthly payments will make credit card relief a potent political issue for crusading congressional and presidential candidates. After all, there are few fundamental differences between those who borrowed too much to buy houses and those who made the same mistake with consumer goods.

If the government bails out the former, then why not the latter, as well? In fact, one reason some homeowners have such large mortgages is that they consolidated their credit card debts into their mortgages each time they refinanced. Why should renters be forced to pay off their credit card debts while homeowners get to have their debts forgiven?

It’s certainly a fair question.

But it may also be moot. Soon, as credit-card delinquencies rise – and losses on pools of securitized credit card debt mount – those supplying the credit will finally get wise to the fact they will never get their money back. As a result, the market for such debt will dry up even more quickly than did the market for subprime mortgages. Credit cards will therefore be much harder to come by and will have much lower limits then they do today. Limited to only the cash in their wallets, Americans finally will be forced to dramatically curtail their spending, and the recession will finally gather serious momentum.

[Editor’s Note: For a more-detailed analysis of the nation’s financial problems, and the inherent dangers they pose for both the U.S. economy and for dollar-denominated investments, click here to download Schiff’s new financial-research report, "The Collapsing Dollar: The Powerful Case for Investing in Foreign Securities." The report is free of charge].

Source: That Ticking Noise You Hear in Your Wallet is a Credit Card Time Bomb