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?

This from Investor’s Daily Edge:

The government’s latest bailout moves have me scratching my head. It’s throwing $200 billion worth of guarantees at recent and current loans tied to consumer and small-business spending.

Hank and Ben want the consumer to bail out the economy. And they want to do it by putting consumers deeper into debt.

They don’t get it.

They don’t get that consumers are tapped out.

What do they think when they see numbers that show that American households are in deeper debt than ever before? Or when they see that consumer spending in October fell the most in seven years?

Is it really because credit card rates are too high?

So let’s get this straight. Some 1.2 million jobs have been lost so far this year and millions more fear that their jobs are in jeopardy.

This isn’t paranoia on the part of workers either. Companies really are experiencing declining revenues … tightening their belts … and laying off workers. Even companies that have the money are reluctant to spend it as we sink deeper into recession.

But for those companies that don’t have the money and would like to jack up spending, banks are reluctant to lend them money (regardless of the interest rate, and can you blame them?).

By the way, isn’t’ that how we got into this economic mess in the first place? The government allowed and even encouraged banks to lend to home buyers who couldn’t afford the loans. It led to a rash of defaults which triggered the current banking crisis which has spilled over to the entire economy.

Asking debt-ridden consumers to take on more debt when they have actually begun to save more is just wrong.

Lower rates have already triggered a mad rush by home owners to refinance. Presumably, the government thinks that Americans tapping their home equity for extra cash to spend is a good thing for the economy.

And initial reports indicate that stores did better than last year on Black Friday.

But, once again, spending more than we earn is a big part of how we got into this economic mess in the first place.

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There is a better way to get out of this mess than relying on a consumer-led recovery. The government should let (even encourage) consumers to put more of what they earn into their savings accounts and for banks to use this money for infrastructure and capital equipment investments.

The U.S. economy would grow on the back of bigger and more factories rather than bigger and more cars, TVs, X-boxes, etc.  Most of these items benefit Asian countries more so than the U.S.

Other parts of the government’s bailout plans also don’t make much sense. For example, the government doesn’t have enough money to cover banks’ exposure to rancid debt.

The collateral debt swap (CDS) market alone is north of $50 trillion. These swaps are essentially insurance contracts on corporate debt. If just one of the big three auto makers fails, for example, it would trigger underwriting and losses of around $1.2 trillion for banks with exposure to this market.

By the way, a trillion dollars is about the size of the entire economy of Mexico or India.

The fact is, default rates for all kinds of collateral will rise over the next 2-3 years. Mortgage-backed securities, junk bonds, triple-A rated corporate bonds, Alt-A mortgages, car loans, credit-card loans, and loans made to the governments and companies of dozens of countries.  Countries in central Europe plus Turkey and Russia stand out. They will all be experiencing rising rates of default.

Pumping up consumer lending and doling out tens of billions of dollars to banks (and over $100 billion to insurance giant AIG alone) won’t stem the massive tide of failures and buy-outs in the financial sector.

It will, however, help create the conditions for the next round of economic crises: a precipitous drop in the dollar, a massive national debt, and down the road a $100 trillion bailout of our social security system.

Our bailouts are getting bigger and more destructive with the passage of time.

Government intervention usually helps in the short-term, but brings unexpected and harmful consequences in the longer-term. This time around, we’re not even getting the short-term benefits but we will be getting the longer-term consequences which will prove to be bigger, more harmful and more difficult to fix than what we have now.

Source: Why This Bailout Isn’t Working

This from Investor’s Daily Edge:

This past May I wrote an article for Unplugged entitled “81 Billion Reasons Why Gas Affects The Economy”. In that article I talked about how much rising gas prices were siphoning out of the economy each year. Well now the opposite reaction is happening.

Here is the meat of that article:

According to the Bureau of Transportation Statistics, there were 135,399,945 licensed automobiles in the United States as of 2003. The owners of these vehicles have less money to spend as the price of gas has soared in the last six months. What impact does this have on the economy – and on your investments? Let’s do the math and find out.

If the average driver drives 1,000 miles per month and gets 20 miles per gallon, they are using 50 gallons of gas per month. According to the Department of Energy, the national gas price has gone up $1.00 on average since October. That means the average driver has $50 less per month to spend on items other than gas. This may not seem like a huge difference, but let’s take the next step.

Multiply the number of cars nationally (135,399,945) by $50 per month. That’s an additional $6,769,997,250 going into our gas tanks each month and not getting used for other items. That is $81 billion on an annual basis.

Fast- forwarding to today, we see that the average gas price has fallen from over $4 a gallon to under $2 a gallon. So let’s take the same math from the article in May and carry it out to see how much American consumers are saving thanks to the fall in gas prices.

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If the average for gas was $4, and the average driver used 50 gallons of gas, this would mean $200 a month for gas. Now we see $2 gas, so the average driver is spending $100 per month for gas. Now take this times the number of cars nationally (135,399,945), and you can see that overall consumers have the ability to spend $13.5 billion per month on items other than gas.

Do you think this might stimulate the economy? You bet it can. Over $162 billion annually to be spent on something other than gas, combined with a little boost to consumer confidence with the leadership change in January, and I think you see the U.S. start the recovery process in mid-2009.

I have used round numbers in this example in order to keep it simple, but the amount of money that has been freed up thanks to oil and gas tanking is astounding. A few weeks ago during a CNN radio interview, the host asked me where consumers were going to get any money to spend this holiday season. I would say that a potential boost in spending of $13.5 billion would make this holiday season a little brighter for retailers.

Expectations are pretty dire for the retailers, and with good reason. But if the actual numbers come in at or above expectations, we could see the overall market rally and this in turn would provide another boost in consumer confidence.

The hill is steep, so the economic recovery isn’t going happen overnight, but the ball could be rolling up the hill now.

Source: 162 Billion Reasons The Economy Will Improve In 2009

“May was the third straight month where we’ve seen a month-to-month increase in foreclosure activity and the 29th straight month we’ve seen a year-over-year increase,” James J. Saccacio, chief executive officer of RealtyTrac, said in a statement.

Home foreclosures jumped 7% in May from April and are up a whopping 48% year-over-year with 261,255 filings this past month according to RealtyTrak’s U.S. Foreclosure Market Report. That figure includes all homes that either received default or auction sale notices or were repossessed by the bank.

Nevada had the highest percentage of foreclosures with California, Arizona and Florida close behind. These markets were some of the hottest during the housing boom from 2000 to 2005.

“It’s definitely a different kind of market than what we got used to a couple years ago,” Devin Reiss, owner of Realty 500 Reiss Corp. in Las Vegas, told Bloomberg News. “We used to sell homes in a day. Now 50% of our sales are foreclosures.”

With a large supply of housing inventory already glutting the market, the influx from foreclosed homes is going to add to the housing markets woes.

Foreclosures will account for 30% of national home sales this year as 1.2 million foreclosed single-family homes will eventually enter the market, Michelle Meyer and Ethan Harris, economists at Lehman Brothers Holdings Inc. (LEH) in New York, wrote in a recent research report. They estimate foreclosed properties, which typically sell for about 20% less than other homes, will depress home prices nationally by 6%, Bloomberg reported.

Battered U.S. consumers are already struggling to deal with soaring gas and food prices. Losing the family home will tax already stretched incomes to the limits, delaying any possible recovery for the U.S. economy.

Source: Home Foreclosures Continue to Soar Delaying U.S. Economic Recovery

Last week, several key Chinese officials, typically not known for their candor, conspicuously noted the need to both stimulate domestic consumer spending and to bring down roaring inflation. While at first blush these two goals might appear mutually exclusive, China’s leaders do have a “magic bullet” that can hit both targets at once.

The Easy Way vs. The Hard Way

A stronger currency, commensurate with China’s increased economic strength, will simultaneously tamp down inflation and enable Chinese consumers to buy more goods and services. However, for reasons not entirely clear to me (or few others, for that matter), China’s leaders are resisting this simple-and-beneficial solution.

By prodding China’s citizens to spend more, the country’s leaders say their goal is to decrease the nation’s dependence on exports. If China’s consumers, who currently save 50% of their incomes, saved less, more of the nation’s production output would be consumed domestically and China would be much less vulnerable to downturns in its overseas export markets.

Without a vibrant domestic market, over-leveraged Americans will apparently remain China’s most important customers.

A strengthened yuan would lower the real costs of goods for domestic consumers and allow the Chinese themselves to compete more evenly with consumers in other nations to whom they currently send the fruits of their labor. As goods become more affordable in China, the Chinese will naturally consume more. A rising yuan would therefore kill two birds with one stone: It would reverse recent consumer-price increases and it would induce Chinese consumers to buy their own products.

If the Chinese were to follow such a sensible path, the consequences here in America would be immediate and severe. By allowing China’s currency to appreciate, that country’s monetary authorities would no longer need to buy and remove as many dollars from the open market, producing an immediate reduction in the demand for U.S. Treasuries, mortgage-backed securities and other U.S. dollar-denominated debt. The result in America would be a simultaneous increase in both consumer prices and interest rates. Such developments would only compound the problems already rippling through our economy.

To spur domestic spending absent such currency rebalancing, Beijing must instead rely on the nominative, simulative effects of inflation. By further expanding its money supply and allowing those increases to be passed on to workers in the form of higher wages, China will ensure that its consumers will have more yuan to spend and, hence, will use that cash to buy more “stuff.”

Such a policy, however, while having a strong impact, will only solve one problem by aggravating the other.

The Savings vs. Spending Debate

By penalizing savers through the erosive effects of inflation, China would discourage savings and jeopardize one of the true sources of its rising standard of living. Contrary to the economic hocus pocus propagated on Wall Street, in Washington and at American universities, economies grow not as a result of consumer spending, but as a result of savings. So-called “underconsumption” is the true source of prosperity because it engenders capital formation, which lies at the root of sustainable economic growth.

Here, too, the implications for Americans are dire. In effect, China’s consumers are spending only half their incomes and are lending much of the rest to us; so we’re effectively enjoying the “current” consumption that China’s frugal consumers have opted to defer.

That’s a big help right now. But think about this: As China’s consumers spend more, America’s consumers will simply be forced to consume less.

Low prices and rich consumers are a potent concoction that is sure to soothe China’s roaring economy while raising the living standards of its hardworking citizenry. It’s a simple solution that only an economist can miss.

Source: As China’s Consumers Start Spending More, U.S Consumers Will Begin to Feel the Global Economic Squeeze

–”China may be chasing Twiggy,” reports Matthew Stevens in today’s Australian. “There is talk in New York that the Rudd Government has approved an application from China’s Baosteel to acquire 16 per cent of the iron ore maverick, Fortescue Metals Group (ASX: FMG). Fortescue says it does not know whether its biggest Chinese customer has even made an application to the Foreign Investment Review Board, let alone received a green light.”

–Fortescue is the low-hanging fruit in the iron ore sector. It’s easy pickings. It aims to be the third major ore producer in the Pilbara, behind BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO). It’s not surprising that Baosteel-China’s largest steel maker-would go over the biggest plum in the pie.

–What IS surprising is just how far into the iron ore sector Chinese companies are drilling for ownership of undefined resource bases that are years away from production. It speaks to the strength of demand for iron ore…and the itch in Chinese pockets to trade U.S. dollars for real assets before the dollar falls even more…or before the Chinese revalue their own currency.

–First up on the menu yesterday was FerrAus (ASX: FRS), a member of the North West Iron ore Alliance we mentioned last Thursday. China’s Shanghai-listed Western Mining Company announced its intention to take a 10% stake in FerrAus at $1.15 a share through a share placement arrangement. Regulators have to approve the deal.

–Here’s the interesting thing about this deal; Western Mining is a base metals miner. It doesn’t even produce iron ore. It just likes the cut of FerrAus’s jib. And for its part, Adelaide-based FerrAus hasn’t even proven up its indicated resource of 43 million tonnes. But hey, when the market value of the assets is going up, these kinds of deals get done.

–And there are more of them. Gindalbie Metals (ASX:GBG) shot down rumours that Angang and Iron and Steel was seeking to increase the 13% stake it already has in the mid-West iron ore junior (a member of the Geraldton Iron Ore Alliance). Investors may or may not have been convinced. But they seemed to like Gindablie’s announcement that it would spend $10 million this year on 12 drilling targets that it hopes will yield 80-100 million tonnes of hematite ore in the Pilbara. The shares closed up 16%.

–And the beat goes on. Prosperity Resources (ASX:PSP) announced that Shougang Holding Limited would buy up to 19.9% of the company through a share placement. To be honest, we had never even heard of Propserity Resources until this morning. Perhaps we are not digging and drilling thoroughly enough.

–We do like at least one thing about the company, though-its ticker symbol. PSP is the acronym we’ve taken to using for a new research service we hope to launch soon, the Penny Stock Prospector.

–We want to offer your our research into the junior mining and energy shares…and hopefully suss out the shares that are moving. It will be as close as you can get to pure speculation. But there’s so much going on in the resource sector now that it’s more than we can cover in Diggers and Drillers.

–Low-hanging fruit is easy to pick. But there’s plenty of fruit on the tree if you’re willing to shake the tree a little. If the PSP sounds like something you’d be interested or you have a hot share tip you can’t wait to share, drop us a line at dr@dailyreckoning.com.au

–By the way, the Koreans are getting busy too. Posco, the world’s fourth-largest steel maker, announced its intention to buy 19.9% of Sandfire Resources (ASX:SFR). The mineral grab goes on.

Source: www.bigcharts.com

–What do you think of the chart above? Seriously. Can you really believe spot crude oil is up 53% in the last year? Oil rocketed up in New York overnight, busting through US$120 before settling just below at US$119.67 by the time trading got going thismorning in Sydney.