If you simply paid attention to the equity markets you’d think the credit crisis was long gone. Many markets have rebounded 75%+ from their troughs and if you had slept through the last 18 months you probably wouldn’t even know that we just underwent a highly destructive and challenging credit crunch. This is nowhere more apparent than it is on Wall Street where bankers are handing out record bonuses and using the various government programs and policy approaches to generate better than expected earnings. Of course, the same cannot be said of Main Street.
David Rosenberg notes the record setting credit crunch that continues on Main Street:
Consumer credit in October fell less than consensus expectations, falling $3.5bln (or -1.7% at an annual rate) versus market estimates of a steep $9.4bln decline. September was revised to now show an $8.7bln decline compared to earlier estimates of -$14.8bln. However, we are now in a phase of frugality and households are not willing to take on more debt — this is the ninth consecutive monthly of decline in consumer credit, a streak never before seen in the data’s 66-year history — at a time when wages are still falling and the unemployment rate is still at lofty levels.
Moreover, with record delinquency rates and the fragility of the U.S. financial sector, banks continue to tighten credit conditions and as a result are hesitant to extend its lending practice. Indeed, revolving consumer credit (credit cards) fell $6.9bln (or -9.3% at an annual rate) to $888.1bln, which is the lowest level since March 2007 and is now down $87.1bln from the peak back in September 2008. Nonrevolving consumer credit did rise $3.5bln (or +2.6% annualized) in October, but that was probably the result of stronger auto sales, which rose 1.2% in October.
Of course, Wall Street could really give a damn about Main Street. The primary reason this rally has confounded so many investors is because of this sharp disconnect between Main Street and Wall Street. A series of “better than expected” quarters of earnings and a market awash in liquidity has led to resurgence in equity markets. But don’t be fooled. The problems on Main Street represent the much larger (and more important) structural damage that has been done to the U.S. economy. The market may rally in the near-term, but eventually these long-term structural problems will catch up with us all.
Source: Gluskin Sheff
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.