But The Recession Is Over!

Uh, don't bother telling the banks:

BOSTON (MarketWatch) -- Charge-offs on U.S. credit cards gauged by a Moody's index surpassed 10% in May for the first time in the benchmark's history of more than 20 years. "We expect the charge-off rate index to continue to rise in the coming months but at a slower pace, as it peaks at around 12% in the second quarter of 2010," said William Black, Moody's senior vice president, in a press release Wednesday. May was the sixth consecutive month the charge-off rate rose to a record high, Moody's said.

Charge offs tend to parallel U-3 unemployment, strongly implying that we will see 10% unemployment sooner rather than later.

BTW, 12.x% unemployment would be the highest number registered on U-3 - ever - by about a 20% margin.

9.7% was the post-war high, set in 1982.  10% will best it and 12.x% will blow it to Mars, putting the lie immediately to those who claim "the recession is over."

The worse news is that since we no longer have a "Usury" law at the federal level and we allow banks to locate card divisions in states where there are no usury laws but then demand federal protection for their operations (rather than force them to deal with consumer protection suits in the same state) the response to this has been and will continue to be a relentless ratcheting upward of average interest rates charged on card balances which will not abate until the charge-off rate comes down.

This in turn will stomp on consumer discretionary income and spending, since money paid in interest obviously does not get spent at the local Best Buy purchasing a new flatscreen TV.

Those who argue for "green shoots" have yet to reconcile the reality of ramping debt service requirements, with many people being hit with credit card interest rates reaching 30% with their projection that consumer activity will "recover".

How big of a problem is this?  Revolving credit is some $1 trillion in total, up about 60% since 2000.  For every point in interest rate increase on average against this debt $10 billion is subtracted from consumer discretionary spending.  Even those who carry no balance are seeing major changes in rates - I don't care if card companies change my interest rate, for example, since I never carry a balance, but change they have been, and not downward.  I would not be surprised if the average interest rate has gone up by a full five points in the last six months for those who do carry a balance, and given the laws going into effect next year this will continue - right up into the deadline when they can't change rates for existing balances any more.

This is a direct $50 billion hit to consumer discretionary spending and the worse news is that the withdrawal of free credit lines will hit spending even more.  Card companies are cutting back lines to the used balance relentlessly for those who revolve accounts, precluding further credit extension and chopping off consumer spending at the knees.

Anyone who thinks that a $100 billion+ hit to consumer spending capacity, plus the follow-on emotional impact of "feeling poorer" when the plastic doesn't work any more won't show up in the economy has rocks in their head.

Anyone who believes that the impact of consumers having interest rates double will not result in a permanent aversion to credit use by consumers is even dumber.

Consumer spending has "enjoyed" a roughly 5% increase over "natural and sustainable" levels over the last five years due to "fog-a-mirror" credit policies.  Now that the results of this are coming crashing down on both banks and consumers, the believe that the removal of that increase will not boomerang by more than the original increase is simple foolishness.

The outcome of all of this, by the way, is an essentially-permanent 4% reduction to GDP that will be reflected in forward economic performance, and that's before the impact of unemployment is added in.

The willful refusal of the talking heads on TV to discuss the inevitable math of this credit collapse and its impact on consumer behavior is dangerous to your portfolio.

(And people wondered where I got my expectation of a potential 20% top-to-bottom GDP contraction from?  Now that you're seeing it in the data does it begin to make sense?)