& Market Trends
Squeezing Americans Dry
October 7, 2005
With rising inflation and debt
payments, the household budgets of all of us are being squeezed.
The picture does not look pretty.
Let's first look at inflation.
Signs of rising prices - the way in which we are most influenced
by inflation - are everywhere. Regular gas now costs over $3
a gallon, insurance and property tax bills are escalating, and
staggering home heating costs will definitely keep Santa from
coming down the chimney this Christmas. Natural gas prices are
particularly worrisome as they push up the price of electricity,
anything plastic, and the general cost of manufacturing. For
2006, the big effect of hurricanes Katrina and Rita will be the
needed excuse to raise the cost of insuring a home by 10 to 30
percent (depending on where the lucky homeowner lives). Rising
diesel prices push up the cost of goods on every store shelf
because they have to be trucked in. The CPI data for September,
scheduled for release shortly, is likely to show an annual rate
of increase, over September 2004, of at least 4 percent.
So, how bad is inflation? In
the past year, the wages and salaries of American workers have
not kept up with inflation. If the CPI (currently at 4 percent)
was honest and included rising housing prices and did not over-indulge
in hedonic price adjustment, 5.5 to 6 percent would be the actual
reported number. Bottom line: Americans are being squeezed by
prices rising faster than income. As the winter heating bills
pile up and rising manufacturing and shipping costs make their
way to store shelves, our loss of purchasing power will only
Second, let's look at rising
debt payments. Americans owe about $11 trillion dollars - $2
trillion for consumer debt and $9 trillion for mortgage debt.
As much as one-third of the loans given today are adjustable
rate (this includes credit cards, ARM mortgages and home equity
loans). Americans owe over $800 million in home equity loans
("HELOC") which are mostly tied to the prime rate,
with an average interest rate of 8 percent. Just a few short
years ago, when the Fed Funds rate was 1 percent, these HELOC
loans seemed almost "free" at 5 percent. Well, money
is no longer free. Americans also owe over $800 billion of credit
card debt with an average interest rate of 13 percent. Credit
card debt is tied to the
prime rate and like ARMs and HELOC loans, interest rates have
been moving up at a steady pace.
The Federal Reserve has raised
interest rates 11 times since they first started tightening and
several more increases are scheduled that should take the Fed
Funds rate to 4.5 percent by the end of January, 2006. Short-term
interest rates have been rising 2 percent a year. Every time
consumers are forced to pay another 2 percent on average for
their $11 trillion of debt, they will have no choice but to raid
the cookie jar for an extra $200 billion. The only problem is
that most Americans haven't been saving so, unfortunately, their
cookie jars are empty.
Worse yet, for consumers making
credit card payments, the US Treasury has new regulations that
will come as a real shock this fall. The Treasury has the authority
to set minimum principal payments on credit cards and is increasing
the minimum from 2 to 4 percent per month. For the average American
with a $10,000 credit card balance, that increases the minimum
monthly payment from $200 to $400. For the big spender with $50,000
in credit card debt, the monthly payments would pop from $1,000
to $2,000! Needless to say, a large number of people are used
to paying the minimum every month, and millions of card holders
are maxed out on numerous cards and barely meeting monthly payments.
So, even if prices weren't rising, the American debtor will be
getting hung out to dry by a noose of credit cards around their
Between rising prices and debt
costs, how bad is it really for the average American? Our guess
is that most of us will experience an increase in monthly costs
of no less than $300, and many will see their monthly costs rise
over $700. Also, "The Bankruptcy Abuse Prevention &
Consumer Protection Act of 2005" will require debtors to
pass a strict Means Test to determine whether they can have their
debts liquidated through Chapter 7 or whether they must enter
a repayment plan through Chapter 13. This Act goes into effect
on October 17 and is designed to make working Americans wage
slaves to the bank for life so we'll not only get squeezed, we'll
get crushed! The Means Test is just plain mean. With this new
law, the bank not only comes first but a creditor may get to
pay them forever!
Credit card delinquencies,
as measured at the end of the second quarter of 2005, have been
heading up towards 5 percent. When the minimum payment increases
every month along with your heating bills this winter, I am confident
consumer loan defaults will keep the bankruptcy courts busy.
Even before this big squeeze
of rising costs, most of us couldn't afford to save. The question
now is, "can the consumer afford to spend?" The latest
government figures from August show consumption was down by 1
percent, and earnings before inflation were also down. Auto sales
figures just released by GM and Ford for September show the sales
of Sport Utility Vehicles collapsing by 50 percent.
Borrowing against the house,
which has fueled increased consumption over the last decade,
must now be used to pay higher bills for buying less. If we can
no longer afford to save or borrow, it's likely we will no longer
be able to spend. If the consumer cuts back, it means recession.
Before the war and hurricanes,
the budget deficit was about $400 billion, and the trade deficit
was $700 billion. Now, our country gets to pay for an extra couple
hundred billion for energy; several hundred billion more for
consumer, mortgage and Federal debt service; a hundred or two
billion for the hurricanes; and another couple hundred billion
for the endless war. Pretty soon this will add up to real money!
I, for one, wonder how long the United States can get foreigners
to pay for it all so I don't have to foot the bill. Meanwhile,
I am only considering stocks that look like good shorts. Gold
and silver remain great investments, especially when bought on
dips in their market price. Stay tuned and when in doubt, stay
Finance Group, LLC
2505 S. Ocean Boulevard
- Suite 212
Palm Beach, Florida 33480
Richard Benson, SFGroup, is a widely-published
author on securitization and specialty finance, and a sought after
speaker at financing conferences on raising equity for mid-market
Prior to founding
the Specialty Finance Group in 1989, Mr. Benson acted as a trading
desk economist for Chase Manhattan Bank in the early 1980's and
started in the securitization business in 1983 at Bear Stearns,
and helped build the early securitization businesses at Citibank
and E.F. Hutton.
Mr. Benson graduated
from the University of Wisconsin in 1970 in the Honors Program
in Math, and did his doctoral work in Economics at Harvard University.
Mr. Benson is a member of the Harvard Club of New York and Palm
Finance Group, LLC is a Florida Limited Liability Company and
is registered with FINRA/SIPC as a Broker/Dealer.