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Monday, 11 December 2017

On open doors and easy credit

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Anthony Peters looks at the NFPs and the state of consumer credit.

Risk markets rallied sharply on Friday on the back of the US January Payroll Report. The November headline Non-Farm figures were revised strongly upwards, December ones only lightly so but January missed forecasts by a chunk. All the while, the Jobless Rate, at 6.6%, is the lowest reported since October 2008.

I’ve been playing this game for a long time now and yet I’m not sure what it was that drove equities higher and credit tighter. Was it the lower Jobless Rate and, at 63%, the nicely rising Participation Rate that show the US economy to be in rude health and therefore in full expansionary mode or was it the miss on the job creation front – the NFP itself was 113,000 against a consensus forecast of 180,000 – which will keep the Fed in its box in terms of early tightening of monetary policy?

Or was it quite simply that this jobs report came in at a time when the emerging market contagion panic is waning and when markets were going to rally sharply even if a herd of bull elephants wearing pink socks and high on sugar cane was going to invade the floor of the stock exchange? In plain English, was the jobs report knocking on an open door?

From NFP to OPM

Hidden in the excitement of pawn takes queen,  there was a number which I found a bit worrying, namely the late report that Consumer Credit for December had risen by roughly US$18.75bn against a forecast of US$12bn. The consumer credit number is highly volatile at the best of times and one which should be treated with caution but the trend line points to all-time record consumer credit by the end of this year. That might look fine and dandy in the earnings and dividend world but we only just recovering from the last bust brought about by a population living the high-life of the back of “OPM” – other people’s money.

I was talking to a friend recently who is in a dispute. At some point in the conversation I asked whether they were going to choose to fight fire with fire or with water? In the same vein, if the solution to the aftermath of a credit crisis is to bail oneself out with more credit, then I don’t see that as any solution at all.

However and even I must concede this, at the current point in time debt is not really a problem. According to the Fed, the Household Debt Service Ratio stands at 9.92%, the lowest it has been in many, many years. The DSR reflects the proportion of disposable income which is expended on servicing existing mortgage and consumer debt both in terms of capital and interest payments. This figure has been falling since the top in 2007 and household debt as a percentage of GDP is also looking sharp at 77.35% (Q3/13) as opposed to over 95% when GDP was crashing in 2008/9. This number is slightly skewed due to the shift of debt from the private to the public sector in recent years and a full, 3D and Technicolor understanding of what means what is hard to develop.

Americans’ addiction to owning what they can’t afford seems unshaken by the recent credit crunch and banks’ need to generate earnings by lending to them is equally undiminished.

What influence any of this might have had on Friday’s market performance still escapes me but anyone with the gumption to have bought into the sell-off won’t be caring why they got it right and will be happy enough that they did.

Those who missed it will be able to console themselves that they did the prudent thing which is also what they are paid to do. Funds are still long cash and follow through buying could now set in and take us back to where we maybe should have been all along. There is a long way to go until we make up, performance wise, for a totally dismal January but even the longest journey begins with but a single step.

Floods and immigrants

Meanwhile, on the political front, Britain lost its Immigration Minister, Mark Harper, over the week-end when it was found that his cleaning lady was an “illegal”. If he can’t get it right, what chance the rest of us? Well, mine comes from a line which has lived in the village for more generations than I have had hot dinners so no fears there, thank heavens. Anyhow, I’ll be needing her services as on Friday I was flooded for a third time this winter. We all have our buckets to bear….

I have heard so much on the subject of what impact the snow and ice had on the US economy – the payroll series is replete with extraordinary factors – but I have yet to hear what the cost to the UK is going to be in terms of lost production and deferred construction output. Perhaps Devon and Dorset, parts of  which have been under water for over a month now, are too remote for anyone to care. Now the Thames west of London and in the smart suburbs is out of control too. Maybe that will focus the minds.  

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