October 2018 - Bubbles and Bottoms for Consumers -

There are three clear bubbles in the consumer space, namely housing, credit card debt and student loans. When credit card default rates start going up, it will slow down consumer spending, it will lower bank profits (and increase the rate of bank defaults) , which all leads to a lower GDP growth.
Delinquency rates on credit card loans outstanding at banks who are not in the top 100 in size, have already surpassed the rates during the last crisis, and are practically at the same level as in 2003.

The “big banks” have been extremely over-regulated since the crisis, which has resulted in a very low delinquency rate among borrowers, but what about these small banks? Are they being overseen by the regulators? What you notice often is that when governments focus on the cause of a crisis, they take extreme measures to avoid it becoming the cause of a second crisis. Case in point: large banks. They have been bullied into submission by governments, and of course this is then the last place where you will find the origins of the next crisis. No bubble will pop twice in such a short period of time.

History does not repeat itself, but it often rhymes.
- Mark Twain -

The housing market has been cooling off since the beginning of this year, and the number of houses sold have plunged to levels last seen 2 years ago. The housing supply looks even worse, with 7.1 months of supply, equal to 2011.

It`s of course completely logical that when mortgage rates start increasing (30-year mortgage rates are at 7 year highs right now), less people are able to buy a house. I calculated that the average 30-year mortgage rate since 1980 is 7.92%. Currently we`re at 4.86%. If we would ever hit that 7.92% mortgage rate again, there will be blood on the streets.

“How did you go bankrupt?”
“Two ways. Gradually, then suddenly.”
- Ernest Hemingway -

It`s a tough question to ask which of these 3 bubbles will pop first, and which will be the most painful. A new property bubble burst is possible, but as I said earlier, no bubble will pop twice in such a short period of time, so I doubt that it will become the largest trigger to a crisis, at least in the US. Credit card debt and student loans can potentially create a wave of defaults, as it is now at an all-time high of 2.3 Trillion Dollars. That`s 12% of GDP…
I`ll leave this chapter with a lighter subject, which will probably be perceived differently by every single person who sees this chart. It`s about the yearly hours worked per capita. You can clearly see that Europeans took the lead after the second world war and worked much more than any of their counterparties in the world (although there might have been some individual countries in the “rest of the world” section whose citizens worked more hours). This has resulted in great economic growth in the European region, and the current generation reaping the benefits of this. On the other side of the Atlantic you would see the exact opposite happening; current generations work much more than their parents and grandparents. If these trends continue, Europe will likely have a stagnating economy for years to come. Especially because they also have one of the largest aging populations in the world. Will automation save the day?

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