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Consumption Exhaustion


When people use the word catalyst to describe an event that may prick the stock market bubble, they usually discuss something singular, unexpected and potentially shocking. The term “black swan” is frequently invoked to describe such an event. In reality, while such an incident may turn the market around and be the “catalyst” in investors minds, the true catalysts are the major economic and valuation issues that we have discussed in numerous articles.

Most recently, in 22 Troublesome Facts, 720Global outlined factors that are most concerning to us as investors. As a supplement, we elaborate on a few of those topics and build a compelling case for what may be a catalyst for market and economic problems in the months ahead.

Debt Burden

Debt serves as a regulator of economic growth and is the focus of ill-advised fiscal and monetary policy. It is no coincidence that no matter what economic topic we explore, debt is usually a central theme. Illustrated in the chart below is the actual trajectory of total U.S. debt outstanding (black) through March 2017 and a calculated parabolic curve (red). The parabolic curve uses 1951 as a starting point and a quarterly 1.82% compounding factor to create the best statistical fit to the actual debt curve. If we start with the $434 billion of debt outstanding on December 1951 and grow it by 1.82% each quarter thereafter, the result is the gray line. If debt outstanding continues to follow this parabolic curve, it will exceed $60 trillion by the first quarter of 2020, or nine quarters from now.

Data Courtesy: Federal Reserve

Many economists point to the stability of debt service costs as a reason to ignore the parabolic debt chart. Despite rising debt loads, falling interest rates have served as a ballast allowing more debt accumulation at little incremental cost. While that may have worked in the past, near zero interest rates makes it nearly impossible to continue enjoying the benefits of falling interest rates going forward. Importantly, social safety net obligations, demographics, and political dynamics argue that debt growth is likely to continue accelerating as implied by the chart above. Without interest rates falling in step with rising debt burdens, debt service costs will begin to rise appreciably.

The power of compounding, extolled by Albert Einstein as the eighth wonder of the universe, is as damning in its demands as it is merciful in its generosity. Barring negative interest rates, debt service costs will be an insurmountable burden by 2020. However, if the debt trajectory slows as it did in 2008 that too will bring about painful consequences. In other words, all roads lead to trouble.

Debt growth illustrated above has been an important cog in the consumption engine in the United States. Personal consumption accounts for about 70% of Gross Domestic Production (GDP) growth. Neo-Keynesian and Modern Monetary Theory (MMT) economists argue that those who worry about government debt and deficits just don’t understand deficit finance. We worry because we understand the basic math that will limit the U.S. economy’s ability to further burden itself with debt.

Despite policymakers’ lack of regard for this burden, it is important to keep in mind that, as debt accumulates and consumers become less capable of repaying those debts, deleveraging ensues. This means that households will become unable to sustain the lifestyle to which they have become accustomed. Whether debts will be resolved through repayment or default, economic progress will falter.

Retail Sales

The chart below illustrates the components of retail sales in July 2017. Retail sales measures the dollar amount of finished goods sold as opposed to the Personal Consumption Expenditures index (PCE) which measures the price changes of consumer goods and services.

Data Courtesy: U.S. Census Bureau

As shown above, autos, department stores (general merchandise) and restaurants account for 45% of total retail sales. If any of these sectors exhibit weakness then it is challenging for another sector to offset that weakness given its relative size. If all three of these sectors soften at the same time, as is happening now, then it serves as a warning that consumption is likely to decelerate. This has been a precursor to broad economic weakness and even recession in the past. The sections below review each of these three sectors to help you assess the underlying strength or weakness of these important drivers of consumption and the economy.


Car and truck sales helped lead the economy out of the recession over the past eight years. The surge in sales to new record levels was not solely due to outright sales but was heavily nourished by extensive use of lease financing.  As shown below, auto sales appear to have peaked in late 2016, and used car prices have been in decline since 2014. Both factors raise concerns over the auto sector’s future contribution to economic growth.

Data Courtesy: Bloomberg

Because of the reliance on leasing, cars rolling off leases topped 4 million units last year and are expected to rise by 11% in 2017 and 2018 and top 5 million units by 2019. This is producing a glut of used cars on dealer lots and fueling the decline in used car prices. Projected used car prices, also known as residual value calculations, are a major component of the lease finance equation. As 11-12 million used vehicles hit the market over the next 2½ years, the stage is set for problems in the leased vehicle market and total car sales.

At their peak in February 2016, auto leases accounted for one-third of new car sales and the 6-month moving average remains above 30%. As the leasing option becomes more expensive and the used car supply continues to grow, new auto sales are likely to suffer.

Data Courtesy: Bloomberg

The impact of the used car market on leasing can be seen through the purchase versus lease analysis table shown below. A decline in used car prices (residual values) as is currently forecast dramatically alters lease payments, eliminating leasing as a lower-cost alternative. The bull, base and bear case for used car prices below is based on forecasts from Manheim/Morgan Stanley.

In response to weaker car sales, dealers have slashed prices by the most since the last recession. The auto sector, which represents over 20% of retail sales, is an important economic barometer.

Department Stores

The travails of department stores in recent months have been well-covered. Stores closings and down-sizing stems from weakness in consumer spending but has been rationalized by the “Amazon effect” and preferences for on-line shopping. As recently observed by Evergreen/GaveKal, it’s not the “Amazon Effect”, it’s the “Healthcare Spending Effect” as the average family of four pays $26,000 in healthcare costs. The other problem with the “Amazon” excuse is that, while store traffic has dropped, all department stores have functional, secure websites that consumers can access as easily as Amazon’s web site. According to the Department of Commerce, retail sales for the past 12 months totaled $4.9 trillion of which $403 billion or 8.2% were online. Amazon’s total sales of $150 billion were approximately 3% of total retail sales. Needless to say, there is more to the story than Amazon stealing market share.

On-line retailers are making it hard for department stores to maintain market share but the Amazon narrative sounds more like an attempt to downplay the real problem.

Squeezed by weak income gains, higher healthcare and education costs, and the burdensome load of debt from years past, consumers simply have less money to spend and appear less inclined to spend what they do have on apparel and other department store goods.  Further, they have little propensity to borrow to consume more. Since January 2016, department store sales (year over year) declined in every month except two. A continuation of these trends has major implications for retail stalwarts like Macy’s and Nordstrom as well as commercial and retail real estate.

Data Courtesy: Bloomberg


Restaurants face similar issues as retailers with problems extending across all categories of the food service sector except the high-end segment. Restaurant same store sales have experienced 17 consecutive months of year-over-year declines. According to the July 2017 Restaurant Industry Snapshot, Black Box Intelligence reported:

These are the weakest two-year growth rates in over three years, additional evidence that the industry has not reversed the downward trend that began in early 2015.”

Adjusting for inflation further clarifies the difficulties the sector faces. Wolf Richter at adjusted sales at food service and drinking places for inflation (as shown below) and found that sales, as reported in June 2017, are up only 22% from the post-recession lows and have been stagnant since December 2015.

Not going out to eat is one of the easiest ways to tighten a household budget. The decline in restaurant sales seems to reinforce the increasingly tepid state of consumption.

Consumer Credit Outstanding – Record Highs

Evidence of a challenged consumer drowning in debt continues to build. Credit card debt recently hit a record high at $1.02 trillion, and total consumer credit, which includes auto and education loans and excludes mortgages, is fast approaching $4 trillion.

Data Courtesy: Federal Reserve

Economist Joel Naroff, President of Naroff Economic Advisors, elaborated on the weak consumer:One of the clearest indicators that households are spending cautiously is the softening of big-ticket purchases… households are maintaining their lifestyles by reducing their savings rate and that is likely restraining spending on discretionary goods.”


The growth of public and private debt is occurring at a rate faster than wage growth or economic growth. Debt remains the single most important factor in assessing the outlook for the U.S. economy. The business cycle has become incredibly dependent upon the credit cycle which has been hi-jacked by monetary policy. More borrowing leads to better economic growth in the short term, but eventually the music stops, debts must be repaid, and the painful process of deleveraging begins.

Central bank interventions have imprudently disrupted the normal cycle and likely extended it. Unless the Fed can somehow remove human decision-making from the equation, the swings in business cycles remains a permanent feature of the economic system no matter how disfigured from bad monetary policy. What seems to be taking place in the economy today is consumers nearing a point of maximum debt accumulation or consumption exhaustion. Their willingness or ability to take on more credit is slowing and is beginning to become a drag on consumption.

Our assessment of the amount of debt outstanding in conjunction with what we are observing on new and used car lots, at department stores and restaurants offers some indication that we may be near a turning point in the credit cycle. This does not necessarily mean that a recession is imminent but if our concerns are valid, it certainly raises the probability of an economic downturn and quite possibly a catalyst to reverse the direction of asset prices. Given these dynamics and current market valuations, we continue to urge investors to proceed with caution.

16 Comments on "Consumption Exhaustion"

  1. Makati1 on Wed, 6th Sep 2017 5:14 pm 

    Americans are living in a depression already. This is just another cover-up article saying nothing new. More lipstick on a pig that is now obese, like the American people. Anyone not preparing for the future is a fool and deserves the pain to come. So be it.

  2. Anonymouse1 on Wed, 6th Sep 2017 6:07 pm 

    Is Consumption Exhaustion another way of saying, ‘We’re broke’?

  3. Sissyfuss on Wed, 6th Sep 2017 8:06 pm 

    Shadowstats says if govt statistics accounting had not been altered, (corrupted), it would show that we never left the Great Recession. And concerning the sickcare racket, could they have a better partner than the frankenfood corporations that continually send them an unending supply of obese diabetics? The plan is working to perfection but only for the elites.

  4. Makati1 on Wed, 6th Sep 2017 8:34 pm 

    Sissy, you see the real picture. I am not sure we should call it the “Great Recession”. I think “The Eternal Depression” would be more accurate, if the real stats were known.

    As for the frankenfoods subject. Americans have no idea what is being done to them deliberately by their masters. They are being dumbed down by their “education/propaganda” system and the use of brain retarding chemicals in their food and water. I have been watching many food documentaries on the internet (NOT US produced) and was actually surprised at the extent this is happening everywhere they have their tentacles. Additives, not to mention fats, sugars and salt, are all contributing to the early, painful deaths of Americans. And most have no idea it is being done to them.

  5. Apneaman on Wed, 6th Sep 2017 8:43 pm 

    Sissy, I think there are about 200 known comorbidities of obesity. The sick care racket would crumble if the humans slimmed down. So many of these diseases and disorders go away completely or become easily manageable when folks lose enough weight to get under obese. They don’t even need to be skinny. Franken food is a major factor, but there are a whole whack of others, like many sources of endocrine disruptors, that have actually changed the industrial humans on the genetic level. You are an experiment people. Even the fat is distributed on the body differently than it was just 30 years ago. How the fuck does that happen? The cocktail effect of being born into an industrial lab experiment has made the humans mutants. I feel sorry for parents like my brother whose kids a a little chunky even though they are super active. It is impossible to keep your children away from this chemical saturation without getting off planet. At best you can ‘try’ and reduce their exposure.

    Study shows how food preservatives may disrupt human hormones and promote obesity

    Innovative stem-cell testing system demonstrates potential for evaluating health effects of chemicals used in everyday life

    Water – The staff of life

    Plastic fibres found in tap water around the world, study reveals

    Exclusive: Tests show billions of people globally are drinking water contaminated by plastic particles, with 83% of samples found to be polluted

    Duke study links infertility to chemical found in nail polish, mattress pads

    Food cravings engineered by industry
    How Big Food keeps us eating through a combination of science and marketing

    There is simply no way mere mortals, trying to live lives, can manage. To the captains of techno industry you are nothing but lab rats who they have free reign to manipulate for profit….. cause of capitalism N stuff. These fuckers are no different than the drug cartels except the cartels pay for their own muscle whereas the taxpayer pays for the industrialist security and enforcement.

  6. Apneaman on Wed, 6th Sep 2017 9:18 pm 

    One more time

    Surplus Energy Economics
    How the economy REALLY works – Tim Morgan

    #104. Why Mr Trump can’t raise American prosperity
    Posted on September 5, 2017

    “It concludes that American prosperity is in decline, and has been falling ever since it ‘peaked’ way back in 1999. This doesn’t make America unique – prosperity has long been falling across much of the developed West. But it does mean that the central economic task of President Trump, which is to make the average American more prosperous, simply is not possible.

    Two main factors are driving the deterioration in prosperity. First, the underlying economy has been deteriorating, a trend disguised by the spending of borrowed money.

    Second, in America as elsewhere, the trend cost of energy continues to increase markedly, even while market prices are trapped in a cyclical low. This cost acts as an “economic rent”, and translates into individual experience primarily through the cost of essentials, which are energy-intensive.

    Essentially, two things are happening to the average American. First, his or her income is rising less rapidly than the cost of essentials, squeezing the “discretionary” income which is the real definition of prosperity. Second, increases in income are being far exceeded by increases in debt, and also by growing shortfalls in pension provision. So the citizen feels both less prosperous and less secure.

    As SEEDS measures it, per capita prosperity was 10% lower in 2016 than it was back in 2000. Neither is this trend likely to reverse – by 2025, the average American is likely to have seen his or her prosperity decline by a further 8% in comparison with 2016. At the same time, per capita debt has increased by almost $54,000, in real terms, since 2000, a problem now being compounded by a rapidly-growing systemic shortfall in pension provision.”

  7. Cloggie on Thu, 7th Sep 2017 2:35 am 

    The Chinese see the inevitable coming and are throwing their dollars out of the window as fast as they can:

    The great default is coming, that will probably start again in the US, like in 2008, but will cascade over the rest of the planet. Liberal modernity will fall with it and so will western hegemony.

  8. Davy on Thu, 7th Sep 2017 2:53 am 

    “Analyst Lays Out China’s “Doomsday” Scenario”

    “Corporate investigator Violet Ho never put a lot of faith in the bad loan numbers reported by China’s
    banks: crisscrossing provinces from Shandong to Xinjiang, she’s seen too much – from the shell game of
    moving assets between affiliated companies to disguise the true state of their finances to cover-ups by
    bankers loath to admit that loans they made won’t be recovered. The amount of bad debt piling up in
    China is at the center of a debate about whether the country will continue as a locomotive of global
    growth “

    “Another problem with making estimates of adequate collateral protection in China….. it is safe to
    assume that loss given default rates in China are if not 100% (or more, which is impossible in theoretical
    terms but in practice is quite possible, as another curious side effect of unlimited collateral
    rehypothecation), then as close to it as possible. In early June, Reuters published an expose on China’s
    “Ghost Collateral” reminding China watchers that this most insidious phenomenon is anything but

    “International experience suggests that China’s credit growth is on a dangerous trajectory, with
    increasing risks of a disruptive adjustment and/or a marked growth slowdown,” the IMF said. This
    statement is spot on, because as the IIF recently showed, total Chinese debt/GDP has now crossed
    above 300%, a level that in every historical instance, led to a financial crisis.”

    “What was left unsaid is that it is only because China doubled its total debt load following the financial
    crisis that the world managed to avoid succumbing to an unprecedented depression in the years
    following the financial crisis. However, by engaging on this unprecedented debt rampage, China only
    delayed the inevitable.”

    “The number is a doozy: in her latest report, Chu estimates that bad debt in China’s financial system will
    reach as much as Rmb51 trillion , or $7.6 trillion, by the end of this year, more than five times the value
    of bank loans officially classified as either non-performing or one notch above.” That estimate implies a
    bad-debt ratio of 34%, orders of magnitude above the official 5.3% ratio for those two categories at the
    end of June.”

    “Chen’s conclusion is delightfully and perversely reflexive: as long as China can avoid a crash, it will avoid
    a crash: “If there’s an economic collapse, of course there will be massive credit losses. No one disagrees
    about that. But the issue is whether the collapse will actually happen.”

  9. Davy on Thu, 7th Sep 2017 3:09 am 

    “ECB Preview: A Trapped Mario Draghi Makes A Decision”

    “After a barrage of media trial balloons (as recently as today) meant to temper the enthusiasm of Euro bulls now that the EURUSD is back to 1.20 and threatening European corporate profitability, Mario Draghi’s Sintra hawkishness is a distant memory. And so, with the ECB’s policy decision less than 12 hours from now, a “trapped” Mario Draghi finds himself in a quandary: with less than 4 month left until the formal expiration of the ECB’s €2.3 trillion QE program, he will likely start laying the groundwork for the central bank’s stimulus reduction – after all the ECB is rapidly running out of bonds to purchase – but without revealing too much as that will send the EUR surging, and he will also hold off on any major commitment, as an explicit backing off his recent hawkishness could collapse the EUR and send Bunds right back into NIRPatory.”

  10. Makati1 on Thu, 7th Sep 2017 6:58 am 

    The collapse of America…

    “Crumbling America”

  11. Wolfie52 on Thu, 7th Sep 2017 7:25 am 

    Different day, same 5 geniuses to comment endlessly.

    Really, you guys need to spend less time arguing with the same 5 people and get outside.

  12. Davy on Thu, 7th Sep 2017 7:38 am 

    I am outside wolfie. Have you ever heard of an IPhone. Lol. Say something wolfie. What is on your mind? Where are you from BTW.

  13. fmr-paultard on Thu, 7th Sep 2017 7:42 am 

    guys please love one another. no fihting please. we need to promote superiority of western culture through dialogs and exchange of ideas. make love not war, have a lemon party.

    don’t be isis. don’t integrate politics with war/jihad.

  14. GregT on Thu, 7th Sep 2017 8:58 am 

    “Where are you from BTW.”

    As if it matters. As consumption winds down, some people will have much farther to fall than others. It isn’t location specific. Those who call themselves consumers, will learn all about what it means to be survivors. Those who are already survivors, will carry on as usual.

  15. Davy on Thu, 7th Sep 2017 9:41 am 

    it does’t matter as a matter of profound importance. I enjoy knowing more about people especially those who are great commenters. Geography and maps has always been a big interest to me. I have many maps including old collectables.

  16. Jerome Purtzer on Thu, 7th Sep 2017 1:08 pm 

    In answer to Chen’s observation concerning avoiding a collapse. The economy and the debt supporting it are like a super saturated solution. When it reaches a point like 1929 or 2008 the collapse just happens and chaos crystalizes. Judging the point of super saturation becomes the question. The result is not in doubt.

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