Stock Market Remains Unsound; No More Paying Off Credit Cards With Home Equity Loans

People aren't buying anything, because they don't have credit.  Thus, retail sales are down, along with the Dow (story):

Volatility battered Wall Street again Wednesday after a disappointing retail sales report reminded investors that country is either in a recession or moving toward one. The Dow Jones industrials dropped 350 points, giving back a chunk of their huge 936-point advance from Monday, and all of the major indexes were down at least 3 percent.

Sales are not going to improve anytime soon.  Why?  Because here is how many Americans lived:

They'd get a credit card.  They'd run up a huge credit card balance.  They would then take out a home-equity loan to pay off the credit card balance.   Then they'd start putting more stuff on the credit down.  This kept retails sales at a high level, and led to economic growth.

It was a great game.  You buy $25,000 worth of cool stuff.  Rather than pay a high interest rate to a credit card company, you could take out a $25,000 home-equity loan at a lower interest rate.  Oh, and it gets better.  You could take a tax write off for the interest paid for a home-equity loan!  So you get lower interest and a tax break to buy your consumer products.  Genius, right?

Well, what happens when there is no equity in your home, because property values have plummeted?  Suddenly you do not have equity in your home.  Suddenly you cannot take out a home-equity loan. 

This means that many Americans have credit card balances they can't pay off.  They don't have enough available credit on the cards to make consumer purchases.  Retail sales are slumped.

It's thus imprecise to say that the consumer credit market is frozen.  That's not it.  It's just that people no longer have the money to pay off their credit cards, because housing values are down.  Available credit is thus low, and credit limits are not going to be increased. 

So how will people buy stuff?  Short answer: They won't!

The market is not going to improve for a long time.  Markets are driven by earnings.  Earnings are not going to improve.  We haven't hit bottom.  Until we hit 8,000 I won't even think we're close. 

Comments

[JOHN]

TAKE A CLOSE LOOK AT THE PAYMENT ON YOUR CARDS AS WELL. MOST CARD COMPANIES HAVE PUSHED UP THE MINIMUM PAYMENT FROM 2% TO 4%. LESS SPENDING MONEY ANYONE?

[JOHN]

TAKE A CLOSE LOOK AT THE PAYMENT ON YOUR CARDS AS WELL. MOST CARD COMPANIES HAVE PUSHED UP THE MINIMUM PAYMENT FROM 2% TO 4%. LESS SPENDING MONEY ANYONE?