Looking At Consumer And Corporate Debt

This week the Dow Jones didn’t move far from where it closed last week, advancing to -2.75% from last October’s all-time highs, from last week’s -3.15%.  The change from last week’s position in the Dow Jones Bear’s Eye View chart below is imperceptible.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 605\Chart #1   Dow Jones  BEV 2013_20.gif

Looking at the Dow Jones in daily bars below tells us why; daily volatility within the circle containing last week’s market action disappeared. So the Dow Jones cleared 26,000 every day last week, but couldn’t do much after it did.

We saw similar weeks in late February and again in April. Back then such weeks were markers for pending market declines. If this pattern holds true again for mid-June, it’s an indication the market bulls are showing signs of exhaustion.

Let’s see what the bulls can do with the Dow Jones next week. Can they use this week’s quiet trading as a breather before their final assault on last October’s BEV Zero at 26,838, or will next week’s market action see Mr. Bear taking the Dow Jones towards its lows of two weeks ago.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 605\Chart #2   DJIA OHLC.gif

Currently, I’m a bear on the Dow Jones, so I’m expecting the next move will be down to test the low of May 31st (24,815) in the weeks to come. For one thing, the Dow Jones hasn’t done much since it bounded off its low of December 24th, an 18% correction from its last all-time highs of October. All January and February the Dow Jones advanced with enthusiasm, but then came March and April, followed by May and June, and we now have a head and shoulder topping formation in the above Dow Jones daily bar chart.

Seeing a head and shoulders formation doesn’t guarantee future market declines. But seeing how the market has advanced since March 1 invites questions of the bulls’ ability to take out the Dow Jones all-time highs of last October.

So it’s a coin toss between the bulls and Mr. Bear; heads and the bulls take the Dow Jones into new all-time high territory, tails and Mr. Bear takes the Dow Jones below its lows of May 31st, and I’m betting on Mr. Bear.

I’m still on record believing the coming bear market will be a massive deflationary market event that may surpass the 89% market decline of the Great Depression bear market. The Federal Reserve System has created massive levels of debt that must be serviced, and as the economy today is carrying its burden of debt, few people dwell on this topic.

It was much the same for the mortgage market before the sub-prime mortgage market became a crisis. But should the economy slide into a recession, debt defaults will begin a vicious circle of defaults deepening the recession, and the deepening recession increasing the number of debt defaults. But the economy isn’t in a recession just yet, and until it is, we can’t rule out the possibility of seeing the Dow Jones at new all-time highs.

A frequent theme of mine is the growth of debt in the economy outstripping the economy’s means of servicing it. So, this week I thought I’d go back to my sources and create some charts illustrating this problem. The first is consumer debt (Blue Plot below) and personal income (Red Plot below) indexed to January 1959 = 1.00.  Why January 1959? Because that’s as far back as the St. Louis Fed has data on personal income.

As these plots are indexed it’s self-evident how in the past sixty years consumer debt has expanded by a factor of 83.13, while personal income has expanded by only a factor of 46.19. To see the dollar values these factors are based on I have a table in the chart insert. Since 1959, consumer debt has increased from $49 billion to $4,073 billion.

That’s a big increase, but it’s not overwhelming personal income. In 1959 personal income was $392 billion, and as a ratio to consumer debt (CD/PI column) in 1959 consumer debt was only $0.12 for every dollar of personal income. Today this ratio of consumer debt to personal income has risen to only 0.22, or $0.22 of debt for every dollar of personal income.

But what exactly is contained in these data series?  Does consumer debt also include mortgages, sub-prime auto and school loans? Maybe, and then maybe not. It would be nice if the Federal Reserve broke down this data into individual categories.

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