Come a Little Bit Closer

Do you think that U.S. Consumers are near the end of the delebveraging process? Think again. We have been asked: How much deleveraging must U.S. households complete before the economy begins to pick up speed? We are of the opinion that U.S. household debt to income must go back, at least, to levels seen prior to the housing bubble, if not prior to the tech bubble. The following chart displays U.S. household debt as compiled by the Fed: U.S. Household Dept (SAAR) since 1980 (source: Bloomberg & Fed):

As you can see, just to get to levels seen prior to the housing bubble (2000 to 2004), debt would need to be slashed nearly in half. Either household debt falls to come more in line with incomes or income rise to service the debt. Even more telling is the chart which displays household disposable income after debt service: Federal Reserve US Financial Obligations Household Debt Service Ratio Total:

If we want to see the economy experience trend or above-trend growth, we need to get the Household debt service ratio in line with past periods of robust growth. Again, this can be done by shedding debt or increasing incomes. Neither appears to be happening at a rapid pace. To subscribe to Bond Squad go to: http://www.bond-squad.com/subscription.htm Tom Byrne tom@bond-squad.com. www.bond-squad.com www.mksense.blogspot.com 347-927-7823 Twitter: @Bond_Squad Disclaimer: The opinions expressed in this publication are those of the author. They are not, nor should they be considered solicitations to purchase or sell securities.