Volatility and Debt: More Bloat

Recently we used the term "bloat" in our attempt to make sense of the recent Italian elections and the recent valuations of the stock and bond markets. Let's now apply the term to our new regime of volatility in the stock market, along with the dramatic rise in consumer debt.

The up and down swings in stock market prices that began in February mark a new phase in the long-in-the-tooth bull market that began in 2009. This new phase replaced the incredibly calm period that preceded it. Indeed, it was so calm that speculators borrowed massive amounts to bet on the continuing sleepy action. In February, those speculators took it on the chin. And unless they unwound their trades quickly, they've been absorbing punch after punch since then - kind of like a boxer who stumbles around the ring unable to defend himself from his opponent until the ref steps in. As for this new phase, it looks like it's going to stick around for a while, so get used to it. The volatility god has gorged himself on the nickles and dimes of those who doubted his existence and he seems to be enjoying himself immensely. He's a bit bloated, but I don't think it's slaked his appetite for more.

By the way, if the violent swings up and down bother you, you can always opt out. No need to lose sleep over all this. Keep the stock market at bay and the worst that can happen is you lose out on any future rise in stock prices - if they do indeed resume their bull trend. You can pretty much stay safe unless we wind up in a nasty bear market - something that's lurking "out there" somewhere. When the bear strikes, you'll be glad you're out of stocks, but bear markets often weigh heavily on all of us no matter how we're invested. But let's not worry about all that now.

Switching gears, consumer debt looks pretty bloated at this point. Apparently it now exceeds pre-2008 levels. These are considered high enough to effect consumer spending, according to this WSJ article. Banks are holding back on lending to consumers.

Credit-card lenders including Capital One and Synchrony Financial have confirmed that they tightened lending standards over the last two years in response to rising defaults or delinquencies. So, too, have auto lenders like Santander Consumer.

When this happens, consumers with lower credit scores will find it harder to secure auto loans or new credit-card lines. One naturally would expect to see some impact on spending despite healthy incomes.

The debt that consumers have built up in recent years could be a drag on the economy for some time.
Just as fewer and fewer of us are controlling our appetites these days, thus leading to a bloat in our waistlines, so too we're gorging on debt to satisfy our desire for stuff. With food we can just keep eating as long as we've got the dough to pay for the food. But when you rely on credit to buy just about everything else, and the credit isn't forthcoming, that means a slowing in spending. And a slowing in spending means a slowing in the economy at some point. At least that's the theory.

What could change this? Maybe we'll hear it argued that wages are growing, and at some point Americans will start spending those higher earnings. Or maybe the Fed will push banks to lend even more despite the current high levels, just to keep the economy humming. But if it's the case that the average Joe is too bloated with debt, doesn't it make sense that spending should slow down? Isn't that kind of like when you blow up from overeating, you're not going to move around as fast as you did before?

Maybe what we need is a kind of "Financial Lent." Having just exited my Lenten fasting, I can attest to the fact the giving up certain indulgences helps develop self-control. That could work when it comes to spending. Of course, given how few people really take Lent seriously - especially when it comes to any kind of self-denial - I imagine the numbers willing to observe a Financial Lent would be similarly small.