Another Quarter, Another New Record for Consumer Debt
The debt binge continues... Another quarter, another new record for consumer debt... Wells Fargo is in hot water (again)... Starbucks is betting big on China...
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U.S. consumers are still binging on debt...
According to the latest report from the Federal Reserve's Board of Governors, consumer credit outstanding grew about 4.5% in the second quarter to another record. Total consumer debt now sits at $3.91 trillion... nearly 50% higher than the previous credit-cycle peak of $2.67 trillion in the summer of 2008.
As has been the case of late, both student and auto loans jumped to new all-time highs of $1.53 trillion and $1.13 trillion, respectively. And revolving credit – which includes mostly credit-card debt – rose to more than $1 trillion. This is a new record for the second quarter, and second only to the fourth quarter of last year – which tends to see a seasonal spike due to holiday spending – as the highest ever.
As regular Digest readers know, this trend can't go on forever. Sooner or later, this boom will turn to bust, as they always do. A huge amount of this debt will go bad, and another crisis will likely follow.
Of course, what is far less certain is when. It's incredibly difficult to predict the timing of these events. And while there are plenty of reasons to be cautious today, most measures of credit-market stress remain relatively low to date.
Next week, the Federal Reserve Bank of New York will release its own Quarterly Report on Household Debt and Credit, which will provide further details on these numbers, as well as an updated look at delinquencies and defaults. We'll let you know what it says.
Wells Fargo (WFC) is back in the news again...
Longtime readers may recall it was nearly two years ago that the U.S. banking giant was caught in one of the biggest banking scandals since the financial crisis. As we wrote in the September 28, 2016 Digest...
Earlier this month regulators fined the bank $185 million for "widespread illegal" sales practices – including opening as many as 2 million deposit and credit-card accounts without customers' knowledge and transferring funds without permission. According to reports, these practices had been going on for the past five years.
As a part of the settlement, the bank avoided admitting any wrongdoing... but it did admit to firing 5,300 employees, including managers, for "improper sales practices"...
In testimony before the U.S. Senate Banking Committee last week, Wells Chairman and CEO John Stumpf repeatedly said only a "tiny sliver" of the bank's employees were responsible for these problems, suggesting he and his management team were unaware.
As we noted at the time, we were skeptical of that claim. We found it a little hard to believe that more than 5,000 employees could commit fraud for five years without their management's knowledge or willful ignorance.
Since then, the bank has been trying desperately to rebuild its once-pristine image under new CEO Timothy Sloan...
In recent months, you've likely seen the company's new marketing campaign. The ads debuted its new slogan – "Established 1852. Re-established 2018," and feature such feel-good lines as: "We know the value of trust. We were built on it," and, "It's a new day at Wells Fargo."
Sounds great, right? Not exactly...
You see, not only have these ads been widely panned as "insincere" and "inauthentic," but the company has also continued to find itself in hot water since the first scandal was exposed two years ago.
For example, last summer, the company was forced to admit it had fraudulently charged more than half a million of its auto-loan customers for comprehensive auto insurance since 2013.
Last fall, the company admitted that bankers in its foreign-exchange operations had been routinely cheating hundreds of clients.
Back in February, the Federal Reserve sanctioned the company – an unheard-of move by the Fed against a major U.S. bank – citing "widespread consumer abuses."
In March, the Justice Department and the Securities and Exchange Commission ("SEC") said it was expanding its fraud investigation beyond the firm's retail banking operations – which is still ongoing – to include its wealth-management business as well.
Earlier this month, the bank finally agreed to pay $2.1 billion to settle the nearly 10-
And just last Friday, the firm quietly announced it was being investigated yet again. As the Wall Street Journal reported...
Federal agencies are scrutinizing how Wells Fargo purchased tax credits meant to fund housing for low-income people.
San Francisco-based Wells Fargo disclosed in a securities filing Friday that federal agencies have "undertaken formal or informal inquiries or investigations" about how the bank purchased and negotiated to purchase "certain federal low income housing tax credits in connection with the financing of low income housing developments."
The filing didn't specify which agencies were looking into the matter. A spokesman for Wells Fargo declined to comment on the matter Friday.
Even worse, the timing of the announcement – on Friday evening, well after Wall Street had gone home for the weekend – suggests Wells Fargo management was hoping to keep the news as quiet as possible.
Perhaps we're just cynical, but this "new day" at Wells Fargo sure seems a lot like the old.
Finally, regular readers know our colleague Steve Sjuggerud remains bullish on China today...
In short, while Steve says Chinese stocks could continue to struggle in the near-term, he notes that nothing about his long-term bullish thesis has changed. Despite the current "trade war" fears, he still believes the long-term opportunity in China is one of the best opportunities of his entire career.
This is a contrarian opinion, for sure. But Steve isn't entirely alone. Late last week we learned U.S. coffee giant Starbucks (SBUX) remains incredibly bullish on China as well. As Bloomberg reported over the weekend...
The good news for China is the transformation of its economy – from reliance on exports and manufacturing to growth driven by consumer spending and technology. This shift is still little understood, if the public narrative in the U.S. is any guide. The caricature of sweatshop manufacturing and low-end assembly is woefully out of date. Just look at Starbucks.
Starbucks is teaming up with Alibaba to deliver drinks and food in China. Last week's announcement by the two companies is at least partly defensive, but it's testimony to the strength of the domestic Chinese market that Starbucks expects it to surpass America.
This suggests that the trade war isn't scaring away U.S. companies from China. More from the article...
China isn't going away, and its economic transition isn't going to stop between now and the presidential elections of 2020 or 2024. If China's long-term future as an economic powerhouse was in any real jeopardy, Starbucks wouldn't be doing this.
New 52-week highs (as of 8/8/18): Amazon (AMZN), Becton Dickinson (BDX), VF Corporation (VFC), and Williams Partners (WPZ).
In today's mailbag, more on Porter's Friday Digest request... and several folks weigh in on the big announcement from electric-car maker Tesla (TSLA). What did you think? Let us know at feedback@stansberryresearch.com.
"You asked for feedback. As a 'rookie' investor (at 75 years young) with very little capital to invest ($30,000) I decided to buy speculative stocks hoping to be in and out quickly. I did rather well my first two months averaging just 20
"Many of the stock recommendations that your writers have written about did well until recently but many of them also were duds in the short term... almost like throwing darts? However, I appreciate that in most cases, you are recommending businesses that you believe will do well, if we just hold onto them, unless they drop below the '
"I have spent over $20,000 accumulating
"I love Stansberry! Yes, Porter, I love you... And Dan, Dave, Bryan +++ And especially Steve! Yes, I did buy Apple and several others on your list this week. I'm still buying and selling based on whatever TradeStops tell me.
"I met Steve and then you, and the other awesome group you've assembled, back when I was a Navy LT – a Pirate Investor original! Now I'm over 62 and can occasionally withdraw the results from my Self-Directed IRA for something special. But I also know I'll have lots of cushion to my Navy retirement pay.
"So, some of us do pay attention and do what you recommend! Thanks for all you do!" – Paid-up Stansberry Alliance member Lane S.
"I had Apple for
"Tesla tweet equals learning... Thanks!" – Paid-up subscriber James S.
"It would seem to me that Mr. Elon's tweet would have raised an eyebrow or two at the SEC, assuming anyone is awake at the watchdog. The Saudi wealth fund is not known to be an aggressive buyer of anything. This just smacks as unadulterated B.S.!" – Paid-up subscriber Mike O.
"Tesla is the Tucker of our time. The majors will bury him, perhaps not before the SEC does." – Paid-up subscriber John B.
"Elon is the epitome of fake news. He invented it. He must keep it going. 'Smart' investors gorge on it. If you think the stock price is absurd now, wait until he grants land warrants on Mars for the next offering." – Paid-up subscriber Greg H.
"Elon Musk is operating solely on the federal government giveaways. Whether it be SpaceX or Tesla or the Battery business everything Elon does is built on government grants and subsidies (including tax breaks for electric car buyers). He realizes that the government is foolish enough to give away money to encourage their utopian plans.
"The only economically sound business he has been involved with is PayPal. The rest is political 'good feel' and 'idealistic' concepts that honest and knowledgeable free market participants know are unprofitable." – Paid-up subscriber BAC
"Will the rules for public companies and key execs/shareholders making unconfirmed claims and hype to move the stock for some of the purposes listed in [Wednesday's] Digest be investigated and enforced?
"This one seems blatant and nefarious. The classic short squeeze executed on Twitter. If U.S. Special Counsels weren't so consumed with finding Russian trolls under every street light in Washington, they would be free to look into this massive fraud by Musk. I hope Stansberry publications continue to expose this charlatan and get some opportunity to make it stick to him." – Paid-up subscriber Robert A.
Regards,
Justin Brill
Baltimore, Maryland
August 9, 2018