Unprecedented U.S. Consumer Credit Contraction and What the Eurozone Needs

Europe

First, a point on Tuesday's Thaler's Corner (Europe Is 'Almost' Saved), which sparked a number of highly instructive responses about the state of mind of the financial community on this topic.

I included the word 'almost' in the headline because, aside from the euro's positive impact and the ECB's bond purchase programme, the eurozone's survival will come from elsewhere.

The zone needs:

• A budget control and statistics mechanism acceptable to everyone and disposing of real investigative powers.

• Know-how, which is in the process of development, with the new powers granted to Eurostat.

• A eurozone bond purchase programme, allowing governments to obtain financing at the best price, given the liquidity premium.

• Progress, with the European Stability Fund, which will borrow €440bn on markets.

• A more extensive economic governance, leaving state sovereignty to more regal tasks.

• Nothing will be accomplished, unless the Franco-German couple can agree to a common view of Europe's futures.

We see progress, but there is still much to be done.

The United States

The graph below is obviously a measure of credit. Although I know many could care less about it these days as they remain focused sovereign debt spreads, stock indices and Forex markets. And yet, the credit statistics released Tuesday evening in the United States merit a look. They grew $1bn in April, which is better than expected, but remember that the March figure was revised downward from +$2bn to -$5.4bn!

I present below the percentage contractions of outstanding consumer credit during earlier recessions:

-1.1% in 1974, -1.5% in 1980 and -1.6% in 1991. But the -5.4% since 2008 is unprecedented!

It is more than likely that this contraction will continue, given an unemployment rate that is not going to decline anytime soon, continuing bank deleveraging and international pressure on the United States to correct its imbalances (less consumption, more savings and, thus, more investment and exports).

Consumer credit in the U.S.

Contraction unprecedented in scale...

Click to enlarge:

Asset allocation biases and advised option strategies

The long-term macro biases remain downward on eurozone government yields and negative on risky assets (equities, European real estate, commodities) and a deflation/depression scenario, which will require much more effort by the ECB than a shame-faced QE.

Our short-term biases remain neutral. Sorry.

We continue to flirt with the idea of betting on a tactical rebound of about ten Eurostoxx indices, accompanied by a narrowing of sovereign debt spreads, which would lead to a 2-point decline on the Bund. But for that, the ECB will have to really take charge. Its €5.5bn in bond purchases last week are really pitiful.

Disclosure: Long 20 years OAT and 30 years BTP Zero Coupons, EDF Corp 5 Years 4.5%, Greece 2 Y and 10 Y bonds