US consumer credit slumps 10.4%

You might have thought the news that US consumer credit fell in July by a record $21.6 billion would have stalled the stock market rise. That represented the sixth month in a row of lower borrowing by consumers, and a 10.4 per cent seasonally adjusted drop to $2.5 trillion.

The US consumer has started paying off loans and reducing borrowing. For an economy where 70 per cent of GDP relies on consumer spending this is a horrendous and very clear confirmation that there is no recovery.

Market madness

Why then did the US stock markets rise yesterday on this news? Consumer credit is plunging at a record rate, how can this possibly be seen in a favorable light?

In fact, overnight reaction from Asian markets was more sanguine with a pull back across the board. Less US consumer credit means the Asian export slump will continue, and indeed the Baltic Dry Index has confirmed a renewed slump in shipping rates.

All the ducks are in line for a stock market correction of considerable magnitude. The economic fundamentals of global trade and consumer spending are not supportive of the view that a recovery is about to happen or actually in progress, absolutely the reverse.

Moreover, you can not even argue that the stock market is well positioned to go higher because shares are cheap. They have risen more than 50 per cent in value since the March lows and have fully discounted the non-existent recovery.

Shorts on

The clever move is clearly to short these markets and a number of ETFs offer an easy and relatively cheap way to do this for investors who are not happy with the precise market timing required to buy options.

Buying gold is also a form of protection, and from the jump above $1,000 an ounce it seems some investors are taking this advice. However, in a big stock market fall then all asset classes including gold and silver will suffer, and bonds and the dollar rally.

The dollar looks oversold at this point and this could be seen as another indicator that financial markets are about to have another serious bout of volatility and turbulence.