Money Morning asked:


[This is the newest installment in an ongoing news series that looks at the anticipated “aftershocks” of the global financial crisis, and the profit plays those events can trigger.]

By Jason Simpkins

And William Patalon III

Money Morning Editors

U.S. consumers are already losing their jobs at an accelerating rate.

The same thing is now set to happen to their credit lines.

But with so many Americans already losing their main source of income – their jobs – at an ever-spiraling rate, will an economy that derives two-thirds of its power from consumer spending end up mired in its worst funk in decades because those same consumers are now losing their charge accounts?

Before you dismiss the possibility, consider this: The U.S. economy weakened across all regions since the middle of October as it became tougher to get loans and demand for credit shrank, the U.S. Federal Reserve said in its regional economic survey report yesterday (Wednesday). The so-called “Beige Book” report – published just two weeks before central bank policymakers are to meet and consider interest-rate changes – said that retail sales, tourism spending and manufacturing declined in most places, labeled housing markets as “weak” and concluded that the commercial real estate sector “weakened broadly,” Bloomberg News reported.

“We are looking at an economy that is not only in a recession, but a recession that is deepening rapidly,” former Fed Governor Lyle Gramley, now senior economic adviser at Stanford Group Co.,

told Bloomberg Television. “It certainly is a gloomy report, but not, I guess, worse than what you would expect given the data [we’ve seen] coming in.”

The United States has already been in a recession for a year, the National Bureau of Economic Research (NBER) reported this week. This economic one-two punch could generate a much-bigger financial crisis “aftershock” than many experts realize. Only two of the last 10 recessions to take place since the Great Depression have lasted a full year. But this one could last well into 2010.

To fully understand the forces at play, let’s first look at the outlook for U.S. employment.

Weakening Worker Ranks

Non-farm payroll employment fell by 240,000 in October, and the unemployment rate jumped to 6.5%, up from 6.1% the month before, the Bureau of Labor Statistics reported in early November. October’s drop in payroll employment followed declines of 127,000 in August and 284,000 in September.

That means that U.S. employment has fallen by 1.2 million jobs in the first 10 months of the year, with more than half of that decrease occurring in August, September and October.

The government’s jobless numbers for November won’t be released until tomorrow (Friday) – although it’s expected to show that the U.S. economy lost jobs for the 11th straight month, Bloomberg News reported.

But a private report based on payroll data released Tuesday said that United States companies eliminated an estimated 250,000 jobs in November – a much larger amount than was forecast and the most since November 2001, said ADP Employer Services, a unit of payroll-processor Automatic Data Processing Inc. (ADP). That would take the total number of job losses for the year up to 1.5 million.

The ADP report prompted some analysts to boost their estimates for the job losses we’ll see in tomorrow’s Labor Department report. New predictions include a payroll decline of 400,000 from Goldman Sachs Group Inc. (GS) and a drop of 450,000 from Wachovia Corp. (WB) economists. And the unemployment rate for November probably spiked to 6.8%, the highest it’s been since 1993, a Bloomberg survey of economists concluded.

With the world’s largest economy mired in its first recession since 2001, companies have accelerated their job-ranks reductions, with such sectors as banking, manufacturing and even business services taking major hits.

The NBER said Monday that the deterioration of the labor market was one of the key factors in labeling this downturn as a recession, even though we have yet to experience two consecutive quarters of economic contraction.

According to a number of estimates, the U.S employment outlook – and the overall economy – is going to get much worse before it gets better. Goldman Sachs Group Inc. (GS) says the U.S. unemployment rate will spike to 9.0% by the fourth quarter of 2009, as corporate profits plunge an estimated 25% – and that’s after an estimated decline in profits of about 10% this year, Goldman says.

Indeed, the U.S. economy – as measured by gross domestic product (GDP) – will decline by 5.0% in the current quarter, followed by declines of 3.0% in the first quarter of 2009 and 1.0% in the second quarter, Goldman predicts.

Those numbers are worse than Goldman originally forecast, and create an outlook similar to Money Morning’s projections, which called for a credit-crisis-nurtured economic downturn that could last as long as 12-18 months.

The business-cycle dating committee of the NBER, a privately run, nonprofit economic research group, on Monday formally announced that the U.S. recession started after the economy peaked in December 2007. The U.S. Commerce Department estimated that U.S. GDP rose 0.9% in the first quarter and 2.8% in the second quarter. For the third quarter, GDP declined an estimated 0.3%.

The loss of consumer credit lines could make matters even worse.

$2 Trillion in Credit Lines on the Chopping Block

More than $2 trillion in consumer credit could be cut in the next 18 months, as credit-card companies pull back credit lines in anticipation of credit funding problems and regulatory changes, said Meredith Whitney, an Oppenheimer Holdings Inc. (OPY) banking analyst who’s well-known for her gutsy and prescient (and ultimately correct) market calls.

Throughout the week, Whitney has warned that the entire mortgage market will contract for the first time ever in the months ahead. More importantly, however, Whitney says the credit card market will be 18 months behind, as credit-card companies pull back more than $2 trillion in credit lines, taking away consumers’ second major source of liquidity, following jobs.

“What you haven’t seen yet digested by the market is banks pulling lines from consumers,” Whitney said in an interview with CNBC. “And across the board you saw the big banks that command so much of the market share of key products like mortgages and credit cards start to pull lines in the third quarter and that’s going to continue in the fourth quarter. And that’s going to continue into 2009.”

Although some experts note that consumers reduce their spending during recessionary periods — and, needless to say, after they lose their jobs — it’s important to not confuse spending and credit. During dire times, many consumers can boost their use of credit even as they cut overall spending, using the credit cards, home-equity lines and other forms of borrowing as a lifeline to tide them over. For those consumers, a credit line cut can be disastrous personally, and can aggregate into an even-steeper downturn in spending.

Roughly 70% of U.S. households have access to credit cards, and 90% of those people use those credit cards as a cash-flow management vehicle, or revolve payments at least once a year, Whitney says.

A surprisingly small number of national companies dominate the major lending arteries – including credit lines, mortgages and credit cards – that have sustained the U.S. consumer for so long, including mortgages and credit cards. Mortgages have already hit a wall with the collapse of the U.S. housing market and wave of subprime defaults. But credit cards could be next as companies raise interest rates, tighten lending standards, cut credit lines, and even close millions of accounts in an effort to insulate themselves from consumer defaults.

Bank of America Corp. (BAC), Citigroup Inc. (C), and JPMorgan Chase & Co. (JPM) – which controlled more than half of U.S. credit-card lines at the end of the third quarter – have all discussed reducing their credit-card exposure or scaling back growth, according to Whitney.

“You’re going to start to see the consumer get really strained on their credit card lines,” said Whitney. “People think the next shoe to drop is the credit card credit costs – the charges going up. No, it’s the credit card lines being pulled by bank lenders in anticipation of worsening credit funding problems, and then regulatory changes on the horizon.”

Whitney expects the credit-card market to begin to shrink by mid-2010, a time when the unemployment rate could be as high as 9.0%.

“Just when the consumer is losing their job that’s their first source of cash, their first source of liquidity, then they lose their second big source of liquidity, which is their credit card line,” she said.

Indeed, as unemployment rises, so too will credit-card delinquencies. David W. Nelms, chief executive of Discover Financial Services (DFS), told Reuters that card write-offs could be in the mid-5% range in the fourth quarter and near 6% in the first quarter of 2009.

Delinquencies “will tend to track with unemployment,” Nelms told Reuters after a speech to the Executives Club of Chicago. “Most agree that things will tend to get worse next year.”

Lenders, still reeling from losses tied to subprime mortgages, can’t afford another round of defaults on credit cards. So they’ve begun pulling lines of credit, leaving the consumer out in the cold. And it’s only going to get worse, Whitney says.

Crisis Expert Sees Change in Consumer Psychology

Investment expert R. Shah Gilani – a retired hedge fund manager who’s been chronicling the credit crisis as a Money Morning contributing editor – isn’t surprised by Whitney’s predictions.

“This is already happening in a big way,” Gilani said referring to Whitney’s assertion that credit lines have been put in jeopardy. “I have already talked to people who have had their credit lines reduced, even cut in half. So I wouldn’t be surprised if $2 trillion turns out to be an accurate figure.”

And according to Gilani, the evaporation of $2 trillion in credit could be the death knell for the American consumer.

“A number that high makes you gasp, just considering the quantitative effect on consumer spending,” Gilani said. “There’s a strong chance that the American consumer is not just down on the canvas, but has been knocked out of the ring.”

American consumers cut spending by 1% in October, the biggest drop since the last recession in 2001, the government said last week.

U.S. retail sales plunged 2.8% in October – the largest monthly drop since the Commerce Department began tallying monthly retail sales in 1992. The sales drop marked the fourth consecutive monthly decline and the first retrenchment since 1992. And few have any hope left for the Christmas season as consumer confidence is also waning. The Reuters/University of Michigan consumer sentiment index clocked in an ultra-low 55.3 for November, down from 57.6 the month before.

The reading fell well short of the projected 57.7, Reuters said, and – even worse – had deteriorated since the middle of the month, even though lower gasoline prices were seen as a bright spot for consumers. The University of Michigan confidence index dates back to 1952. Its record low was 51.7, which it hit in May 1980.

Once again, jobs, liquidity and confidence were the key issues, the survey report said.

“Consumer confidence fell in the last half of November due to mounting job losses, falling incomes and the evaporation of household wealth,” the report said. “Consumers were unanimous in their recognition that the economy was in recession, and nearly three-in-four expected the recession to deepen in the months ahead.”

However, Gilani, who is also editor of the Trigger Event Strategist – a trading service specifically designed to help investors maneuver through this economic malaise – also believes that what investors are witnessing is yet another “aftershock” of the ongoing global financial crisis.

“What is actually taking place is a shift in consumer psychology that has been driven by factors such as the socioeconomic climate – as well as the environment – and that’s now being compounded by credit conditions,” Gilani said. “This is about banks and credit companies de-leveraging and forcing the American consumer to do the same.”

The trouble is, he said, this can become a cycle that’s hard to stop once it takes hold.

“Whether Americans have lost confidence in the market or simply can’t afford to repay loans, money flows have simply dried up” Gilani said. “So banks have been forced to raise their lending standards to a point that many Americans are now unable to meet. It becomes a vicious cycle.”

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Investment News

Aubrey Clark asked:


The epidemic of home foreclosures, higher gas and food prices have stretchered the average consumers budget to the max. According to Trans Union and Equifax, national credit scores are steadily dropping at a higher rate than they have seen in the last decade. As a result of the lower credit scores large ticket items, like homes and automobiles, have began to slow down fueling the current recession. At Direct Banc, we thought a few credit bureau repair tips might be in order, here are the steps we recommend consumers follow.

Become Familiar with your Credit Report – Having a credit bureau in hand is essential if you are serious about credit bureau repair. There are three major credit reporting repositories (Experian, Equifax, Trans Union), each reporting their own version of your credit. It almost certain that each of their reports will differ from the others. For this reason, you should get a 3 in 1 credit bureau report before you begin your credit bureau repair.

Validate all Negative remarks – We suggest that you send a validation letter to every creditor or collection agency that is reporting negative information about you. Send these letters BEFORE sending a dispute letter to the credit repositories. Creditors/collection agencies are required to validate the legitimacy of your debt and their relationship to the debt. If they are unable or unwilling to answer your request for validation, the credit repositories will likely remove the remark.

Dispute Invalidated Items to the Credit Repositories – Wait 30 business days from the time sent the creditors a letter of validation. Once this time frame has passed, you can send a dispute letter to EVERY credit repository showing proof (certified letter receipt) that the collection agency failed to respond to your request. This will usually result in the removal of the remark.

Stop the Collection Agencies from harassing you –Once you are back on the collection agency’s radar, they will most likely begin to actively collect the debt. We all know how annoying that is; all you need to do is send them a “stop harassment” letter that basically tells them to leave you alone while you are working on the debt.

Dispute Valid Debts with The Credit Repositories – As we mentioned earlier, collection agencies have to prove that you owe the debt to the repositories. Even though you may actually owe the debt, or deserve the negative remark, some agencies are unable to back it up. If you send a dispute letter to ALL of the repositories requesting an investigation the collection agencies are compelled to answer them. If they do not answer the repository in a timely manner, or they offer unsatisfactory proof, the remark must be removed.

This list is just a partial explanation of how to thoroughly repair your credit bureau. We have a tutorial underway at Direct Banc that will give you a detailed, step by step break-down of credit bureau repair. We also list a comprehensive assortment of pre-written sample credit repair letters that are free to download to help you with all of the validations and disputes.

Keep in mind when attempting http://www.directbanc.com/credit_repair/index.php”>credit bureau repair, the  credit repositories are your friends, being rude or disrespectful to them will  not help your situation. The collection agencies, not so much, it’s best to  deal with them by mail. Remember to send ALL correspondence certified, return  receipt mail; it’s worth the two bucks. Keep all receipts and letters, you WILL  need them in the future when the collection agencies sell your debt to penny  brokers.