Mike O’Rourke of BTIG examines the issue of deleveraging (across its various instances), in his latest note. His comments on the consumer appear hard to dispute.
To examine this picture on a larger scale, we can look at Household Debt as a percentage of
Nominal GDP (these debts are repaid in nominal dollars). Going back over the past 6 decades
(Chart 6), household debt has been forever rising as a percentage of GDP, ramping up this
decade to its peak in Q1 last year at 97.3%. Through the end of Q1 this year, it has dropped to
92.8%. Undoubtedly when Q2 data is released, it will have experienced further improvement. If
our rough estimate is correct that real mortgage debt is approximately $1 Trillion lower, then
real Household Debt is 85% of GDP. That puts the ratio at 2004 levels just as the housing
bubble started to pick up. Is there room for the ratio to drop further? Definitely considering we
only used the two most serious categories of delinquency and GDP has the potential to grow.
What is the correct ratio? Considering the ratio has one of the best long term uptrend’s that we
have ever seen, all we can say is we know it was too high at the peak and it is probably coming
down almost as quickly as it went up during most of this decade. Many will also note that much
of the leverage has transferred from the private sector to the public sector. That is something
we cannot deny, but what we do know is a de‐levered consumer will play a much more
instrumental role in the post‐crisis recovery than the other alternative of having a less levered
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