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Why the Setup is Ripe for Another Debt Implosion

Learn the results of a new survey about debt

by Bob Stokes
Updated: October 18, 2017

Spending is fun! Easy credit is a blast! But debt is a downer. And, right now, numerous measures of debt are near all-time highs. Here's what EWI analysts are closely watching.

 

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[Editor's Note: The text version of the story is below.]

When individuals borrow more money than they can pay back, this can result in a personal financial crisis, perhaps bankruptcy.

When a lot of people take on more debt than they can handle, this can lead to a systemic financial crisis, like what happened between 2007 and 2009, when many people bought more house than they could afford.

Our August 2017 Elliott Wave Theorist addressed this concern:

Numerous measures of debt, including auto-loan debt, student-loan debt, real-estate debt at commercial banks (though not overall), consumer debt, margin debt and total debt, have soared to all-time highs, indicating exceptional recklessness among lenders, borrowers and investors.

So, we weren't surprised by the findings of a recent Northwestern Mutual survey (CNBC, Oct. 17):

Interviews with more than 2,700 adults over the age of 18 revealed that nearly three-quarters of them said they were struggling with debt, and it was a "high" or "moderate" source of anxiety for 40 percent of them. Almost half of those interviewed were carrying at least $25,000 in debt, and the average debt load was $37,000, excluding mortgages. More than 1 in 10 owed more than $100,000, and 45 percent of those carrying debt were spending half their monthly income on debt repayments.

This Federal Reserve chart shows the 10-year trend of total consumer credit outstanding:

Total Consumer Credit Owned and Securitized Outstanding

As you can see, in November 2010, the amount was around $2.5 trillion. But, as of Oct. 6, 2017, the dollar figure had climbed to nearly $3.8 trillion.

Yet, here's what you need to know: The momentum of the growth of consumer credit is slowing.

Yes, social mood is still positive, as evidenced by the DJIA hitting 23,000 for the first time on Oct. 17.

But, when social mood turns negative, our view is that the setup is already in place for a historic debt implosion.

EWI's analysts are now letting subscribers know when they expect the stock market and social mood to shift into reverse.

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