Posts filed under “Retail”

Macro Impact of Rates

I mentioned in the prior post that higher rates impact consumers in a negative fashion; Let’s look at some additional details, and respond to some bad dope on this.

There has been a
meme circulating, attributable to Charles Biderman of Trimtabs, that
the overall impact of rising rates is a net positive to US Households. MSN’s Jon Markman described it thusly:

Here’s the math: Households held $6 trillion in cash,
savings accounts, and certificates of deposit with maturities of less
than one year at the end of 2005. The interest earned on all of that
paper is at least one percentage point higher this year than 2005 and
two percentage points higher than in 2004. As a result, says TrimTabs,
consumers will receive $61 billion more in income from higher
short-term interest rates this year than in 2004. That’s real money
they can spend on clothes or cars, and invest in stocks.

That’s the upside of higher rates. The down side? Trim Tabs estimates
that $836 billion in adjustable-rate mortgages will reset this year. If
the average increase in adjustable mortgage rates is 2.5 percentage
points, then higher interest would only cost consumers $21 billion.

First, that omits all the other variable debt obligations — most especially credit cards.

Second, and perhaps more importantly, there seems to be some confusion here between median and mean (with issues of distribution and dispersion).  This is not the first time I have noticed this habit out of Trimtabs.

This issue is easily resolved for the typical family:  How much variable debt obligations does your household have? Have much variable income bearing instruments does your household own?

Add ‘em both up. If your monthly/quarterly debt obligations are greater than your interest income , rising yields hurt you; If you have less, they help you. 

Where Biderman’s analysis loses touch with reality is his explicit statement that because ALL American households have more cash/CDs/bonds/etc than they do have debt, rising yields helps them!

Technically, that specific statement is true — but its also terribly misleading. When you see how those interest bearing income instruments are distributed across the US, its apparent that a big percentage of households are hurt by rising yields. The prime beneficiaries are the very wealthy — and retirees living primarily on yield — assuming they are laddered, have CDs and savings accounts, and are not rate locked. 

For most American families, however, rising Yields are burdensome. The impact is likely to be felt in retail spending.


Addendum: In one of those wonderful pieces of irony that you couldn’t make up if you tried, the Director of Public Relations for Trimtab is named Puffer;  (How great is that?) That’s even more appropriate in light of their cheerful reading of data.




How higher rates pad our wallets
Jon Markman
MSN Money,  Wednesday, March 29, 2006

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