People are not borrowing to spend but to survive! A frightening cash flow crisis have been taking place back in May as more people are taking longer time to pay bills. The raising student loan default rate is also sending another clear message that the crisis is likely to worsen.
Cash (Flow) Really Is King: One of the most important lessons entrepreneurs have to learn, often painfully, is that cash really is king. I’m not talking about paper money — I’m talking about cash flow. Simply put, it doesn’t matter how much money is coming in the future if you don’t have enough money to get from here to there. Employees can’t wait on paychecks until your customers pay. Your landlord doesn’t care that you’re talking to investors and will have the money in a couple of months. Suppliers may not be willing to extend your credit any further and you may not be able to purchase the goods you need in order to deliver to your customer and receive payment.
“It’s A Cash-Flow Problem”: The Ever Broker US Consumer Increasingly Relying On Credit Cards For Daily Staples
Somehow, in all the confusion, the endangered species known as the American “consumer” missed the economic recovery. The reason, as Bloomberg writes, is that consumers are increasingly “using credit cards to pay for basic necessities as income gains fail to keep pace with rising food and fuel prices.” The data comes from credit card transaction processor First Data which reported that the dollar volume of charged purchases rose 10.7% in June (a 6.8% increase in the number of transactions). “The difference probably represents the increasing cost of gasoline, said Silvio Tavares, senior vice president at First Data, the largest credit card processor. “Consumers, particularly in the lower-income end, are being forced to use their credit cards for everyday spending like gas and food,” said Tavares, who’s based in Atlanta. “That’s because there’s been no other positive catalyst, like an increase in wages, to offset higher prices. It’s a cash-flow problem.” Alas, it gets worse. As Bank of America’s Joshua Dennerlein reports today, the end of the year will see 3.7 million Americans stop receiving jobless benefits. “This will act as a hit to consumption in
the first quarter of 2012.” This number is completely independent of any possible new legislation to extended jobless benefits for new unemployed labor pool entrants, as it merely affects those about to hit the 99 week cliff. Unfortunately even more “growth” over the next 6-9 months will have to come from the Fed and the only thing it knows how to
do: print, print, print.
Credit Card Debt in May Grows at Fastest Pace Since Recession At The Same Time Cash Flow Crisis In Small Business Is Taking Pace.
U.S. consumers in May added $8 billion to their outstanding credit card bills, the largest increase since before the beginning of “The Great Recession.”
The Federal Reserve said in its monthly consumer credit data release (also known as G.19) that total consumer credit card debt outstanding at the end of May was $870.2 billion. The revolving debt numbers come straight from Fed member financial institutions.
Total revolving debt outstanding in May increased a seasonally adjusted 0.93 percent from April, marking the highest monthly increase since November 2007, a month before the recession officially began and nearly a year before the financial crisis of fall 2008.
Custom cabinet seller M&J Kitchens survived the recession even though its revenue from homeowners and builders fell by more than half in 2009. Then, last August, with sales tracking 42 percent higher than a year earlier, owner Drew Davies shut the East Greenwich (R.I.) company after 26 years, unable to pay his bills. M&J was a casualty of a cash-flow crisis precipitated by his bank and suppliers that, Davies says, cut off credit lines that had been in place for decades.
Small businesses face what could be a permanent legacy of the recession: Their vendors are demanding faster payment even as their customers take longer to pay. That means companies with the least clout get squeezed the hardest. “The slowdown of currency, of money, the exchange, put us in a very precarious position,” says Davies. “We basically had panic from our vendors.”
The average time private companies took to collect accounts receivable increased to some 27 days in 2010 from about 23 days in the previous four years, according to accounting software maker Sageworks, which analyzes private company financial statements. Payment times jumped to an average of about 24 days, up from roughly 20. The largest corporations are even slower: Companies in the Standard & Poor’s 500-stock index paid vendors in 59 days, on average, in the most recent quarter and collected payments in 46 days, according to data compiled by Bloomberg.
Davies says many of his customers had slowed their payments from 30 days to 60 or 90. At the same time, the cabinet manufacturers he ordered from cut his credit lines or required deposits, which Davies says tied up $60,000 to $120,000 per month. Although Davies says he was current on his loans, his lender, Citizens Bank (RBS), pulled his credit last March, saying his assets had dropped below the level required by the loan agreement. (The bank declined to comment.)
M&J Kitchens, which once employed 12 people and grossed as much as $4 million a year, went into receivership at the end of August. “Without the cash flow we were used to … we didn’t have great negotiating power with the bank,” Davies says. “We were getting squeezed from both sides.”
Late payments can ripple through the supply chain. Wood-Mode, one of the cabinet lines Davies sold, says its customers have slowed their payments, and fewer are taking advantage of discounts for paying in 10 days. Nick Yoder, credit manager of the Kreamer (Pa.) company, says Wood-Mode tries to be flexible with its 1,200 dealers but has begun asking for larger deposits or payment on delivery from some buyers that appear risky. “We have to reassess each individual’s credit,” says Yoder, who confirms that in some cases Wood-Mode cut off credit to customers.
Think of the coffee shop on the corner, the landscaping service that keeps office building grounds neat, the photocopy company that churns out meeting agendas, or the manufacturer that creates and installs signage.
There’s a strong chance that these small businesses, based on the findings of recent reports, are likely to be caught in a trend that forces them to use their operating capital to extend credit to their clients.
The National Federation of Independent Business, a national, small-business lobby group based in Nashville, Tenn., reported that small businesses waited up to 46 days on average to get paid in 2011, six days longer than in 2010 and 10 days longer than 2006. The Kansas City-based Ewing Marion Kauffman Foundation, which focuses on entrepreneurship, released a study in May finding that 14 percent of nearly 5,000 entrepreneurs surveyed cited late or nonpayments as their biggest challenge in 2010, up from 2 percent in 2008.
Jim Lally, president of the Enterprise Bank & Trust’s St. Louis region, confirmed that’s the trend locally as well.
“Our clients tell us that the cash flow cycle from the time in which they provide goods or services to getting paid is elongating,” said Lally.
Late–paying customers are forcing small firms to increase their bank borrowing to maintain cashflow, according to the Federation of Small Businesses (FSB).
Commenting on figures from the British Bankers’ Association (BBA) which revealed that bank lending to small firms (those turning over £1 million or less) increased by 11 per cent in the 12 months to June 2008, FSB public affairs spokesman Stephen Alambritis, said:
“Businesses are not borrowing to expand, they are borrowing to keep still.”
“We think lending is growing not because people are growing their businesses, but because small businesses are not being paid on time by the customers they supply. Businesses are having to go to the bank to pay their rent, rates and other bills — it is a worrying trend.”
Alambritis pointed to the example this summer of high street chemist Alliance Boots imposing on its suppliers payment terms of 75 days from the end of the invoice month, rather than the 30 days it had previously honoured.
The BBA figures also highlighted that in the 12 months to June 2008, small firms’ overdraft borrowing increased by just three per cent — to a total of £9.2 billion….
Until now. With annual tuition rates alone well into five figures even for traditionally bargain-basement institutions like land-grant universities, potential students and their hard-pressed parents are very likely to start looking for alternatives to baccalaureate degrees. Although college enrollments remain steady so far, so did housing purchases — right up to the eve of the crash.
Student loan debt is different from credit card debt and mortgage debt in one very significant way: It cannot be discharged via bankruptcy. Student debt, under current law, is with the borrower, interest accrual and all, for as long as it takes to pay it off, unless extreme circumstances like total disability supervene. Creditors almost never forgive student debt, because they know that, backed by the federal government, they can continue to pile on interest and pursue delinquent borrowers literally for their entire lives.
In better times, few student borrowers were even aware of such obligations. But with defaults on the rise, aggressive and less-than-fully-truthful tactics employed by lenders to entice students to borrow money on what seem like attractive terms are now getting wide publicity — as are banks’ increasingly aggressive efforts to track down and shake down borrowers in default.
Comments: If student default on his student loan, he is more likely to declare bankruptcy than paying other bills on time.
The economic damage wrought by a handful of financial firms has left the American public clamoring for a pound of flesh. This week, New York Attorney General Eric Schneiderman tried to satisfy that desire. He chose a curious first scalp.
Schneiderman, who is co-chairman of a state-federal mortgage-fraud task force created by President Barack Obama, hit JPMorgan Chase & Co. (JPM) with a lawsuit alleging the kind of deceptive behavior all too common in the run-up to the financial crisis: creating and marketing defective mortgage-backed securities that blew up on investors. The conduct, however, took place not at JPMorgan but at Bear Stearns, the investment bank JPMorgan bought in a government-arranged sale as the financial crisis was unfolding.
Schneiderman coordinated his lawsuit with the Justice Department, the Securities and Exchange Commission and the Federal Housing Finance Agency, putting the federal government in the awkward position of punishing JPMorgan for behavior it had, in fact, encouraged.
Worse, the move runs the risk of sending a troubling message to markets, which might not be as willing to step in during times of crisis. The Dodd-Frank financial law established a government process for rescuing failing firms like Bear and Lehman Brothers Holdings Inc. to avoid the need for a taxpayer bailout, a process that requires private market participation.
My company’s 3 largest Accounts Receivable Balances are from Bank of America, JP Morgan Chase & Wells Fargo. In August they did not pay us as much as they should have, in September it is worse. I am talking about low 8 digits in receivables and climbing….
In the financial world, the month of October is synonymous with stock market crashes. So will a massive stock market crash happen this year? You never know. The truth is that our financial system is even more vulnerable than it was back in 2008, and financial experts such as Doug Short, Peter Schiff, Robert Wiedemer and Harry Dent are all warning that the next crash is rapidly approaching. We are living in the greatest debt bubble in the history of the world and Wall Street has been transformed into a giant casino that is based on a massive web of debt, risk and leverage. When that web breaks we are going to see a stock market crash that is going to make 2008 look like a Sunday picnic. Yes, the Federal Reserve has tried to prevent any problems from erupting in the financial markets by initiatinganother round of quantitative easing, but 40 billion dollars a month will not be nearly enough to stop the massive collapse that is coming. This will be explained in detail toward the end of the article. Hopefully we will get through October (and the rest of this year) without seeing a stock market collapse, but without a doubt one is coming at some point. Those on the wrong end of the coming crash are going to be absolutely wiped out.
A lot of people focus on the month of October because of the history of stock market crashes in this month. This history was detailed in a recent USA Today article….
When it comes to wealth suddenly disappearing, October can be diabolically frightful. The stock market crash of 1929 that led to the Great Depression occurred in October. So did the 22.6% plunge suffered by the Dow Jones industrial average in 1987 on “Black Monday.”
The scariest 19-day span during the 2008 financial crisis also went down in October, when the Dow plunged 2,675 points after investors fearing a financial collapse went on a panic-driven stock-selling spree that resulted in five of the 10 biggest daily point drops in the iconic Dow’s 123-year history.
So what will we see this year?
Only time will tell.
If a stock market crash does not happen this month or by the end of this year, that does not mean that the experts that are predicting a stock market crash are wrong.
It just means that they were early.
As I have said so many times, there are thousands upon thousands of moving parts in the global financial system. So that makes it nearly impossible to predict the timing of events with perfect precision. Financial conditions are constantly shifting and changing.
But without a doubt another major financial collapse similar to what happened back in 2008 (or even worse) is on the way. Let’s take a look at some of the financial experts that are predicting really bad things for our financial markets in the months ahead….
According to Doug Short, the vice president of research at Advisor Perspectives, the stock market is somewhere between 33% and 51% overvalued at this point. In a recent article he offered the following evidence to support his position….
? The Crestmont Research P/E Ratio (more)
? The cyclical P/E ratio using the trailing 10-year earnings as the divisor (more)
? The Q Ratio, which is the total price of the market divided by its replacement cost (more)
? The relationship of the S&P Composite price to a regression trendline (more)
Peter Schiff, the CEO of Euro Pacific Capital, has been one of the leading voices in the financial community warning people about the crisis that is coming.
During a recent interview with Fox Business, Schiff stated that the massive financial collapse that we witnessed back in 2008 “wasn’t the real crash” and he boldly declared that the “real crash is coming”.
So is Schiff right?
We shall see.
Economist Robert Wiedemer warned people what was coming before the crash of 2008, and now he is warning that what is coming next is going to be even worse….
“The data is clear, 50% unemployment, a 90% stock market drop, and 100% annual inflation . . . starting in 2012.”