Montreal, Canada

Consumers aren't borrowing or they can't secure financing. Banks, flushed with cash, have been busy rebuilding reserves or paying back government TARP funds since June. But they're not lending.

Data from the Federal Reserve yesterday confirms the trend since mid-2008 whereby domestic consumption is impaired by tepid credit demand and loan growth.

Consumer lending fell 1.7% in October – the ninth consecutive monthly drop and extending the decline of financing available to help boost the American economy. From its peak in July 2008, borrowing by U.S. consumers (credit cards, auto loans but excluding mortgage loans) has contracted 4%.

Although credit markets continue heal across the board – including the most speculative debt instruments – credit is not flowing to consumers. It's a mistake to interpret a rally in most fixed-income securities to mean credit is starting to flow again to individuals and businesses; it is not.

Financial markets that support credit-card lending, auto loans and home mortgages not backed by the federal government are between 10% and 40% smaller than they were in the second half of 2007, according to The Wall Street Journal. It's important to note than almost 2/3s of all mortgage originations prior to 2008 were courtesy of Wall Street securitization or mortgage-backed securities. That market has almost disappeared.

A combination of a rising savings rate and debt repayment is at the heart of the new trend in consumer finances; the good ole' days are gone for now. In the post-2008 credit environment U.S. consumption is impaired by long-term debt deleveraging, frugal consumption and personal asset values in housing and stocks still about 30% off their all-time highs. How can anyone be in a "feel good" mood, unless they work for Wall Street and were bailed-out by the Feds?

The fact is that the average man on the street has nothing at all invested in the stock market. He might own a home -- if it hasn't been foreclosed already. He's also struggling to get by if he has a job and, if not, it's taking longer to find a job since late 2007 when the employment market peaked.

Consumer credit isn't the only segment of the economy that's stuck in reverse.

Small business, which accounts for almost 50% of U.S. employment, continues to witness deteriorating business conditions and can't secure financing. If small businesses can't expand then the economy won't sustain a long-term advance.

In every post-WW II economic expansion credit growth has been pivotal to support a credible growth cycle. Yet that's not happening as we shortly conclude 2009.

Increasingly, this post-March 9 rally is looking like a bear market trap because it won't be supported by broad-based economic strength or credit expansion in 2010.