12/05/2013 03:23 pm ET Updated Feb 04, 2014

Another Magic Mountain

We are squeezing those behinds into crowded aisles, with subtle and focused elbow nudging (but not too rowdily, please), and diligently trained hands reaching for the next "hot" whatever -- oh, the joys of holiday shopping! The world is scratching its proverbial head over our passion to consume, as if we were seriously running out of all the good stuff. One of the busiest subcultures on the planet, the U.S. consumer has contributed more than 70 percent to domestic GDP over the past decade -- a rather impressive data point. As always in life, there is another side to the story. With the impact of the financial crisis somewhat erased from our collective mind, consumer debt has been expanding rapidly, and a recent communication by the New York Federal Reserve that total household debt of $11.28 trillion remains comfortably below its peak level reached in 2008 ($12.67 trillion) is just outright misleading.

Let's stir up the Fed's mix-a-lot messaging for a fresh look: Not considering the sizable pool of home mortgages (that really being the "twist"), the level of consumer debt since 2008 has actually been on the rise, marking new highs month-over-month; the fastest growing segments are auto and student loans. Data from earlier this year shows that an increasing number of auto loans are being originated in the subprime space, typically with credit scores below the 660 mark, and that the origination of high quality loans is in decline. The picture related to student loans is not much better. Since 2008, this financing option has increased by nearly 60 percent to more than $1 trillion outstanding, but with the 90+ day delinquency rate up from 7.55 percent to 11.83 percent over the five-year period. If our distant memory cries out, "NINJA loans!" (No Income, No Job), which were commonly utilized in pre-crisis real estate transactions, we may be on to something...

Back to the twist: At the peak of the U.S. real-estate boom in 2006, on average, 43 cents for each dollar of "bricks" were financed through a mortgage or home equity loan; today, about 50 cents have been borrowed against each dollar of real estate, an increase of 16 percent. Consequently, the fact that the amount of all outstanding mortgages has dropped from a total of $9.9 trillion in 2006 to $9.3 trillion today should not leave the Fed in comfort or be taken as an indication of a more restrained consumer.

The novel, The Magic Mountain, was considered a "Bildungsroman" (German for an educational or coming-of-age novel), a rather common stylistic approach in writings of the early 1920s, typically dealing with aspects of moral and psychological growth. In applying our "Bildung" to the current state of economic affairs, investors should consider two things: First, we need to challenge the quality of economic data; the mainstream hype of "what is or is not" is an insufficient guide to preferably value-based investment decisions. Second, the consumer's economic recovery has mainly been led by a supportive Federal Reserve providing cheap money and, therefore, improved credit conditions; with the anticipated removal of stimulus, consumer confidence may suffer.

The higher we climb mountains of debt, the thinner the air will get. Financial markets, after five years of stellar performance, appear to trade closer to this "out-of-breath constellation," and caution may be warranted before resuming the ascent.