- Beyond the fact that revolving credit (largely credit cards) grew at a frightening 8.8% annual rate in the third quarter (more than double the rate of growth from last year’s third quarter, almost 30% above the second quarter and more than 3 times the growth rate of consumer spending)....
- The statistic that caught my attention most in Friday’s Federal Reserve report on consumer credit was that of the $25 billion increase in revolving credit for the quarter, $11 billion, or 44% of the increase, was funded through the securitization market. And, overall, 48% ($444 billion) of all non-mortgage revolving credit is currently off-balance sheet.
- Should the market for new credit card asset-backed securities follow the plight of the mortgage market, it is difficult for me to imagine the ability for some issuers to find both the capital and liquidity to support the on-balance sheet growth of these assets. (perhaps an investment from the Arabs or Far East will do the trick? seems to be placating the markets thus far)
- Further, the immediate earnings hit to establish loan loss reserves for 5% loss credit card assets returning to the balance sheet (albeit over time), would be significant – at current loss rates roughly $20 billion. (what's $20 billion among friends?)
- At an industry-wide 15.5% annual interest rate cost, this quarter’s $25 billion credit card balance growth alone represents a more than $3.75 billion incremental non-deductible interest expense drag to the U.S. consumer for 2008. (well when the Fed cuts by 1.5% percent over 3-4 meetings, this will be passed onto the consumer... in time... unless they start defaulting... in which case the rates jump to 29%... or more)
- It is not clear to me how many more quarters U.S. consumers can pile on 15% to 20% interest rate debt before they, their banks, and our consumer spending dependent economy collapse from the weight of it. (all we need to do is keep them afloat for maybe 3 more months and then everything will be "good" again circa February 2008, problem solved! Ben's a hero. We're all winners here.)
As I keep saying... first comes the mortgages, then the auto loans, then the credit cards, now the 401k withdrawels... much of this consumer culture in the face of real and persistant inflation, in the face of stagnant wage growth, in face of service based economy where many "new jobs" pay less than old jobs.... has been masked by the house of cards that is inflated home prices. Once that goes... well now you are scratching the surface on the rest. The equity market continues to ignore this, as 50 basis points will reverse all these trends.... (right?), and the bond market continues to stand aside in virtual panic. So who is right? We shall see ...
