Tack

Credit Card Defaults Down in July

Thanks for the comment. Having lived and invested through numerous recessions, I am going to outline what I believe to be a fallacy in the way recessions and recoveries are viewed.

It is commonly believed that the economy is affected --nay, controlled-- by the unemployment rate, be it 5%, 8%, 10%, etc. It's not. It's controlled by the effect that lost confidence has upon the 90+% of the people, who have jobs, who have income, who have discretionary funds. These are the people that control what happens; they always have and always will. When they stop spending, look out; when they wan to start again, be prepared.

It's not the lost-jobbers going back to work that provides the new spending for the economy. It's the regaining of confidence of the other vastly larger employed group that gets spending, investing and lending back on track. That's one reason why the umemployment rate is such a "lagging" indicator; it really has little direct affect on the economy, at all.

What will make the economy start to get back in gear is the belief on the part of the "90-percenters" that things are stabilizing and going to get better. As soon as that happens, they'll start getting more liberal in their spending, and that will ripple through to demand, and that, in turn, will see companies exapnd production and hiring; ergo, umemployment will finally decline...but, it's the last cherry on the cake, not a driving force.

In fact, if employment statistics have an value, they're a better indicator of when the economy is feeling too giidy and companies are adding too much fat, at the end of business cycles. Very low unemployment can be seen as as a potential "canary" for the next exhaustion of profit growth and downturn.

Furthermore, the banks are sitting on piles of cash, generating more each day and will be totally willing, able and happy to lend as demand increases. Meanwhile, they are well reserved against any reasonable short-term changes in credit-card delinquencies, which I believe, by now, are mostly just ambient noise for banks, and have built sizable reserves for commercial realty, too, after seeing the residential fiasco.

All things considered, I believe the future looks positive for banks and for gradual economic recovery, lots of naysaying notwithstanding.






On Aug 18 04:09 PM mbeckerp wrote:

> Tack, Condfidence can come back in a big way but unless you have
> the income to service that debt there will be NO increase in consumer
> debt. The average American consumer has a long way to go before they
> de-leverage enough to tack on new debt. Once extended unemployment
> benefits expire I expect to see an upward swing in CC delinquincies.
> Add to that the fact that CC companies are madly raising rates and
> that debt becomes even harder to service.

Capital One Financial Is Not American Express

After being down a "whopping" 2.7%, it's now up a more whopping 3.2%. Guess it doesn't matter whether it's exactly like AXP.

The bottom line is that general consumer credit conditions are gradually improving, no matter the individual anecdotal stories that are publicized.

Credit Card Defaults Down in July

Credit-card deliquencies have been trending down for five months, while the media trumpeted the monthly default data, which of course is an end-stage process and not as good a measure of what's happening with current credit as is the delinquency data.

As for banks, the residential delinquencies seem to be bottoming, huge reserves have been taken for CRE loans, and the "toxic" asset situation is grossly misunderstood. Bank debt assets are performing at levels much more representative of the bank discounted-cashflow models than to the completely anomalous MTM values, which have no basis for valuation other than an easily manipulated illiquid market.

Banks, in fact, are swimming in cash and cash flows. The "paper solvency" debate has completely distracted attention from the banks' real positions, which can be seen in cash balances and cash flow.

Also, most of the lack of lending is not due to unwillingness to lend, it's because of a lack of demand. Like consumers, businesses have been paring debt and reducing risk. Once confidence improves, demand will increase, and the banks will have plenty of cash to service it.

There will be no Fed intervention, and none is required.


On Aug 18 11:59 AM conceptwizard wrote:

> The credit card defaults are encouraging but to early to tell. Their
> are many other issues on the horizons for the banks. CRE, Residentials
> foreclosures, Toxic assets due to "mark to Market" accounting slieght
> of hand. The consumer lendng is down. The Fed will have to step again
> soon.