Silver Lining For Darkening Clouds Of Credit? Asset Allocation Daily

by: SA For FAs
Summary

Russell Investments: “The yen is our preferred currency.”.

Constantin Gurdgiev: Cut your losses or book your gains by selling BTC.

Thought For The Day: Today’s tightening of credit needn’t be interpreted as a replay of 2007; it could be that financial institutions are proactively limiting exposure to bad credit risks.

Currencies

“The yen is our preferred currency. It's significantly undervalued, getting cycle support as the BOJ becomes less dovish and has contrarian sentiment support from extreme market short positions. The euro and British sterling appear undervalued as we move into 2019. The recovery in European economic indicators should support the euro. Sterling will be volatile around the Brexit negotiations but should rebound if a deal is agreed with the European Union. We think it has more upside potential than the euro. We also believe that the U.S. dollar has modest upside potential.” (Russell Investments)

Bitcoin

“Another factor that led BTC to a lightning fast rise in December 2017 was the promise of the "inevitable" and "scale-supported" arrival of institutional investors into the market. This not only failed to materialise over the duration of 2018, but we are also now learning that the few institutional investors that made their forays into the markets have abandoned any plans for engaging in setting up trading and investment functions for their clients….Cut your losses or book your gains by selling BTC.” (Constantin Gurdgiev)

Calculating Brexit Losses

An ‘FTA’ scenario, which assumes that the UK and EU reach agreement on a broad free trade pact, including an agreement on services trade, but with some restrictions on migration. In this scenario, UK output will be about 2½ to 4 percent lower in the long run compared to a no-Brexit scenario. This translates into a cost of about £900 to £1,300 per capita. A ‘WTO’ scenario, in which the UK loses any preferential access to the EU market and adopts WTO tariff schedules for trade in goods…In this scenario, the decline in real output relative to no Brexit would be larger, between 5 and 8 percent in the long run (about £1,700 to £2,700 per capita).” (iMFdirect)

High-Yield Bonds

“For investors with long investment horizons, higher rates are good news because they mean higher returns. This goes for all bonds, but it's especially important in high-yield bonds because the average life of a high-yield bond is just four or five years. Maturities, tenders, and calls mean that the typical high-yield portfolio returns roughly 20% of its value every year in cash, allowing investors to reinvest the money in newer - and higher-yielding - bonds.” (AllianceBernstein)

Consumer Credit

“Why are credit-card issuers rejecting more customers and shuttering more accounts? One reason is that they may be spooked by the increasing number of people who aren't paying off their cards. Credit-card delinquency rates began to climb sharply toward the end of 2016, a trend that hasn't reversed in 2018, according to Fed data. Given the healthy state of the economy and low unemployment, an increase in delinquencies is ‘potentially concerning,’ according to the Fed, and most likely signals that card companies issued debt too freely and to less-trustworthy borrowers in preceding years and are now trying to reverse course.” (Business Insider)

Thought For The Day

A study by the Federal Reserve Bank of New York reveals a marked tightening in consumer credit, something that Business Insider (in the above-linked article) suggests is not supposed to happen in a hot economy. The concern is legitimate. When financial institutions start pulling credit, the jig is up. I can personally recall creditworthy people whose retirement plans involving the acquisition of a beach home were derailed by the shutting down of their home equity line of credit in 2007. That scenario was played out across America. It was a game of musical chairs where the music stopped, and in the quiet din of credit clawbacks and delinquencies, business plans, residential moving plans and economic activity on a vast scale were halted.

There may however be a big difference between now and then. Financial institutions were cratering from bad debt from subprime mortgages. That’s why even creditworthy people had their credit pulled. Banks were taking no chances. So, conceivably, today’s tightening of credit need not be interpreted as a replay of 2007; it could actually be the opposite, i.e., that financial institutions are being proactive this time in limiting their exposure to bad credit risks. Time will tell.

But either way, credit users should consider this trend and buffer themselves against any adverse consequences. If you’ve taken out a big line of credit, and will need the monies soon, it could be worthwhile to transfer the funds to a personal account if a withdrawal of your loan will crimp your business plans. If, on the other extreme, you’re one of the risks financial institutions fear, there’s no time like the present to start repairing your credit, which you may one day need to buy a home. And if you’re an investor just watching trends, you should make sure, as always, that your portfolio is not tied to just one volatile asset class or one geographic region. It’s getting choppy out there.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.