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OTHERS OF NOTE
Consumer Credit Cracks
The 'New Shadow Banking' Collateral Problem
The 2008 financial crisis intially showed itself as cracks in the consumer credit market and in the complicated financial instruments employed by the shadow banking system which fostered that consumer credit. A shocked world learned a whole new vocabulary of acronyms such as SIV's, ABCP's, CDS's, CDO's and MBS/ABS's. It was eerily remeniscent of the post dotcom bubble when troubled companies such as Enron taught us about SPV/ SPE's and a new world of off balance sheet accounting. We all wondred how we could have not been aware of the magnitude of the pervasive usage of these esotteric instruments.
Six years later it seems that it is 'deja vu all over again' as the shadow banking system has morphed into something that once again allows credeit excesses to go unchecked. In 2008 it was driven by sub-prime mortgages and and a bloated US housing sector. Today the cancer is student and car leasing loans, the only credit growth area remaining for a tapped out US consumer.
Last month US distressed debt spreads reached a five year high and continues to get worse at an accelerating rate.
CREDIT CARD GROWTH RISK
Lenders are taking on more risk to compete in more competitive credit markets and are once again willing to take on higher risk borrowers.
CREDIT CREATION - Student Loans and Car Loans
The overalll US credit market growth is almost solely dependent on Student loans and car loans. The reason for this is because consumers feel they have no choice when it comes to financing education and the need for a car. Like the 2008 financial crisis that was built on the expectations of the collateral value of homes not falling the new bubble is built on false assumptions.
It the flawed assumptions and mistaken confidence is based on:
- Are non dischargeable loans and are protected from bankruptsy court,
- Are easily securitized with entities such as Sallie MAe standing behind them,
- A belief the government will step in if defaults get oput of control,
- Are unecured other than the ability to guaranshee the wages of the borrower (ssuming a college education will get you a job),
CAR LEASE LOANS
- Car sales of new cars have risen because lease rates make it more attractive than owning an older car and the possibilities of rising repair and maintenance costs which sub prime borrowers can not afford,
- New cars can be leased with no money down and extremely low/ sub prime credit because the car is expected to be able to be resold (tell this to bloated wholesale auto auctions and the dealers with full car lots of used cars) because of the low mileage covenants in the lease contracts.
LOAN RISK GROWTH - AUTOS
Car sales are being held up by sub-prime car lending which like 2008 is securitized and sold as ABS's through the shadow banking system to yield hungry institutions. The situation has improved for borrowers in recent years, and that has been credited with helping spur a sharp upturn in the U.S. auto industry, which collectively moved more than 15.5 million vehicles in 2013—the highest figure since the recession began. According to a recent Moody's report, loans that originated last year had the highest delinquencies since those that originated in 2008. The chart below makes it easy to see why.
STUDENT LOAN DEFAULT RISK
Recently, student loan delinquencies have become a noticable porblem which cannot be ignored.
CREDIT CREATION - Housing
As bad as student loans delinquencies have become it pales in comparison to the iceberg of HELOC (Home Equity Lines of Credit) loans still on the books from the housing bubble era where borrowers are now losing jobs and can't pay.
Credit in housing is also showing the same level of credit deterioration.
FALLING CREDIT SCORES
The shadow banking system has a collateral problem which is beginning to become clear to all. When we consider traditional trend indicators we see patterns which scream "caution advised" because when someone finally yells FIRE! - the exits are often blocked.
CANARIES - SPREADS & HIGH YIELD ISSUANCES
CHINA SHIPPING CREDIT
We refer you to our article "PAY ATTENTION TO CREDIT MARKET - Divergence Have Been Reliably Warning" that allowed readers to exit before the recent weakness in the equity markets and additionally the video "BALTIC FREIGHT, SHIPPING CREDIT & CHINA" which like 2008 shows eerily similar 'canary' credit problems in Shipping Credit.
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