 Casey Files:
The Credit Crunch, Close
Up and Personal
Olivier Garret
CEO, Casey Research
The
Casey Report
Dec 16, 2008
Within the last year, the true
extent of the real estate debacle and ensuing credit crisis in
the United States has become blatantly obvious.
But now there is a new phenomenon
rearing its ugly head: a credit crisis of the individual
that is hitting a large number of Americans straight in the pocketbook.
The reason: credit providers have started to batten down the
hatches.
According to a November report
by the Federal Reserve, nearly 60% of banks severely tightened
their lending standards on credit card loans and 65% on other
consumer loans in the last three months. As unemployment and
delinquency rates go up and lenders are trying to minimize their
risk, the average American all of a sudden finds himself cash
strapped... this at a time when home equity has dried up, 401(k)s
and IRAs are losing value by the day, and many common stocks
are barely worth the paper they're printed on.
"We've been hearing about
the liquidity crisis affecting banks for quite a while,"
Joe Ridout, spokesman for the advocacy group Consumer Action,
told the Washington Post. "Now we're seeing it transform
into a crisis affecting people's personal finances as well. The
next wave of the financial crisis may well be a credit-card-related
crisis."
Credit card companies are indeed
clamping down hard on customers. Many Americans may have noticed
that while their mailbox used to burst with junk mail of the
"You're Pre-Approved!" sort, these days the influx
has slowed down to a dribble. That's no coincidence - credit
card direct mail offers in the third quarter of 2008 have seen
a 28% drop year-over year as Visa, AmEx & Co. are struggling
to cope with a tidal wave of defaults.
Moody's Investors Service reported
that charge-off rates rose 48% in August compared to the same
month last year, the 20th consecutive year-over-year increase.
This number is expected to go even higher in 2009, potentially
exceeding the charge-off rates during past recessions.
Thus, credit card members are
increasingly coming under scrutiny - and not just those in the
subprime category. Customers with a credit score of 700, who
were deemed "most creditworthy" just a year ago are
not anymore. According to cardratings.com, 730 is the new 700.
The palette of "risk factors"
has also broadened. Aside from late bill and mortgage payments,
now location, profession, and even shopping behavior are considered.
If you live in a high-foreclosure area, work in the real estate,
auto, or construction business, and buy your household necessities
at Wal-Mart, you're likely on the target list.
One of the measures credit
card issuers have devised to reduce risk is slashing credit limits
in half. 60% of banks lowered the credit ceiling for existing
nonprime and 20% for prime customers. And, as a testament that
the intended "trickle-down effect" of the Fed's massive
rate cuts didn't work at all, many companies have kept their
interest rates at the same level or even raised them by two or
three percentage points. Late fees, too, have been increased.
This tightening of credit translates
directly to people's shopping habits. While Black Friday weekend
brought an overall growth of 0.9% in sales from last year, retail
sales data show that that wasn't enough to save the month of
November. The MasterCard SpendingPulse reading noted that electronics
and appliance sales dropped by 25% in November, luxury goods
by 24%, and sales at clothing and department stores by 20%. Foot
traffic decreased by 19% from 2007, meaning shoppers visited
fewer stores.
C. Britt Beemer, CEO and founder
of America's Research Group, who has correctly predicted percentage
changes in Christmas retail sales for 16 of the last 17 years,
published his first negative forecast (of -1%) in 23 years, calling
the 2008 Christmas shopping season a "perfect storm"
for retailers.
 Even as the average American is battening
down the hatches and reining in consumption, the Federal Reserve
seems to be going the opposite way, judging from the $700 billion
bailout package that has - literally within weeks - ballooned
into an estimated $8.5 trillion colossus. But despite throwing
fistfuls of money at the problem, says Bud Conrad, Casey Research
chief economist and editor of The
Casey Report, "all the king's horses and all the king's
men haven't been able to put Humpty back together again."
We don't know whether the Humpty
Dumpty economy can be saved... what we do know, though, is that
every crisis holds danger and opportunity. By making the
trend your friend instead of swimming against the stream, you
can preserve your assets and profit handsomely, especially in
highly volatile environments like the one we are seeing now.
To learn more about
how to generate double- and triple-digit returns in a crisis,
click
here.
Dec 12, 2008
Casey Archives
321gold Ltd
|
