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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.
Olivier Garret
Caseyresearch.com
Olivier Garret is CEO of Casey Research, LLC., one
of the nation’s oldest and most respected organizations dedicated to
providing independent investors with unbiased research on opportunities to
earn extraordinary profits by being just ahead of the crowd.
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