Debt and its Discontents

Lots of Bulls — and quite a few commenters here — agree there is a worldwide boom going on. What is fueling it, you may ask? Organic growth? Government stimulus? Innovation? An expanding economy? China?

Well, all of that contributes. These items have had an impact. But the biggest factor by far, according to MacroMavens‘ Stephanie Pomboy, is, in a word, Debt:

IT ISN’T MONEY OR LOVE THAT MAKES the world go ’round — it’s debt. That’s certainly true of this blessed land of ours. At last count, Uncle Sam was in hock to the tune of $4 trillion or so, and every day the big fellow borrows a ton more. According to Goldman Sachs, the U.S. private sector, not to be outdone, in the first three quarters of this year has been borrowing like mad as well and runs a financial deficit of 4% of GDP, second only to 2000′s peak 5½% shortfall.

Debt and its discontents also happens to be the theme of Stephanie Pomboy’s latest MacroMavens commentary. But her focus, while large in potential import for the economy, the markets and the legions of poor souls who have borrowed neither wisely nor well, is more specific and provides insight into how the consumer has managed to keep bubbling along without the easy access to cash and credit his house provided.

Pure and simple, as a source of funds, Jane and John Q., with the well gone dry on the home equity front, have turned to plastic. They’ve also increasingly frequented other such usurious lenders as pawnshops, check cashers and that ilk — which she dubs payday lenders — where customers typically pay $793 for a $325 loan.

Stephanie reports that while home-equity loans have dwindled to a mere sliver of their former bulge, credit-card borrowing has been zooming, accounting or 47% of the increase in total consumer credit.

As to the payday lenders, they’re enjoying a truly big payday: Their 33,000 storefronts exceed in number the outlets of McDonald’s, Burger King and Wendy’s combined.

The top five payday lenders — America Cash Advance, Cash America, Dollar Financial, EZCORP and ACE Cash — do an aggregate $2.3 billion in revenues; that’s 50% more than they did a scant three years ago. Stephanie muses, though, that perhaps business is too good and "it’s just a matter of time before their embarrassment of riches attracts the attention of the regulators."

As for the credit-card lenders, she predicts that it’s just a matter of time, too, before what has laid the subprime lenders low affects them. "It’s a little thing," she explains, "known as ‘adverse selection,’ " of borrowers. The irony is that while "their home-equity lending counterparts are beginning to turn down risky borrowers, the credit-card companies are rolling out the red carpet for them."

At this point, Stephanie suggests, investors might do worse than to short, and certainly underweight, the stocks of credit-card outfits, while going long subprime lenders; short the shares of regional banks and mortgage brokers and go long or add to positions in Fannie Mae, which regulators, by restricting its lending capacity, have predictably impaired housing liquidity in general when housing needs it most, but lessened Fannie’s own vulnerability to the shakeout in mortgage credit.

If you are curious about Macromaven’s chief economist, there was a good interview with Stephanie last year in Barron’s — you can see it at the Macromaven site here.



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