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Friday, January 18, 2013

Last Year Turns Into This Year

Last year I pointed out that consumer loan defaults had to rise, and they have. This is not going to be improved by two factors this year - millions of workers seeing cuts in their hours worked as a result of Obamacare and the payroll tax increase.

So it is worth looking at where we stand now, before the effect of those two things has shown up in default rates.

Article 1:
While the composite rate of the S&P/Experian Consumer Credit Default Indices ticked up for the third consecutive month, auto loan default rates stayed flat in December, halting a rising trend that lasted three months. ... 

Meanwhile, after hitting a post-recession low of 1.46 percent in September, the national composite rate — a comprehensive measure of changes in consumer credit defaults — increased for third month in a row. The December reading came in at 1.72 percent, following levels of 1.64 percent in November and 1.55 percent in October. ... 

First mortgage defaults increased from its post-recession low of 1.36 percent in September to 1.47 percent in October, 1.58 percent in November before reaching 1.68 percent in December.
Bank card default rates remain extremely low, because banks have been very conservative.

Article 2 (Wells Fargo):
Wells Fargo — the auto lending market leader according to the latest data generated by Experian Automotive — watched its originations soften as the year closed, but they still improved compared to the last quarter of 2011. Reflecting what they described as seasonality and increased competition, company officials said their fourth-quarter auto originations totaled $5.4 billion, a level 15 percent lower than prior quarter but 8 percent higher than the prior year period.
Never believe what they say. Clearly Wells is tightening, because:
The charge-off reading jumped from 1.02 percent to 1.46 percent, while the delinquency reading moved up from 1.27 percent to 1.30 percent. 
I expect Wells Fargo to do a pretty good job managing its risks, but at the cost of tightening standards. This means that somebody else is picking up the junk, which means it is sitting there somewhere, and those picking up the slack are going to be taking some much higher losses relative to the pool. If you are wondering how that happened, here's a clue - from September of last year.

Here's a paper from 2004 discussing subprime auto loan defaults, which comes up with the absolutely amazing conclusion that households default on their auto loans when they don't have money to repay them.
To the extent that the Fed's efforts have filtered into the Main Street economy favorably, they have done so by two mechanisms. The first is that they have spurred mortgage refinancings which have lowered the consumer monthly debt repayment burden. The second is that they have made subprime auto lending blindingly profitable, and have greatly increased auto sales. Mind you, Fed moves also have negative effects on Main Street by increasing prices of consumables and decreasing real incomes.

This year that tide somewhat reverses. Mortgage credit either has to tighten or rates have to rise, and subprime auto lending has to tighten. 

The standard financial press is wandering around staring at the sky whistling Dixie, but the big wave is coming. 

Okay, so it's not exactly on topic, but did you see this article on zombie titles: link ? It just made me mad. If you are not going to foreclose on the house, then why not let the owner continue to live in the place? At least they will try and keep the place up and prevent it from being trashed. One of the worst things about the foreclosure mess are the number of houses that were ruined because the banks did not take care of them.

Two thoughts:

1) Given that the Fed is committed to propping up the banking system by means of direct injection of reserves, are shaky subprime auto loans really a negative? When the borrowers stop paying, their net income goes up, the much-abused used car market gets new inventory, and the banking system in the aggregate (though perhaps not the actual lender) is made whole by the Fed. Win-win-win!

2) The BP report that came out today saying that the U.S. will become the world's largest oil producer in 2013, about seven years ahead of schedule. This has to have some positive effect on GDP and particularly on tax revenues during these next critical years. Could this possibly pull our huevos out of the fuego?

Neil: What BP giveth, the EPA can taketh away.
Neil - it's more the flow of money through the economy that matters rather than the supply of money - i.e. the money supply only matters insofar as it can be circulated. So this is a trend that should reduce GDP.

I was looking at WPSR (petroleum report). Oil production in the last four weeks is 20% above where it was last year (7,003 vs 5,817 thousand barrels a day).

I assume that we will make every effort to shut this down. If we did not, it would have very favorable long-term repercussions for GDP.
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