Sunday, March 04, 2007

Credit Card Looting

When you examine our markets, you’ll notice two types of clients, market investors and consumer borrowers. These two groups are at odds with each other (you could be in both groups at the same time).

The Market investors are looking for investment return on their capital. Consumer borrowers’ are looking for a way to consume and consider paying back what is borrowed at a much later date

The investor is willing to take more risk for higher returns; the investment plans are many and quite structured. The borrower on the other hand is consuming at a rate that is often higher than earned income. No Structure, forget the interest and spend until they cut you off.

On a micro level example, we have a consumer in bankruptcy and/or foreclosure with 5 to 10 credit cards maxed out. The consumers’ plight is very visible and as layoffs increase, the group is going to get bigger. Use that plastic while you can! It’s only money (somebody else’s).

The investor has been removed from the reality of all of this. That is, until a month ago. The Alt-A and sub prime market started to implode, triggered by real estate. No worry there, the hedge funds are coming to the rescue. The tooth fairy might also make an appearance.

So what’s the consumer to do? If bankruptcy is the final play, then why not max out the cards? That can give you and extra 3 to 6 months of the good life. So, the credit card companies are doing great. Two trillion in accounts payable with an average amount owed of $9,149 at 18% interest. This gives new meaning to “Creative Financing.” Two trillion of unsecured debt; it’s a bad joke when you realize the size of it.

Thinking of filing for Bankruptcy? The question arises, why bother? Bankruptcy lawyers cost money. Just write the credit card company and tell them you are broke and to go fly a kite (the kite part is optional). You can’t squeeze blood out of a turnip and debtors don’t go to jail.

What’s the investor doing? They’re probably sitting at Starbucks having a cup of Moca, reading the Wall Street Journal on their laptop. No problems, everything is under control.

They haven’t got a clue!

It will be interesting to see how the DOW holds up this week with the Asian markets in free fall.

3 comments:

Free Fallin' said...

I think Tom Petty said it best...

http://finance.yahoo.com/intlindices?e=asia

Jim in San Marcos said...

I looked for a posted comment at that site and didn't see anything.

Come back at me.

Anonymous said...

Worse than 2T in unsecured credit card debt is all the debt formerly secured by real estate, which is now just as dicey as credit card debt. The problem is, it ain't makin' 18%.