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First, The Good News
Amid soaring consumer debt (more on that in a minute), there’s a chance you’re earning more money.
A meaningful number of employers are responding to inflation with pay increases.
Additionally, 34% of employers have started using or increased signing bonuses, while 18% have done likewise with retention bonuses.
Take This Job And Shove It, I Ain’t Workin’ Here No More
For as much as we hear about labor strife (e.g., unionization at Starbucks or complaints over RTO), it’s a workers’ market. We’re seeing these bonuses not only in response to inflation, but because of all these people who quit a job, more than half make more money at their next gig.
This begs the question – Taking millionaires and billionaires out of the equation, do we live in a world of haves and have nots?
Are the people getting these pay increases doing super well or do they require higher wages simply to make ends meet in a challenging environment?
Or is there just a doing super well group separate from the barely making ends meet contingent?
We might never get a clear answer to this question, however one thing’s certain.
We’re racking up credit card debt again. And the writing on the wall might not be a pretty picture.
There’s A Crash Coming, But Not Necessarily In Stocks
On more than one recent occasion, we sounded the alarm on consumer debt.
Consider the April 19th edition of The Juice:
In their respective Q1s, Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), and Bank of America (BAC) reported 23%, 29%, 33%, and 25% increases in consumer credit card spending.
At all four banks, debtors have started to make slower payments. In other words, they’re carrying balances, however, for the most part, charge offs have yet to appear worrisome.
According to the Fed, overall consumer credit increased 11.3% in February. Revolving credit, which includes credit cards, drove that number, popping 20.7% annually.
If you thought the February number was bad, get a load of the Fed’s March, 2022 consumer credit data, released late last week:
Source: The Fed
You’re reading that correctly.
Revolving debt (that’s credit cards) surged by $35.3 billion in March. That’s a 21.4% annual increase and blows away the $16.2 billion monthly increase we saw in February.
Pent-up, post-lockdown spending? People using credit cards to pay for life’s basic necessities? Probably a mix of both.
No matter the case, this news coalesces with something else we expressed concern over last week in The Juice. An increase in home equity loan debt:
The average homeowner sits on $185,000 in available equity, that is the amount of money you can access in your home while maintaining at least 20% equity. So you’d think something’s gotta give.
In fact, on his company’s recent earnings call, Bank of America (BAC) CEO Bryan Moynihan made an interesting comment: “you’re seeing home equity come back up even though mortgage will fall off.”
Indeed, new home equity loan originations popped by 17.6% at BofA between Q4/2021 and Q1/2022.
Does This Spell Trouble?
Only time will tell.
However, if you dig into bank earnings calls, you catch some nuggets. There’s the aforementioned from BAC’s Moynihan and this from JPMorgan & Chase CEO Jamie Dimon on his company’s recent call:
Charge-offs are extraordinarily good, as a matter of fact, way better than they should be… So, credit is very good. That will get worse. NII is going to get much better. Things are going to normalize.
Simply put, despite debt increases, consumer credit looks good. That’s because consumer cash balances remain healthy. But how long will this “way better than (it) should be” scenario last? As Dimon said himself, “things are going to normalize.”
Any way you slice it, this is good news for banks.
The Bottom Line: The Juice will keep our eyes on credit card debt as well as how consumers handle their balances going forward. If we had to bet, we think we’re in for consumer credit problems, if not an outright crash as debt starts pressuring cash on hand.
The big worry – as interest rates increase, credit card debt becomes more expensive. This is good news for banks. It’s not as if they’re increasing savings interest rates in lock step. The money you earn on your deposit accounts at big banks has barely budged.
A perfect world scenario for the big banks might unfold. Credit card and home equity loan balances continue to increase. Consumers take longer to pay down balances, particularly on the credit card side. All of this translates into an increase in net interest income, as Dimon alluded to. This enhances a bank’s bottom line and makes their shares potentially more attractive to investors.
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