What will happen if the credit market’s other shoe drops?

Recent bond and stock market turmoil has turned full attention to credit markets. What has surprised me is that conditions for credit markets aren’t that bad. Am I mad, you may be thinking?

Here’s my line of reasoning. There are three things that can really beat up the consumer credit market: availability of credit, interest rates and employment.

The fireworks seen so far are almost purely due to the availability of credit. Market participants have been scared by recent credit defaults and delinquencies, and so they are refusing to grant such markets more credit.

But, interest rates and employment are just as important, and they are doing great right now. Both look as good as they have since the 1950’s and 1960’s, with long term interest rates at 4-5% and unemployment down around 4-5%.

What would happen if this were to change, and why doesn’t anybody seem to be discussing this?

I guaranty that if interest rates increase and employment starts to fall, you will see many more defaults and delinquencies. In other words, what we are witnessing in credit markets could just be the tip of the iceberg.

With Congress threatening 27.5% tariffs on Chinese goods and China threatening to sell the huge amount of US Government Treasury bonds they hold in response, the threat of higher interest rates is real. With credit market troubles in the US forcing the Fed to intervene and the dollar falling, higher interest rates are even more of a threat.

With the housing market supplying so many jobs since the 2001 recession and the housing market crashing, employment problems could just be surfacing. With recent retail sales so poor, additional employment problems could be rearing their ugly head, too.

I don’t know how this will play out, but I’m watching it carefully. If the economy continues to be strong, then interest rates and employment will not be big concerns.

But, if the economy continues to slow, the dollar continues to fall, retails sales continue to look punk, the housing market continues to decline, or protectionist sentiment in Congress gains momentum, look out below!

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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Clampdown on risky mortgages

The Wall Street Journal had an interesting article today by James Hagerty and Ruth Simon titled “Lenders Broaden Clampdown on Risky Mortgages.”

In it, they highlighted that “Jittery home-mortgage lenders are cutting off credit or raising interest rates for a growing portion of Americans.”

As they say, “This worsening credit crunch threatens to put further pressure on the housing market.”

The mortgages being effected aren’t just subprime, but also included so-called Alt-A loans, a category in between prime and subprime. This illustrates how the credit crunch impacting the subprime market is spreading to other markets.

The articles quotes Thomas Lawler, a housing economist in Vienna, Va, who said the credit squeeze “will further crimp the effective demand for housing, and will make the late summer home-sales season even worse than the dismal spring season.”

Also, American Home Mortgage Investment stopped making loans earlier this week and said late yesterday it would cease most operations and lay off over 6,000 employees. Accredited Home Lenders Holding is almost in as much trouble after auditors said its “financial and operational viability” is uncertain.

In other words, the so-called “contained” credit market squeeze continues to impact more and more markets and businesses. It’s my guess that it will take years for this situation to fully work out and that players in the credit markets will see record stress before it’s all over.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.