Juggling Dynamite

As traders and security sales firms have been working to assure us that the worst of the pandemic and 2020 ‘greatest recession’ are past, the numbers don’t confirm the thesis, and corporate clients are being privately urged to load up on cash for a long winter ahead, see Wall Steet warning to corporate America:  Get cash while you can.

Yesterday, Dr. Anne Schuchat, deputy director of the US Centers for Disease Control and Prevention lanced the blind hope bubble, noting that the coronavirus is spreading too rapidly and too broadly for the world’s largest economy to bring it under control:

“This is really the beginning. I think there was a lot of wishful thinking around the country that, hey it’s summer. Everything’s going to be fine. We’re over this and we are not even beginning to be over this. There are a lot of worrisome factors about the last week or so.”

Here’s the chart via CNBC.  Not ‘all clear’.  The pandemic has accelerated secular demand destruction in an urge to spend less and save.  The reality check of job losses, debt defaults and capital destruction is still unfolding.

From March 1 through the end of May, Americans deferred debt payments on 106 million different loans, according to credit-reporting firm TransUnion, triple the number at the end of April.

In addition to missing payments on student and auto loans, 8.8% (4.68 million) of American homeowners were in forbearance plans delaying their mortgage payments for at least three months.  By comparison, Canada Mortgage and Housing Corporation estimate that 12% of Canadian mortgage holders deferred their payments in June, and expect this number to reach 20% by September.

The initial deferral presumption was that most people would be back to work by September and loan payments could resume.  But as the virus continues and social distancing requirements persist, this presumption is looking increasingly naive and begs the question of how many deferrals will end up as defaults and loan losses for lenders.

In the meantime, credit transmission is slowing through the economy.  It is difficult to tell who represents a good credit risk for new offers.  Deferrals under forbearance plans do not appear as delinquencies on credit reports, and it is hard to tell who is deferring because they lack the income to pay, and who has the income but are choosing to take the deferral.  At the same time, financial insecurity is reducing the appetite for even able consumers to borrow more.

One thing is for sure, lower credit originations along with rising provisions for bad debts add up to lower profit-prospects for lenders.  See WSJ, ‘Flying blind into a credit storm’:  Widespread deferrals mean banks can’t tell who’s creditworthy:

An estimated 79,000 personal loans were extended in the week ended May 10, compared with 226,000 in the week ended March 22, according to Equifax Inc. Auto loan and lease originations fell to 266,000 from 390,000 during the same period. General-purpose credit-card originations totaled 483,000, down from 856,000. In 2019, weekly card originations rarely fell below 1.2 million.

Lenders that are having a tough time spotting risky loan applicants are approving fewer borrowers for credit cards, auto loans and other consumer debt. They are also hunting for new data sets that could indicate who is in financial trouble and how much they need to set aside to cover soured loans. The Federal Reserve last week said the biggest U.S. banks could be saddled with as much as $700 billion in loan losses in a prolonged downturn.

Danielle was a guest with Jim Goddard on Talk Digital Network talking about recent developments in the world economy and markets.  You can listen to an audio clip of the segment here.