In America, the streets aren’t paved in gold. They are lined with lenders.
That thought occurred to me as my wife handed me her two most recent credit card offers. One was a special, introductory low rate offer of a card for vegetarians. The other was a special, introductory low rate card for walkers.
I am not making this up.
Both offers were from the same bank, one so generous with its postage that it failed to create a card for vegetarians who walk.
One wonders. Were there also offers to dog lovers, gardeners and stamp collectors, not to mention miscreants, recidivists, and former members of the communist party? And why was I neglected? Why was there no offer of a special, introductory low rate card for nerds or one for otherwise sane people over 50 who ride motorcycles?
We will never know.
All we know is that offers of credit are abundant in America. According to statistics on the Ramresearch web site, www.ramresearch.com, bank credit cards now account for 79.1 percent of all revolving credit, up from 60.5 percent in 1994. In addition, bank mailings for 1998 are projected at 3.2 billion pieces, up from 3 billion last year. As a result of that deluge, some $2.2 trillion in credit is being extended. A staggering $1.8 trillion in available credit lines now languishes, unused. Cash awaiting our whims.
As I said, in America, the streets are lined with lenders. If you are dissatisfied with the dull macadam of your local street, there is a lender who will provide the where-with-all to buy the gold so it can be properly paved.
Just sign here.
For better or worse, there is a curve in the road ahead. Economists call it the yield curve. In case you’ve never heard of a yield curve, it is the line you make connecting the yields of instruments of different maturity.
The most popular shape for yield curves is one where you can borrow money for a few weeks or month at the lowest cost. At longer maturities, interest rates rise so it might cost one, two, or three percentage points more to borrow for 10 or 20 years. Lenders like this curve because they basically borrow short and lend long, making a profit on the spread. The bigger the spread, the more profitable lending will be.
But those days are gone.
The most painful yield curve is one where it costs more to borrow short term than long term. We had a market like that in the early eighties when money market funds were yielding more than 20 percent but long term Treasuries were yielding “only” 12 to 14 percent. When that happens, economists say we have an inverted yield curve.
Lenders aren’t like economists. When the yield curve inverts lenders say things like, “This is the end of western civilization.”
They say this because an inverted yield curve makes life painful for lenders. The money they use to make loans costs more, but they have difficulty getting higher yields on their loans. They are less profitable. Losses are common.
With the current rush for safety as investors flee the uncertainty of events in Russian and Asia, an inverted yield curve is developing in the United States. Recently, the Treasury could borrow for 3 months for 5.03 percent or 30 years at 5.47 percent. Basically a flat line. Overnight money at LIBOR rates is now about 5.6 percent.
The Flat Yield Curve
| Term | Yield |
| 3 months | 5.03% |
| 6 months | 5.14 |
| 1 year | 5.17 |
| 2 years | 5.20 |
| 3 years | 5.17 |
| 5 years | 5.17 |
| 10 years | 5.28 |
| 30 years | 5.47 |
Source: Bloomberg, 8/21/98
Traditionally, an inverted yield curve slowed consumer lending. Banks became more selective with home mortgages. Car loans were harder to get.
Not this time.
In the new era, consumer credit is always available. Why? Because the biggest spreads are in consumer lending.
It’s hard to beat that 18 percent rate on bank credit cards.
Home mortgages are similar. With millions of people eager to refinance their home mortgages, mortgage rates haven’t fallen as much as benchmark Treasury yields. As a result, mortgage loans are slightly more profitable than they were a year ago. Mortgage loans for people with poor credit histories are even more profitable. As you might expect, sub-standard mortgage growth is booming.
What does it all mean?
You won’t get the message from your mailbox but this is a good time to be reducing debt, not increasing it.
(PS My wife isn’t a vegetarian.)
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Pixabay
(c) A. M. Universal, 1998