American Consequences - August 2017

Everyone needs a roof over their heads, so they’ll pay the mortgage first. And they need to get to work, so they pay their auto loan. But the credit card has no urgency. That’s why losses on credit cards are always much higher than other types of debt. When defaults on credit cards start to soar toward crisis levels, debt and equity investors flee from these lenders. We’ve seen it before, and we’ll see it again this time. Snap’s disregard for shareholders bites it... Global index provider FTSE Russell – whose U.S. indexes are important benchmarks for large institutional investors – said it would not include Snap (SNAP), maker of the trendy photo- and video-sharing app Snapchat, in its indexes. The S&P 500 Index will also bar Snap. The company’s share structure denies voting rights to investors... and likely portends more selling in Snap shares ahead. Index inclusion tends to bring large amounts of institutional money into a stock. American Consequences contributor and real-time Newswire editor Scott Garliss notes that many IPO investors were likely sold on the promise that this institutional buying would push shares higher. Now, that is no longer the case... So if you’re an account that has been hanging on to these shares during the pullback because you were hoping the prospect of index inclusion may help things, you just lost another reason to own this name. ( If you haven’t downloaded the free Newswire app, click here to do so .)

Inflation is plunging, sticking the Fed between a rock and a hard place... Inflation has decelerated dramatically in recent months. More concerning, three- month inflation is getting close to 0% for the first time since the financial crisis. This suggests another bout of deflation – not inflation – could be the bigger risk today. If this trend continues, the Fed will have no choice but to give up its “tightening” cycle or risk triggering another crisis. Central banks are stuck... If they don’t try to tighten now, they’ll have no room to “ease” when the next downturn comes. But simply unwinding their massive stimulus programs could hasten its arrival. Delinquencies and defaults hit highest levels in seven years... Credit-ratings firm Fitch reports that 6% of borrowers have fallen behind on payments by 60 days or more. This is an early “crack” in the ice of the credit market. Delinquencies always increase before defaults. And the defaults are starting to rise, too. Investment bank Wells Fargo recently reported the cumulative default rate as of January was more than 12%, the highest rate since 2010.

Credit-card debt nearing its 2008 peak...

Total U.S. credit-card debt sits around $750 billion today. All that secures this debt is the borrower’s promise to pay. When times get tough for cardholders, credit cards and student loans are the first debts they stop paying.

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