Rising leverage is a massively underappreciated risk.
That’s right, 2015 was the fastest year ever in the number of credit cards issued to deep sub-prime and traditional sub-prime borrowers. To be precise, that number was 7,804,000, according to data from the New York Fed. This should seem eerily reminiscent of prior financial crises, when debt was issued to borrowers who were ultimately unable to pay.
Perhaps more disconcerting, as you can see in the Chart of the Day, the deep sub-prime bucket (sub-620 FICO score) and the traditional sub-prime bucket (620-659) carry average credit card balances not dissimilar from prime borrowers. For background, "Subprime borrowers typically have weakened credit histories that include payment delinquencies and possibly more severe problems such as charge-offs, judgments, and bankruptcies," according to the FDIC.
In other words, borrowers deemed subprime are accumulating credit card balances within spitting distance of more able borrowers. As Hedgeye CEO Keith McCullough writes in today's Early Look (our morning newsletter to subscribers):
"While people may think that wealth can be accumulated through leverage (and not saving), every 6-7 years (for the last 20 in America), when the cycle slows to 0% GDP growth, many of those people have lost a lot of money."
While all economic cycles are different in catalysts and tipping points, they often rhyme in their excesses.