Aside from the fact that credit cards help families manage their budgets and fill everyday financial needs, it is the issuers, merchants, and credit investors who keep the business running. Investors provide the funding to support the financial institutions that bear the risk.
From the sound of it, as you can read in the WSJ, investors are beginning to get a bit antsy.
- A Bank of America survey of credit investors showed fears of recession rising nearly as high as inflation worries, pointing to the increasing likelihood of aggressive Federal Reserve tightening sending the economy into a recession.
- Credit investors, on average, now see a 53% probability of a U.S. recession, up from 39% in May, according to Bank of America. Over a third of investors surveyed now see a greater than 60% chance of a recession.
- Three-quarters of respondents now list inflation as a major concern, up from just 6% at the start of the year.
The concern about investors is warranted. If they take a position in a credit card firm, they might temper the investment. If they are buying asset-backed securities, they might demand higher yields. (Read about asset-backed securities in this Mercator classic).
In all cases, the concern is about the consumer budget, which you can read about in this recently published Mercator Viewpoint. It is certainly not just in the United States, as we mentioned in the report. In some cases, energy drives the inflationary cycle. In other cases, it is milk and eggs. But either way, consumer face severe disruption in their household budget, and as a result, credit quality will soon take a hit.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group