Failure to Launch

 

The borrowing consumer (and the businesses that rely on him or her) is the next shoe to drop.  It won’t be unusual to see people who are superficially successful file for bankruptcy in the coming years.  A large number of people participate in the “fake it ‘till you make it” mindset.  They fake it by borrowing excessively.

Since the bursting of the last bubble in 2009, the credit reporting and ratings agencies have redefined the term “subprime”.  There are all sorts of ways that the consumer can boost his or her credit score and improve his or her chances of being approved for credit.  Applications for credit (all sorts of credit) are routinely full of fraudulent information and most thinking persons involved know it.  Many just go along with the scam even though they know better.  Others are genuinely stupid and many of them hold technocratic positions with some level of authority over the minions who churn out the paper.  It’s largely bullshit.  The ratings agencies have for years now been figuring out how to hit the numbers and magically turn poorly qualified applicants into triple-A rated candidates for credit.  That's not just for receiving a lowly consumer loan.  That extends out to issuing bonds as well but that's a post for a different day.  It is the equivalent of “polishing a turd”.  The ratings agencies know this to be true but won't admit it.  The Fed will be the bag holder on this deal as they have been the dumping ground for all of the securities that are backed by these contracts for years.  It is entirely fitting that the Federal Reserve be the end bag holder.

Think of the Fed as an enabling parent who coddles and cuddles his or her “amazing” child to the point of being ridiculous.  Think of markets as being their “amazing” children. 

The parent shields the increasingly spoiled child from the consequences of his or her actions for years and showers the “amazing” child with undeserved praise and gifts.  The parent insists that the surrounding public praise the “amazing” child and treat him or her with kid gloves.  Then, years later, the enabling parent grumbles about the 35 year old son or daughter who can’t get their life together and lives in the basement or who requires regular parental cash infusions to pay his or her rent, pay for utilities, buy groceries, keep insurance on his or her car, etc., etc., etc.  Perhaps the “now not so amazing” son or daughter has now gifted the heretofore overprotective parent with an “amazing” grandchild or grandchildren (likely a grandchild born out of wedlock) and they can “wash, rinse, and repeat”…or change course.  The Fed is in a difficult spot and I think that they know this.

The shit has not as yet hit the fan but it will very soon.  Despite all of the happy talk in the financial news about the resilient consumer and the low level of current loan delinquencies, the “fake it ‘till you make it” consumer is struggling right now and he or she will prove to be not so amazing.  Over the long haul, they all implode.  They always do.  The businesses that rely on this consumer to make their margins had better be planning for the inevitable.  We may have reached the point where the Fed has to make a difficult choice between once again “saving the spoiled children” or saving the currency.  My thought is that they will throw the spoiled children under the bus and save the currency.

If you fully believe in the current Standard and Poors rating for US debt (AA+), I’ve got some Florida land for sale that you might be interested in…you can’t go wrong with real estate.