Morgan Stanley Asks "If Employment So Good," Why Is This Happening To Credit Card Delinquencies...

In a new downgrade of subprime lenders Capital One and Synchrony, Morgan Stanley sought to answer the nagging question of why subprime credit card losses are suddenly soaring, per the chart below, "if employment is so good." 


After reportedly spending the entire month of August analyzing that question, Morgan Stanley came to many of the same conclusions that we note a regular, recurring basis.  Apparently, those soaring delinquencies have something to do with stagnant wages in the face of soaring healthcare costs, rising rents and a pullback in consumer credit extension...who could have guessed that?

Investors ask, "Why are card losses rising if employment is  so good?" Our deep dive & quant work shows subprime is stretched from higher rent, healthcare costs & low  wage growth, with lower credit availability a coming drag.


A Tale of Two Consumers, with the subprime consumer increasingly at risk, driving up net charge-offs (NCO) and lowering EPS: The economy is solid and unemployment is very low, but credit card delinquencies have been increasing... so we spent the month of August delving into what is really  going on with the US consumer.   We found that the average consumer is in good shape but the financial pressures on subprime consumers are high and, critically, rising


1. Banks are  pulling back on subprime card loan growth. For the past 3 years, bank lending to subprime card posted an 8% CAGR, faster than prime's 5% growth.   But banks are now beginning to put on the brakes.  Subprime loan growth has slowed over the past two quarters to 10% y/y in 2Q17, down from 13% y/y peak in 4Q16.    Our quant work shows a negative correlation between change in loan growth and change in losses.  Result? Expect declining subprime loan growth to drive up subprime losses over the next 12 months. 


2. Rent and healthcare costs a bigger burden for lower income consumers… and rising.  Consumers in the lowest income quintile spend 38% of after-tax income on rent and another 18% on healthcare costs, a combined 56%.  This is well above the average consumer's  40%.  Pressures are building on both.  Our REIT colleagues expect rental rates on mid- to low income apartments, Classes B & C,  will continue to rise from already high levels, but at a decelerating pace.  Our healthcare colleagues expect healthcare costs to rise ~5% annually over the next few years.   These costs put more pressure on lower income consumers, who have lower wage growth.


3. Discretionary income not keeping up with debt service burden growth.  Debt service burden (interest and principal repayment) is growing 2%, faster than the 1% growth in discretionary income for the average consumer. That means, after paying for basic needs like  shelter, food, healthcare, and utilities, there is less left over to pay back lenders. Middle income renters are in the toughest spot as  it looks like their borrowing has accelerated in auto, student, and personal loans, while their  disposable income growth has been below average.  The lowest income quintile is burdened by high and rising rent and healthcare costs.


Ironically, after declining for decades, Morgan Stanley presents the following chart which reveals that healthcare costs as a percent of disposable income started consistently rising again only after the passage of Obamacare.  Meanwhile, soaring apartment rents are also wreaking havoc on disposable income for middle-class families.

Who could have guessed that 4-year average Obamacare premium increases of 113% would take a toll on middle-class household budgets...shocking.


Meanwhile, despite a "strong job market", debt payments continue to grow at a faster rate than incomes.


But the real kicker is that the banks have seemingly caught on to the fact that the subprime jig is up and have started to pull back on credit growth.  Of course, as we all know well, bad things happen to ponzi schemes when people are no longer able to refinance their old credit with new credit...


Forbes ejmoosa Fri, 09/08/2017 - 18:24 Permalink

Are credit card rates low? Seems to me they still charge the same ~18% as when the fed funds rate was 4-6%. It's the measures of actual inflation and actual emplyment/unemployment that are misleadingly out of whack. The analysts that spent August "drilling down" seem oblivious while parrotting The Narrative regarding unemployment, labor markets, and wages. Garbage in, garbage out...

In reply to by ejmoosa

Omen IV yogibear Fri, 09/08/2017 - 16:39 Permalink

The "host" is the middle class -Scumbag Obama destroyed healthcare affordability and forced the middle class to pay for the low end scum - in the form of taxes and premiums  - so these fat slobs can get medical care which NONE of them deserve based upon their prior contribution to societyhe destroyed the ability to pay - by bringing in Illegals and lowering wages and then $18,000 premiums plus $6,000 deductible before you get a dime form the Insurance co but the low end get medical care from dollar one Insane system!!!

In reply to by yogibear

Doom Porn Star Fri, 09/08/2017 - 14:55 Permalink

" Our healthcare colleagues expect healthcare costs to rise ~5% annually over the next few years.    "Health Care costs haven't risen by such a low amount in decades.These assholes are flat out lying as this would be the lowest rate of increase since the fucking 1980's.

swmnguy Doom Porn Star Fri, 09/08/2017 - 15:39 Permalink

Sure, it's healthcare costs and housing costs and higher education costs.None of these things matter to me personally.  Why not?  Because I am among the incredibly few not in the Finance Sector nor in the .01%, 1%, or even top 15%, who has seen his income double over the past decade.I'm incredibly fortunate.  Bully for me.  Actually, my income doubled between 1995 and 2007, and has now doubled again since 2007.  I'm lucky.  I got into a weird niche business that caters to corporate neediness and ineffectuality.  Nice gig if you can get it, keep it, and tolerate it.But everyone else in the "bottom" 85%?  Their income has gone down, for some in actual number of dollars, but for all in terms of purchasing power.  Over the course of my lifetime (I'm 51), the purchasing power of a full-time wage-paying job has dropped by nearly 50%.  Not coincidentally, when I was a kid most households had one income.  Now they all have 2 and more, and they're still not keeping up in terms of purchasing power.So, people are working more but getting less?  Where's all that value going?  In the same timeframe, the pay of the median top executive went from being 30x the median worker to well over 300x.  Finance has gone from 5% of GDP to nearly 50%.And there you have it.Healthcare finance costs are bad and getting worse, but they're a symptom, not a cause.  Healthcare finance in the US was fucked before 1973, when the Nixon Administration introduced HMO plans as a solution to the skyrocketing costs.  Continuing to pay more and more in order to prop up a system we've known doesn't work for the past 45 years isn't going to work now, either.  Especially not now that we've stifled and diminished the ability of the median household to pay for the median cost of living.

In reply to by Doom Porn Star

CPL Fri, 09/08/2017 - 14:55 Permalink

Answer:  Everyone is full of shit and pretending that atruism is extended back to idiots that run fiat banking regimes is completely unlikely.

More_sellers_t… Fri, 09/08/2017 - 14:56 Permalink

Because things never get better!.. As the crap rolls downhill, you adjust your lifestyle, make changes, sell things, but if it never gets any beter at some point it breaks and you cannot put up a facade anymore.

CJgipper Fri, 09/08/2017 - 14:57 Permalink

between abandoned homes and bad credit card loans and abandoned autos and loans....... BTFD on the banks, because there's another bailout coming.

Heffer Fri, 09/08/2017 - 14:57 Permalink

most employment is for wages in the $9-12 range so just because employment is good doesn't mean most have enough money for all the toys they crave.

swmnguy Heffer Fri, 09/08/2017 - 15:44 Permalink

At current wages, and the cost of the credentials required to even be considered for such wages, I'd have to re-imagine the meaning of the word "Good" before I could agree that "employment is good."Myself, I've come to believe that employment is bad.  Bad for people, bad for employers, bad for society.  I love to work, don't get me wrong, but I hate jobs and I've quit every single one I've ever had.  I haven't had a job now in about 14 years and Lord Willing, I never will have one again.  Being self-employed with no employees, I am my product.  Fortunately for me, it's a great product that sells itself and has plenty of repeat customers.  The feudalistic, falsely paternalistic nature of convention employment and jobs is a pure negative for most people over the age of, say, 25.  It's a good way to learn a few things about how things work, but it's no end goal to be aspired to.  A building block at best.  If you want to remain employed by somebody else and get a W2, you are saying you are unwilling to and incapable of fending for yourself, and you are content to never earn the true value of your work.  I'm not able to say those things about myself, personally.

In reply to by Heffer

Drater swmnguy Fri, 09/08/2017 - 15:53 Permalink

"Being self-employed with no employees, I am my product.  Fortunately for me, it's a great product that sells itself and has plenty of repeat customers." Based on your comments on the Target price cutting story on ZH, your job must be sucking tranny cock in Target restrooms...

In reply to by swmnguy

itstippy Mrmojorisin515 Fri, 09/08/2017 - 15:32 Permalink

Flippers, individual investors, and REITS.They buy up the affordable places, add paint and new kitchen coutertops, and put it back on the market at triple the rent.  There is no modest housing left in areas where people want to live.  There are bidding wars going on for the few remaining fixer-uppers.  Borrowed money and individual investors desperate for yield and diversity are fueling the problem.

In reply to by Mrmojorisin515

techpriest itstippy Fri, 09/08/2017 - 15:39 Permalink

I'm watching it turn in Dallas. Houses used to sell in 24 hours in this area, now the investor-bought house across the street hasn't sold in 24 days since the open house.

Good thing I bought less than half what the bank said I could "afford." It's looking like we will be totally debt free and in a position to either buy or bug out when this really gets rolling.

In reply to by itstippy

skidrow techpriest Sat, 09/09/2017 - 13:18 Permalink

Not so here in Uptown. I had 2 one bedroom units in my 16 unit complex sell in less than 48 hours and both had 5+ offers. Additionally, the two bedroom unit above me went for $25K over asking price witin the last year. I just slam dunked a cash-out refi with ZERO upgrades to my 30+ year old unit due to the increasing COMPS alone.#LocationStillMatters 

In reply to by techpriest

Calculus99 Fri, 09/08/2017 - 15:14 Permalink

Looks like those EXPONENTIAL rises in health care costs are starting to bite. That's the bad news. However, the even worse news is once an EXPONENTIAL starts to bite the bite starts to get very large, very quickly...Something has to be done otherwise everything breaks as the consumer loans/debt/interest won't get repaid because they can't get repaid.

Herdee Fri, 09/08/2017 - 15:16 Permalink

Ask the politicians like McCain. They shipped off all the jobs to Communist China in return for debt financing for their MiddleEast wars. Nice bunch of thieves in Washington. Do you think that they care about ordinary working people? Get real.

Deep Snorkeler Fri, 09/08/2017 - 15:19 Permalink

Economic data is juiced.Later it is rejuiced.Nothing you see is as it is.Americans are meandering Mole People,with an insane desire for total simplicityfitting their lifestyle delusion.You live in a world that is on the edgeof realignment.

taketheredpill Fri, 09/08/2017 - 15:29 Permalink

  In previous cycles going back to 1980's, Rents would increase (with a lag) after mortgage rates rose.  Because home became less affordable (and because rising rates led to slower economic activity/wages) more people rented so rents would rise. Mortgage rates have been falling since 2008 but because nobody can buy a house with their shitty wage gains there is a forced demand for rent. Rents are rising because of demand and also because there is no alternative other than sleeping in a park (or a car). Try to picture all the building owners with a shit-eating "Shkreli" grin on their faces.   

Money Mantra (not verified) Fri, 09/08/2017 - 15:33 Permalink

False argument by MS. They are trying to hedge their bad market calls. Only analysts getting the markets right is SHEPWAVE. Called this week's moves again.

MrBoompi Fri, 09/08/2017 - 15:50 Permalink

Morgan Stanley asks questions as if they don't know the answer to them.  The unemployment numbers are fake, and for most of those who are employed they are woefully undercompensated.  They give money ( a kind term for debt) to "people" who don't have pulses and then act like they don't know what the problem is. 

Ron_Mexico Fri, 09/08/2017 - 16:30 Permalink

"After declining for decades, Morgan Stanley presents the following chart which reveals that healthcare costs as a percent of disposable income started consistently rising again only after the passage of Obamacare."Some conservative group should put this up on billboards/TV ads in every city in the USA. (Er, maybe wait until right before the 2018 elections.)