A Contrarian View on Credit-Related Investments?

Posted by: Lauren Young on May 29, 2009

There are two stories in the new issue of BusinessWeek about credit. I wrote a piece about fund managers eschewing credit-related stocks for credit-related debt. And our Inside Wall Street column looks at credit-card processors such as MasterCard (MA) and Visa (V).

A contrarian view comes from Martin Weiss, president of Weiss Research, who says the consumer credit bubble in America has burst. In the third quarter of 2007, banks and credit card companies made $44 billion in net new loans on credit cards, autos, and other consumer credit, excluding mortgages. Then, just 12 months later, in the third quarter of 2008, new consumer credit credit collapsed to a meager $8.7 billion, a decline of 80% from a year earlier.

But the decline didn’t stop there.

In last year’s fourth quarter, not only did new credit disappear, but lenders actually pulled out of the consumer credit market to the tune of $19.5 billion. And they did it again in the first quarter of this year, pulling out another $12.2 billion. It is the largest decline in consumer credit ever recorded. (These are monthly Federal Reserve figures which Weiss aggregated on a quarter-to-quarter basis to show the trends more clearly.)

This vividly marks the end of an era. The heady days when credit cards were mass marketed like hotcakes have been replaced by a new world of tighter lending standards, higher fees, government controls, and more consumer aversion to plastic: A fundamental financial, political and cultural shift. For credit card lenders and service providers, this means a sharp decline in business in the near term and a greatly reduced volume for years to come.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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