Retail sales remain strong, unemployment claims remain low, and broadly speaking economic growth as measured by consumption and GDP is solid. That’s the good news.
The bad news is that some cracks are starting to emerge in consumer lending. Subprime auto loans is lending to those with the worst credit scores so they can drive something off the lot. Delinquencies are on the rise. This isn’t the housing crisis of 2007/2008. Mortgage delinquencies and auto delinquencies are two very different things. The repo man comes and takes care of the latter. But the combination of higher interest rates, tighter financial conditions, and a high level of inflation has low-quality auto borrowers paying late. It’s symptomatic of lending standards going up a lot, money getting expensive, and borrowers determining which bill gets paid last (or late) when inflation spikes.
We are staying away/avoiding/being distant from low-quality lending on many fronts, ranging from high yield bonds to sub-prime mortgages, to low-quality, risky consumer credit. Critical to distinguish between temporary and permanent loss. Low-quality credit is at risk of permanent impairment.
Chief Investment Officer
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