Credit World May Become A Battlefield If FICO and Square Butt Heads; Silver on the Move; ADP Fairy Tales

A couple of stories from the world of personal credit are noteworthy as the world enters the third quarter of 2020 hoping for improvement but fearing a repeat of the second quarter from the same enemy which ran roughshod over the world economy.

It's not the virus that people fear, but government response to it in terms of restricted mobility, business operations, and general closures of everything from schools and churches to bars and hair salons.

While the planet and government managers struggle with the virus and their chances in the upcoming US elections in November, credit issues are popping up like daffodils in Springtime. Huge numbers of Americans are foregoing rent and mortgage payments, citing unemployment as the main cause for a diminished cash flow, and delinquencies are piling up not only on mortgages (which are vitally important), but on car loans and leases, student debt, credit cards, and personal loans.

It's because of these issues, or perhaps in spite of them, that FICO (Fair Isaac Corporation) wants to rate your resilience and ability to pay back borrowed money in a recession or economic downturn. The company and its affiliate credit scorekeepers - Experian, TransUnion and Equifax - are looking back at credit histories from the GFC in 2007-09 for hints of riskiness in borrowers.

Their findings, which won't be relevant for at least a few more months, could affect how consumers are judged when applying for any kind of credit, from mortgages to car loans. If economic conditions remain below par, many people with poor resilience scores could find themselves out of luck getting credit.

Countering FICO's foray into past performance of borrowers, Chime continues to innovate in the banking and credit space with the launch of the Chime Credit Builder Visa Credit Card.

Actually a debit card that works like a credit card, users can transfer funds from a secure Chime account to a Visa card, and use that money to charge anything, including everyday items like food, gas, clothing or general expenses. The charges are paid by the card automatically, and the results reported to the credit bureaus. The goal is to improve credit scores for mainly younger folks, who favor debit cards over credit, but who need to establish or improve their credit history.

If it sounds like cheating, it very well may be. This is reporting of purchases made with essentially a debit card being reported as a credit card. The credit bureaus are likely to balk at this methodology. A clash between the old standard bureaus and the upstart Chime might make for some interesting developments in how credit and individual risk are measured down the road.

Tuesday's hands-down big winner was silver, which rocketed up by more than two percent in the futures space, vaulting over the psychologically-challenging $18 mark and holding around $18.20. Gold's little sister has a lot of catching up to do and if this price maintains, should signal that a run up to resistance in the $20-21 range is imminent. Correlated closely to the S&P index (for God only knows what reason), if stocks falter and silver holds or goes even higher, that would qualify as a major development. Keep eyes peeled on that space.

Stocks continued their rally from Monday into Tuesday, which was the final day of the month and of the second quarter, an important milestone, since GDP for the quarter - heavily affected by the coronavirus and state-by-state lockdowns and business closures - is expected to check in with a very negative number on a scale likely never seen before. Estimates for second quarter GDP range between -25% to -52%.

Current stock valuations seem to be suggesting that investors are leaning toward the upper end of that range. A decline of 30-35% might actually be seen as a positive for markets because it will be viewed as a one-off event followed by a rapid recovery, though the jury is still out on whether economic recovery will look like a "V", "W", or an "L".

Any view of the stock market indices over the past five months clearly show a "V" shape, with stocks declining and rising at the same frenetic pace. The recovery pattern for stocks can hardly be taken as definitive by any measure of economic activity. Stocks were skyrocketing off their lows as millions of people were losing their jobs, the government and Federal Reserve exercising emergency measures, and the general economy entering a recession.

A "W" pattern goes along with the "second wave" theory of the virus, already being engineered by increased testing and renewed calls for shutdowns, lockdowns, face masks, social distancing and all the assorted recommendations which were successful only in wrecking the Main Street small business economy.

The "L" pattern is the one most despised by money managers, banking executives, and financial central planners because it offers no realistic hope for the immediate future. The "L" concept implies that the economy falls and stays down for an extended period. Like just about everything else the experts at the biggest banks and financial institutions predict, contrarian view has the slow recovery "L" pattern front of mind and it is actually the most likely pattern - not for stocks or any other asset classes - for the general economy in terms of GDP, personal income, and employment.

Finally, queueing the start of the third quarter in the typical doublespeak manner, ADP's June Employment Report showed a gain of 2,369,000 jobs in the non-farm private sector. This follows a decline of 2,760,000 in May, with June just about covering all those job losses. ADP saw 19.5 million people lose their jobs in April, another 2.8 million lost jobs in May (which has now been revised to +3.065mm!). It's almost as if many of those 20 million people filing continuing unemployment claims don't exist, which is fine, since we're all living in bizarro-world now.

At the Close, Tuesday, June 30, 2020:
Dow: 25,812.88, +217.08 (+0.85%)
NASDAQ: 10,058.77, +184.61 (+1.87%)
S&P 500: 3,100.29, +47.05 (+1.54%)
NYSE: 11,893.78, +116.69 (+0.99%)

Stocks Erase Most of Monday's Gains; Dow Closes Down for the Quarter, Year

Well, that escalated quickly...

After booming on Monday, Tuesday's players must have had a case of buyer's regret, selling back 2/3rds of what was bid up just a day earlier, very odd, considering that the last trading day of the month usually ends up positive, due to "window dressing" by fund managers.

That did not happen today. In fact, the markets reversed course right at the open, but really accelerated the selling in the final hour of trading.

Reasons? The Fed? Mountains upon mountains of un-payable debt? Iran? Yellen? Bueller?

Tracking the foibles and fantasies of the Wall Street crowd on a daily basis can be a thankless task, especially under the conditions which are currently reigning over the market. Levels of uncertainty are reaching a fever pitch, between various conditions in Europe (Draghi's failing QE, Ukraine, Turkey tuning totalitarian, Greece), the Middle East (ISIS, Syria, Iran) or the troubles bourn at home in the US, ranging from gay upset in Indiana, crumbing infrastructure, fracking drillers facing bankruptcy, insolvency of college grads with high student debt loads (a catastrophe waiting to happen), chronic underemployment or a host of other nagging circumstances which don't add up to recovery after six years of waiting.

The good news is that the credit spigots are wide open, though many individuals, having been burned by financial institutions or failed investments in the past have been wary to expend much energy spending money they don't have on things they don't need. Credit card companies have been unduly generous of late, the number of 0% interest cards offered having swelled in recent months.

Additionally, auto loans and leases are becoming as easy to obtain as water from a faucet, but default rates are also rising as consumers continue to be tapped out on the road.

Gas prices are low, sings of Spring are everywhere, but somehow, the major indices - at least for today - are not feeling the love.

Something is wrong, but we're not going to wait around to find out what it is. Anyone who hasn't divorced his/herself, at least in some part, from the credit-debt-tax-cycle-slave-system is missing the proverbial boat, which may sail off into the horizon at any time.

Americans, especially older ones, are becoming more detached from the system as the system disappoints and disillusions many who have played and paid and are seeing their paltry incomes stagnate and savings threatened by seven years of a low-interest regime engineered by the Federal Reserve.

And, with markets closed on Friday, who exactly will be able to react to the March non-farm payroll data? At least tomorrow, ADP will issue their March jobs report, which mirrors the NFP report to a degree.

Making matters worse, the Dow Industrials closed the quarter lower than at the start of the year, the S&P and NASDAQ posting fractional gains (less than one percent) for the quarter and the year so far.

So much to ponder and so little time. Tax day is April 15. What fun!

Dow 17,776.12, -200.19 (-1.11%)
S&P 500 2,067.89, -18.35 (-0.88%)
NASDAQ 4,900.88, -46.56 (-0.94%)