Credit Card Default Wave Hits U.S. Banks

~~ Lau Vegys, Doug Casey’s Crisis Investing

As I’ve said many times, the U.S. government isn’t the only one drowning in a sea of debt—Americans are too. And nowhere is this more evident than with credit card debt.

Recent data from the latest consumer debt report by the Federal Reserve Bank of New York shows that credit card balances hit $1.17 trillion in the third quarter of 2024.

This is the highest balance on record since 1947. As you can see in the graph below, credit card debt surged during the pandemic and has continued climbing ever since—all under the watchful eyes of Biden and Powell.

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Card balances aren’t that important if we pay them off at the end of each month—and what we should really be watching are delinquencies.

While that might be the case (with a few caveats), I’ve got some bad news for you. New data is in… And as it turns out, defaults on U.S. credit card loans hit the highest level in 14 years last year. You can see this spike in the chart below.

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According to BankRegData, credit card lenders wrote off $46 billion in delinquent loan balances in the first nine months of 2024. Again, this is the highest amount since around the time the global financial crisis wreaked havoc on economies worldwide. It’s also a 50% increase from the year prior.

This puts the final nail in the coffin of the “strong economy” narrative that President Biden’s handlers and Fed Chair Jerome Powell have been pushing. It’s anything but strong…

After years of Fed’s money printing and inflation, the American consumer’s finances are in worse shape than they’ve been in decades. And now, that reality is catching up with them in a major way.

Too Many Canaries in the Coal Mine

Early signs show more and more people are falling behind on their debts. Capital One, the third-largest U.S. credit card lender, said its write-off rate hit 6.1% in November, up from 5.2% last year.

Other major banks like Citibank, JP Morgan Chase, and Bank of America are all reporting massive spikes in delinquencies.

This is bad news for the consumer, but it’s also a big problem for the banks.

Keep in mind, all of this comes at a time when banks are sitting on hundreds of billions in unrealized losses, facing commercial real estate problems, and watching their credit ratings get downgraded left and right (while their shares hover near multi-year lows).

These are all the reasons why the smart money has been fleeing U.S. banks. As I wrote before, Warren Buffett’s Berkshire Hathaway has been systematically pulling out of major banks since early 2020. They’ve completely divested their stakes in Wells Fargo, U.S. Bancorp, JPMorgan Chase, and Goldman Sachs, while drastically reducing their position in Bank of America. And Buffett isn’t alone—Ray Dalio’s Bridgewater Associates and other major investors have been dumping bank stocks en masse.

The upshot is, the banking sector was already buckling under multiple pressures. I’m not saying card defaults will be the final straw, but they’re certainly piling weight onto a camel that’s already struggling to stand.

One last thing…

I’ve recently spoken with a senior banker who has been in the financial industry longer than the Great Financial Crisis. His take is that the surge in credit card defaults isn’t happening in isolation—it’s part of a broader pattern of distress. The American consumer is simply tapped out. That’s why banks are seeing increases in defaults across all types of consumer debt, from auto loans to mortgages to personal loans. This isn’t about financial schemes or out-of-control risk-taking like we saw in 2008—it’s about the brutal reality that American households are struggling to survive.

And that’s what, according to him, makes this situation potentially even more dangerous than the 2007-2008 crisis was. ~ Lau Vegys, Doug Casey’s Crisis Investing

~~ Lau Vegys, Doug Casey’s Crisis Investing

As I’ve said many times, the U.S. government isn’t the only one drowning in a sea of debt—Americans are too. And nowhere is this more evident than with credit card debt.

Recent data from the latest consumer debt report by the Federal Reserve Bank of New York shows that credit card balances hit $1.17 trillion in the third quarter of 2024.

Turn Your Images On

Card balances aren’t that important if we pay them off at the end of each month—and what we should really be watching are delinquencies.

Turn Your Images On

This puts the final nail in the coffin of the “strong economy” narrative that President Biden’s handlers and Fed Chair Jerome Powell have been pushing. It’s anything but strong…

Too Many Canaries in the Coal Mine

Early signs show more and more people are falling behind on their debts. Capital One, the third-largest U.S. credit card lender, said its write-off rate hit 6.1% in November, up from 5.2% last year.

Other major banks like Citibank, JP Morgan Chase, and Bank of America are all reporting massive spikes in delinquencies.

This is bad news for the consumer, but it’s also a big problem for the banks.

One last thing…

And that’s what, according to him, makes this situation potentially even more dangerous than the 2007-2008 crisis was. ~ Lau Vegys, Doug Casey’s Crisis Investing

Relative to GDP, the net international investment claim on the U.S. economy was 20% in 2003. It had swollen to 65% by 2023. Practically every type of American company, bond, or real estate asset now has some degree of foreign ownership.

But it’s even worse than that. As the federal deficit has pumped up the GDP figures, and made a larger share of the economy dependent on government spending, the quality and sustainability of GDP have deteriorated. So, foreigners, to the extent they are paying attention, are accumulating claims on an economy that has been eroded by inefficient, government-directed spending and “investments.” Why should foreign creditors maintain confidence in the integrity of these paper claims? Only to the extent that their economies are even worse off. And in the case of China, that’s probably true.

As global government interest expense climbed, gold quietly followed it higher. The IIF estimates that interest costs on government debt now run at nearly $4.9 trillion annually. Over the same span, gold prices have tracked that burden almost one-for-one.

Silver has recently gone along for the ride, with even more enthusiasm.

Since early 2023, Japan’s 10-year government bond yield has risen roughly 150 basis points, touching levels not seen since the 1990s.

Over that same period, gold prices have surged about 135%, while silver is up roughly 175%. Zoom out two years, and the divergence becomes starker still: gold up 114%, silver up 178%, while the S&P 500 gained 44%.

According to the American Association of Individual Investors, the average retail investor has about a 70% allocation to stocks. That’s well over the traditional 60/40 split between stocks and bonds. Even a 60/40 allocation ignores real estate, gold, collectibles, and private assets.

A pullback in the 10% range – which is likely in any given year – will prompt investors to scream as if it’s the end of the world.

Our “panic now, avoid the rush” strategy is simple.

Take tech profits off the table, raise some cash, and focus on industry-leading companies that pay dividends. Roll those dividends up and use compounding to your overall portfolio’s advantage.

In a healthy economy, production and consumption communicate constantly. If a company builds something useful, customers respond by buying it. If they overbuild, inventories pile up and prices fall, sending a signal to slow down.

AI infrastructure, by contrast, is being built largely on faith. Companies are scaling up compute power without clear signs of sustainable demand. Unlike oil and gas, where prices adjust second-by-second, AI companies operate in a fog. They release tools, collect usage stats, and hope that paid conversions will follow.

But hope is not a business model.

Silver has recently gone along for the ride, with even more enthusiasm.

Since early 2023, Japan’s 10-year government bond yield has risen roughly 150 basis points, touching levels not seen since the 1990s.

A pullback in the 10% range – which is likely in any given year – will prompt investors to scream as if it’s the end of the world.

Our “panic now, avoid the rush” strategy is simple.

Take tech profits off the table, raise some cash, and focus on industry-leading companies that pay dividends. Roll those dividends up and use compounding to your overall portfolio’s advantage.

But hope is not a business model.