HELOCs
Comment of the Day

July 15 2021

Commentary by Eoin Treacy

HELOCs

Thanks to a subscriber for this report from Morgan Stanley which may be of interest. Here is a section:

Eoin Treacy's view

Here is a link to the fullHELOC report.

The willingness and indeed ability of banks to make loans is an important credit multiplier. The retrenchment of both consumers and banks following the global financial crisis meant that multiplier was missing and the anticipated inflationary forces did not appear. It is logical to monitor this topic as a key support arbiter of whether inflationary pressures will be transitory.

The thing that bugs me about only looking at this question from the bank credit multiplier angle is that liquidity has been abundant over the last decade despite banks being less than active. That means there are other sources of financing available to the market, most particularly private equity. Businesses have had little difficulty sourcing funding for speculative ventures.

Perhaps it is more correct to think inflation has not rebounded in a forceful manner because consumers were not confident enough to re-engage because of the trauma of the credit crisis. With banks less willing to lend to consumers and consumers reticent to leverage up, the credit multiplier was contained.

The pandemic could be the catalyst for renewed appetites for debt. The massive swell of deposits could help to fund significant demand growth well into the future even if it does level off at a higher plateau. After that splurge and demand to live one’s best life, demand for debt should pick up. That suggests Home Equity Lines of Credit (HELOC) should be an indicator of consumer demand for debt that would contribute to inflation. At present is still trending lower because savings are high. When it turns upwards, it will confirm a change in sentiment towards more debt has occurred but perhaps not before. .

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