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The Consumer Is Cracking — Here's How to Play It

Posted October 23, 2023

Zach Scheidt

By Zach Scheidt

The Consumer Is Cracking — Here's How to Play It

I came across a disturbing chart in my research this morning...

One that shows just how dangerous this economy is for many consumers. 

But it’s also one that gives you a great opportunity to profit — if you know how to set up the right trade.

Today, I want to make sure you're aware of this developing trend, so you can better protect your wealth and generate some extra income for retirement.

Let's jump right in!

The Danger of Delinquencies

Take a look at the chart below that shows the percentage of subprime auto loans that are at least 60 days late.


Delinquencies are hitting an all-time high as inflation makes it more and more difficult for families to pay their bills.

This chart is particularly concerning when you think about the way many families organize their budgets.

I don't typically recommend families borrow money for a depreciating asset like a car, especially in today's high interest rate environment. 

But for families that do take out an auto loan, there’s a huge incentive to stay current on the payments.

That's because if you default on your auto loan, your car will almost certainly be repossessed. When that happens, it becomes even tougher to make ends meet. 

After all, how are you going to get to work when you don't have transportation?

Yes, there's public transportation. And some people may choose to take an Uber or Lyft to and from work. 

But those options are either time consuming or prohibitively expensive in most cities. So borrowers tend to avoid missing a car payment at all costs.

Typically, most families start by making sure their rent payment is covered with the family's car payment being a close second on the priority list. 

Once those two items are covered, families can then divvy up the remaining income for groceries, incidentals, and other family expenses.

The fact that auto delinquencies are hitting an all-time high is a very sobering statistic for our consumer-led economy.

Risks and Returns in a Consumer-Challenged Environment

On one hand, the rising rate of auto delinquencies is concerning. Roughly 70% of the U.S. economy is driven by consumer spending. 

And while many affluent consumers are in decent shape because of rising home values, many middle-class and lower-income families are struggling with stubborn inflation.

Wage gains simply haven't been strong enough to offset rising costs. And that's why we're seeing more people default on auto loans.

On the other hand, our free-market society gives investors like us an opportunity to profit from just about any environment. You just have to know how to set up a trade that benefits from specific situations.

Today's challenges are making life particularly difficult for companies who lend to lower-income families. 

The risk of default continues to climb and in many cases, lenders simply can't charge enough interest to make up for the delinquencies and defaults.

Shares of credit card issuers Discover Financial (DFS) and Capital One Financial (COF) are now in clear downtrends and could have much further to fall.

[Full Disclosure: I have a personal bearish position in COF as part of my Income Alliance model portfolio.]

Buying put contracts on these subprime lenders is a great way to protect your wealth and actually profit in a challenging period for investors.

Just to be clear, buying put contracts on DFS or COF won’t harm the families that borrow money from these credit card companies. So you're not making money off the backs of working-class consumers.

However, shares of these lenders are likely to continue lower as delinquencies rise. And as investors, it's our responsibility to take advantage of the opportunities that this market gives us.

It's certainly a challenging time for investors. But with the proper tools, you can continue to grow your retirement wealth even while traditional investors are stuck treading water.

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