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The bubble has popped
The more I look at the current landscape, sans an immediate miracle drug/vaccine, the more pessimistic I become towards future travel resembling anything like what we knew and loved just a couple of months ago. Business Travel is going to enter a new normal, and a lot of leisure travel has been fueled by outsized benefits rooted in amazing credit card bonuses, perks, and transfer partners. While I think many of the cards will live on, and we may even see higher bonuses, retention offers, and the like…I believe the great travel/credit card point boom we’ve all experienced and greatly benefitted from in the past few years has popped. When you compound the fear factor of piling into a metal tube, uncertain personal finances, travel restrictions, foreign travel health concerns, and increased credit card approval scrutiny – I don’t see how it continues.
The Banking Situation
Banks loan and invest to create profit, and your credit card is an investment in you. They trust that the money they will loan you for goods and services will be paid back in full + fees and interest. If you don’t…the system doesn’t work. Banks have taken action that forecasts that they have lost faith in their existing models of how many people will repay, and that means loan approvals, whether home/personal/business, or credit card will plummet.
This past week we saw major banks report earnings, and one by one, they all indicated massive loan loss provisions that I can only imagine will increase, and “forbearance” became a hot word of the week. Interestingly enough, deferment, was rarely mentioned, a big reason as to why I think the bubble has popped, but may not be bad for all participants. You see, with forbearance, every payment that you didn’t make during your forbearance period will be due in full after the moratorium. Meaning…if you didn’t pay your $2k a month mortgage for 3 months, you next payment will be for $2k + $6k you didn’t pay. If you don’t pay the $8k…as soon as limitations on foreclosures are lifted, proceedings will start.
Why? Because the bank sold your mortgage to a fund who packaged it into a Mortgage Backed Security, and those cash flows have to be paid to the owners of the fund. If they deferred your payments, or simply added those 3 months of mortgage payments to the end of your mortgage, they aren’t made full and have floated your payments. They want their money. ( Anyone know a really good Credit Default Swap I could buy?)
It’s why Loan Loss provisions have escalated, and will continue to do so in my opinion. Remember that article I published about Cap1 facing a $1B energy margin call…have energy prices gone up or down since then? How about the likelihood of other loans defaulting? Not saying it’s existential, but I don’t think a cogent argument exists to suggest the outlook is sunnier. Cap1 is just one of many banks that have generated Billions of dollars of loans packaged for MBS.
In fact, I would be surprised if we don’t see some kind of bailout for the firms that maintain the MBS funds since they’re still on the hook for payment even when the banks don’t produce cash flows to them…which I’d say is a few months off when that forbearance comes due. How are you going to argue, during a crisis that has seen 20Million people hit unemployment so far, that those who couldn’t pay their mortgage in April are going to pay for April, May, June, and then July as a lump sum? We’re facing a default crisis…ring, ring, Fed Reserve…let’s talk about that balance sheet again.
Banks have also tightened their lending qualifications across the board. Chase now requires 20% down with a 700 minimum FICO score, up from a supposed 15% and 680. While this doesn’t seem like much of a difference, if you pour into some of the data, it’s fairly significant in areas where housing prices aren’t as high. Banks are also requiring more up to date income statements, and real estate investors who would collateralize rent payments for loans must now show 6 months of cash for every rental property they own. This is all happening in month one…
If they are tightening on home loans with a house as collateral, a down payment, and full access to your financials, it doesn’t take a genius to think that they are going to significantly cut down on credit card approvals. In fact, we’re already seeing reverberations…
All you have to do is read some Reddit threads to know that credit lines on existing accounts are being cut left, right, and center as well. This is just the start. If you’re carrying a balance, have a short history with the bank, have high credit lines to income ratio, expect your line to be cut. Hope that it isn’t to save your credit score. I’ve talked about this in great length on the blog, but also in my Youtube videos that Credit Utilization is one of the most important factors in your score. If your lines start getting cut, your utilization will sky rocket, and your score will plummet.
Additionally, rumors are circling that small business cards, and potentially other consumer cards, may now require bank deposits for approval, and I can’t imagine this is going to improve anytime soon. While the stock market is soaring, a decoupling from main street and reality, the world is facing one of the most trying economic times ever. Banks are going to need more financial certainty that you will pay, and that doesn’t equate to a fluid credit card market for most.
VFTW declared business travel dead. I agree…or at least it’s going to be on a long ambulance ride to hospital and when it’s resuscitated, a completely different entity will emerge. Mandatory shutdowns, work from home, etc has been a complete game changer. I think many firms will not only avoid exposing executives to disease that they would pick up on a business trip and drag back to corporate, but also minimize overhead expense that office space consumes. One could argue that perhaps reiterations of WeWork will emerge ( not that house of cards should be emulated), with different distancing protocols in place, for meetings that must happen in person, but overall I think we will see an increased move to “work from home” positions.
Factor in how much travel is for conferences, events, sporting or otherwise, that will now just flat out not happen…it’s a major dent in business travel that forces a new normal to emerge. I also tend to think that worldwide there is going to be a major focus on re-nationalizing supply chains, the very least of which will be items deemed crucial to national security and health. More domesticated/regional supply chains will lead to far less demand on international routes, and even ones that are still global will be managed remotely, and site visits reduced significantly, especially if quarantines are mandated pre-vaccine.
Travel restrictions and Health Concerns.
We’ve lived in a period where restrictions on travel had been rolled back, and the world was gradually opening itself up to easy tourism. This is all about to change, especially for travel in and out of countries that have vulnerable health systems or limited capacity for testing. Vaccine immunity passports are discussed regularly on main stream media, and one can imagine the pushback these are going to create for anyone who has read a dystopian novel in their life. Macron has advised that EU borders may remain closed until September. I don’t think this is hyperbole at all, and the biggest issue I think the EU is going to face is convincing all the member countries to reopen their borders even within the EU. Pre-Covid, there was immense stress put on the system regarding a wide array of issues, but I’d argue border contorl was the biggest reason they didn’t close off Italy when the outbreak started in Lombardy. Once closed…a re-opening is markedly harder to enforce.
How many people do we honestly think are going to be utilizing credit card points, etc to travel to Europe if they need to show proof of a vaccine, and how hard is it going to be for governments around the world to decide on one universal vaccine? If there is a second wave, or a flare up anywhere in the world, what happens? Do borders close instantaneously? If you’re Italy, will you wait for EU approval before shutting down your borders, or will you close like Austria did?
Bloggers have undoubtedly inflated the balloon. From this blog to Business Insider and Forbes, affiliate links have become big business. I don’t bemoan affiliate links at all, afterall, this is a business and you need revenue. However, I do think there is a difference between pushing products for profit, and earning money off of products that you actually value and use.
In the past month, Affiliate links have almost universally withered on the vine. Companies are cutting back on ad budgets, travel is non-existant, and many brands that provided affiliates are battling existential crises as we speak. I’d guess that’s why you’re probably seeing a decrease in output from many bloggers…they’re writing with no way to monetize.
Bloggers, like myself, have been able to build streams of revenue for their businesses by illustrating how we have capitalized on fruitful programs, and earning a commission when you, the reader, use our links to sign up for the credit cards, hotels, flights, etc that we talk about. We appreciate it when you use one of our affiliate links, but ultimately, I want readers to get a great deal, and often times that isn’t with a link that I get paid on. I do my best to distinguish between card offers I earn a commission on, and other offers, like our Amex Referrals, that are often better deals and allow you to participate in the traffic of our site, the landscape of bloggers has grown exponentially. We’ve never hired anyone, and in fact, we were looking to add a few award bookers on when this whole fiasco happened. I’ve always been the sole voice of the blog, work from home, and didn’t try to out-climb my oxygen.
I started this blog because I had had a back surgery and was laid out. I loved travel, but I didn’t think it’d be a career. It was a fun, creative outlet that made my mental state drastically improve, and then turned into something that made money. I even started an award booking business around it, joined affiliate networks, and started earning commission of credit cards. However…it’s always been a passion project, and while I haven’t worked as much as an actor in the past couple of years, acting is still an income producer and something I will always pursue as a career. While I don’t see travel blogging going away, I do think it’s going to separate the wheat from the chaff. It takes a lot of work to write articles. If you aren’t making money around it…you had better love it because you’ll need gratification paid to you in ways that don’t carry a decimal point. Sites like Doctor of Credit, that have built models of a sustainable business outside the credit card affiliate model will do really well, as well as established sites that generate a high volume of traffic. But even then, I think times will be lean.
On the other side of this whole thing I believe there will be less emphasis on the banking system, and travel blogs will be the vicarious eyes of the homebound. This excites me in so many ways since my truest joy is in entertaining, and I do feel like this lens is what will be favored going forward. Many people will not be able to acquire credit cards as they have in the past, but more impactful, they won’t feel comfortable traveling away from home.
High FICOS and 6 figure incomes
If this is you…you’re in luck. Carrying large savings/checking balances at the bank, keeping a mighty credit score, and filing a tax return with 6 figure income is going to be a sword you can wield in the upcoming environment. Once banks get a real handle on their total exposure to loan loss, they’ll start targeting their most trusted and highest spending clientele to create cash flow. That is you.
I anticipate bonuses being the largest we’ve ever seen on premium cards targeted for high FICOs and high income. Hilton just sold $1B points to Amex. Delta and United have been in discussions to sell points to Chase and Amex at huge discounts. Travel brands, while getting government bail out money, are still going to be hurting. I’m an absolute travel geek and the last thing I can really think about is staying in a hotel or flying in a plane before getting an antibody test, knowing if antibodies protect me, getting a vaccine, knowing about proven treatment, etc. If I feel that way and I would fly to Bangkok on a weekend whim, what is a normal person going to go be looking to do?
Decreased demand means these brands are going to need to leverage every asset they have, and I think that means we will see more of these massive point sales, and potentially the spin off of loyalty programs to fund continued operations and generate cash flow. Most companies do not have a large warchest of cash reserves to weather a recession or even a depression.
Banks with tighter application restrictions will leverage high sign up bonuses to entice those they can rely upon to generate cash flow for the banks. If you’re in this category…stay tuned, it’s going to get fun.
This is completely speculative, but it wouldn’t surprise me to see, especially if we encounter a full blown recession, that many of the draconian application rules are rolled back. If people aren’t traveling, points aren’t in as much demand. Amex’s Once in a Lifetime rule, Chase’s 5/24, 48 month rule, etc, etc won’t be meaningful when your biggest problem has been highly desirable customers canceling cards to avoid annual fees. If you make $130k a year now, and you don’t foresee traveling much in the next 12-18 months, why on earth are you going to keep paying $450+ for a credit card that leverages points for travel? Have three of those…let the cancellations begin. Perhaps, the recent trend of Amex retention offers will spill over to other banks to keep premium card holders holding cards, but at some point you exhaust your runway.
Those customers may want back into the game in a year or two. Do you really want to deter them, or incentivize they look at other banks simply because they can’t get a sign up bonus. Personally I think the sun is setting on those rules and we’ll see a new day soon enough that rewards those with high FICOs, bank history, and 6 figure income…first. Then, as we scale up the recovery trend, it will trickle down as it did in the last 10 years and a re-emergence of strict rules. But…my gut tells me they will relax.
What you should be doing
As I’ve always said, you shouldn’t be carrying credit card debt. If you do, strategize a way of paying it off as fast as possible. There are many 0% balance offers out there and I would suggest investigating them, using them to avoid interest, and stick to a plan of paying them off before the interest kicks in.
If you’re not in the high FICO, 6 figure club, I would weather the storm. My gut is applications as well as existing accounts are going to be pressed with increased scrutiny. Pay your bills in full and on time and if your lines get cut, call in and try to negotiate to reinstate them. You want your credit score to stay in tact and healthy.
If you’re looking at a way to weather the storm and emerge in a fantastic position to travel once the fog has cleared…take advantage of our Amex and Chase referral pages – you can earn points easily this way without signing up for any cards. I would advise pivoting all/most of your spending on to cards that offer flexible points, that way you can analyze which programs offer the best redemptions after this is in the rear view mirror, and transfer into them for best use.
The Bubble Has Popped
Just like the great tech bubble, technology didn’t die, there was just a great reset. I believe we are in the beginning stages of this once again, and the travel industry will be greatly impacted. The customer has enjoyed a plethora of riches when it comes to credit card points, application approvals, premium travel, perks, and benefits. At the same time, for many travel programs, the customer’s experience has been undermined, eroded, and taken for granted. I don’t see business as usual coming back anytime soon when it comes to travel, dining, and leisure, and once it does…it’ll be a new normal. The space between will be an opportunity to get your ducks in a row and emerge prepared to take advantage of some once in a lifetime opportunities.
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