Expert Commentary

Deflation Warning from Credit Cards

There's never been a better time to own a credit card company. The future may not be so bright.

Statistics continue to show that the developed western world is drowning in personal debt. Those numbers only get released on an infrequent basis and so, like all economic statistics, are somewhat backward-looking. What if we had a way of gauging the demand for credit on a daily basis? Step forward, the stock market.

The stock market is like a massive voting machine whereby everyone gets to vote on a company's prospects. Therefore, if a stock price is going up, we can safely surmise that, on a net basis, people expect the company to continue to do well. The stock market is a reflection of people's expectations about the future and this is why it generally leads the economy.

The two global credit card giants, Visa and Mastercard, have had publicly traded shares for over a decade and so we can analyze their performance for clues as to the prospects for the credit card industry.

The first chart, below, shows the average of the Visa and Mastercard share price since 2008. Notice the parabolic shape of the advance. At the risk of stating the obvious, this cannot go on forever. We've seen this shape many times in previous bubbles. At some point there has to be at least a sideways correction or, more probably, a severe decline.

Visa Mastercard Average

The second chart shows the share price of Mastercard, this time on a logarithmic scale, since its Initial Public Offering in 2006 (the height of the last credit cycle). The structure counts exceedingly well as five waves up which, under the Elliott Wave Principle, is a completed advance. Notice also that wave (2) was a sharp, deep correction whereas wave (4) was a sideways triangle. This speaks to Elliott's guideline of alternation. We can employ more Elliott guidelines in order to gain insight as to where wave (5) may end. From his exhaustive empirical research, Elliott noticed that if we draw a line from the end of wave (2) with the end of wave (4) and then parallel that line to the end of wave (3), wave (5) often ends at a point where it subsequently meets that line. Finally, Elliott observed that when wave (5) is extended (it's the longest on an arithmetic scale), its length often equals 1.618 times the length of waves (1) through (3). Both of those guidelines are warning of an imminent top in Mastercard.

Mastercard Inc - A

What this analysis tells us is that the share prices of Visa and Mastercard are probably about to enter a multi-year decline that could result in, at least, a 50% drop. Such a decline will be driven by a negative mood towards these companies' prospects and that will be fueled by a deflation in credit.

The famous slogan is, "There are some things money can't buy. For everything else, there's Mastercard." As deflation takes its vice-like grip, the irony will be that money (cash) will become far more valuable than everything else.