Billionaire Chamath Palihapitiya is warning that one metric suggests that the financial health of American consumers is deteriorating.
In a new episode of the All-In Podcast, Palihapitiya says he’s keeping a close watch on the price-to-book ratios of subprime lenders Capital One and Credit Acceptance.
Investors use the price-to-book ratio to evaluate whether asset-heavy firms like banks are undervalued or overvalued.
But the billionaire venture capitalist notes that the financial metric can also be used as an early warning signal for a potential liquidity crisis in the US.
“What it shows you is the spread where Credit Acceptance is versus Capital One. And the point in bringing this up is that when you look back historically around these subprime lenders, whenever these guys start to see price to books just start to escalate and get to highs, it tends to portend a liquidity crisis. It tends to show that things are about to roll over.
And from that perspective, I think there are some blinking yellow lights that the Fed needs to take seriously.”
The billionaire also says that the Fed can get ahead of a potential liquidity crisis by abruptly cutting rates.
“Some of the most critical leading indicators, particularly around liquidity and the credit health of the American consumer are blinking yellow. So right now, they are choosing to ignore these historically useful leading indicators.”
Last week, the Federal Reserve decided to keep interest rates steady at 4.25% to 4.5%, citing its dual mandate of achieving maximum employment and inflation at 2% over the long run.
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