Credit conditions for people at the bottom of the ladder are getting tighter.
FTSE 250 lender Cattles, which specialises in the "sub-prime" market, said today that its full-year profits are set to meet market expectations.
But even though demand for its loans are up on last year, the group said "we continue to maintain our cautious stance on the selection of customers".
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In other words, they're being more picky about who they lend to. In fact, they're being so picky that they expect the amount of new business they write to actually fall.
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Cattles is right to be cautious about lending. Consumers are facing rising costs, which always impacts on the people with the least money first. And the news on that front isn't getting any better.
British Gas owner Centrica warned at the end of last week that customers' energy bills are set to rise again in 2006, following a 15% hike in September. The British Gas unit is set to post a second-half operating loss, though it will make a profit for the year as a whole.
Centrica's shares rose 2% to 243.5p, because investors like the idea that the company will make its money back by passing its surging costs directly onto its customers. But it's not such a pleasant prospect for those facing yet another year of rising energy bills.
Meanwhile, accountancy group Grant Thornton predicts that nearly 20,000 people will go bankrupt in the first quarter of 2006. That would be the highest number since records began in 1960. The group reckons 6,500 of these will be as a direct result of spending too much over Christmas.
You can read more about the looming consumer credit crunch and its likely impact on the UK property market in our recommended article from RH Asset Management (see below).
But while those lending to the people at the bottom of the tree are rapidly reeling in their credit lines, the ones lending to those at the top are still merrily dishing out their money to invest in increasingly exotic and risky areas.
In its twice-yearly Financial Stability Review, the Bank of England said it is worried that the "search for yield" in other words, trying to get a decent return when interest rates are low has lead financial institutions to loosen their lending criteria too much, and to put too much money into risky investments.
One asset class worrying the bank is commercial property, which now accounts for 10.2% of outstanding debt in the corporate sector. That's an 18-year record.
Because of the high demand in the sector, banks have been loosening up their lending criteria in the rush to snatch business from one another. As think tank Capital Economics points out, "this may have caused a reduction in the quality of the underlying asset on which the money is lent."
The BoE warns that this increased exposure to "more illiquid financial products" could spell trouble if there was "a marked deterioration in the economic climate."
We discussed the risks of investing in commercial property in Money Morning last week if you missed it, you can read it on our new website, by clicking here: A warning from Germany for commercial property investors.
Of course, as well as global economic imbalances and the explosion in derivatives trading, the bank has more mundane things to worry about - like UK inflation.
The annual rate of inflation has slipped back in recent months as oil prices retreated from record highs, but consumers' expectations of inflation have picked up sharply.
That means that the bank will be holding its breath for the results of public sector pay awards in January. But the unions are not currently in a cooperative mood. The latest news is that the Fire Brigades Union is considering strike action over attempts to raise the retirement age of new fire officers from 50 to 60. They are looking at co-ordinating action with local government workers, who are also opposed to working longer.
Amid this upsurge in militance, Gordon Brown's plea to the public sector pay bodies to keep salary increases capped at the 2% inflation target, seems increasingly like wishful thinking.
And higher wages, means higher inflation, which eventually leads to higher interest rates. And when that happens, all those banks might wish they'd followed Cattles' example and been a bit pickier in who they chose to give their money to.
Turning back to the stock markets...
The FTSE 100 closed 36 points higher at 5,531. Tobacco group Gallaher moved up as it revealed that trading is in line with hopes, with strong growth in eastern Europe offsetting declines in Germany and the UK.
Over in continental Europe, the German Dax Xetra gained 57 points to 5,353 while the Paris Cac 40 rose 31 to 4,704.
Across the Atlantic, US stocks slipped back. The Dow Jones lost 6 points to 10,875, the S&P 500 fell 3 to 1,267, and the tech-heavy Nasdaq fell 8 to 2,252.
In Asian trading hours, oil was little changed, trading at around $58.10 a barrel in New York, while Brent crude was trading at around $56.70.
Spot gold rebounded a little, holding out above $500 an ounce, to trade at around $506. Silver was little changed, trading at around $8.52 an ounce.
In Asian stock markets, the Nikkei 225 jumped 218 points to 15,391. Exporters advanced as the dollar rebounded against the yen after last week's falls, and oil prices remained below $60 a barrel.
And in the UK, US giant Honeywell International has agreed to buy crash-test dummy manufacturer First Technology for 275p a share, valuing the group at around £207m .
And our two recommended articles for today...
How to make a success of investing in India
- With a rapidly expanding middle class, consumerism is big business in India. But plenty of big multinationals have come a cropper on the sub-continent, says The Daily Reckoning's Sala Kannan. So what's the secret behind the success of those who do make it? To find out, and to learn how you could profit from four US companies who are set to enter India in a big way, see: How to make a success of investing in India.
Why UK house price falls are inevitable
- UK property sales during 2005 are set to be the worst in 30 years, say Andrew Selsby and John Robson of RH Asset Management. And with lenders tightening their credit criteria, and more people collapsing under the weight of their debts, things look set to get worse. To find out why house price deflation is almost inevitable, click here: Why UK house price falls are inevitable.
