A Look Ahead

A Look Ahead (And Behind)

By normxxx | 7 July 2008

Impaired institutions are likely to experience failures in the course of this year. There will not likely be more bailouts like Bear Stearns (the coffers are empty). It's rumored that even Merrill Lynch couldn't raise funds from the Arabs recently— everyone burned is already twice-shy. We think Paulson is sort of taking the high road to saying 'we're in trouble', and making it sound appropriate not to let banks and brokers think they'll get bailed out, rather than flat-out say… no more dough.

There is an ongoing loan 'contraction' in the U.S.— everyone knows that by now. However, some officials act like matters are improving. They're not. Rather, everyone is adjusting to ratcheting things down and living with it. Credit card and home equity loan delinquencies are rising, not shrinking, and that too is worrisome as the Summer and Fall proceed.

When things are this bad, inflation often precedes deflation. (Selective) commodity price rises reflect an arrangement of changes, rather than negating a developing deflation (eg, as in housing and the real, inflation adjusted, price of many things). Eventually, as the emerging markets succumb following a series of heavy equity market declines overseas, you'll get wider commodity price breaks. That's why 'decoupling' is bad for the U.S.; you won't break the hold of our anticipated 'stagflation' without taking down demand (and prices) for overseas commodities.

Deleveraging is a bitch. Contracting credit is one of the forms of deleveraging. That has already occurred with housing of course, but is now spreading to commercial and industrial loans. It is reportedly the case that dozens of banks are paying 'way over' the Fed Funds rate (and concealing this fact) just for interbank borrowing. (While it's still a small number, it's not happened in recent memory.) That alone deflects all the nonsensical arguments about the banks being past the crisis, and now being attractive investments. We'll get there someday, but not nearly yet.

For those familiar with Term Auction Facility transactions, things are no better in Europe than here in the United States, and the ECB is at risk of substantial TAF-Europe defaults. The truth is, the entire international banking system, many national banking systems, and many banking behemoths are poised very, very precariously at this time— knowledgeable people are worried about what's really going on in banking, domestically and overseas.

Some weeks ago, London's LIBOR rate was way above normal spread ranges, and I suspect this was a signal of what was/is to come. It's bad, not good, and not likely to get better anytime soon. This is why bank stocks aren't yet seen as a great 'bargain', given that some are selling under what is (purportedly) book value. Well maybe the marketplace isn't as nuts as some say.

It would appear that those with the money, the 'real' analysts, expect more writedowns, and other costly 'events'. Such doings by the banks are by no means 'cleaned-out' and, while much has occurred, bank transparency is still like 'looking through a glass, darkly', not anywhere near full-disclosure. The worst shock may be behind us (and then again, may not be), but the worst results are still ahead (if a bank or broker goes even broker, then I guess the results are worse than now).

The credit markets are barely functional (and that only because of the massive intervention by the CBers— well over $1 TRillion, $1000 billion, plus other 'innovations'). We have contended that many of the banking behemoths are in trouble, basically insolvent, with various measures being used to conceal reality from the investing public (well, the Japanese banks pulled it off during the '90s). Whether it's failing Auction Rate Securites, Alt-A or Option ARMs mortgages, credit cards, home equity or other asset backed loans, or a host of forthcoming foreclosures, this is a phenomenal, massive contraction of credit (aka, 'ersatz-money'). It is all deleveraging— essentially deflation. (And, as BB desperately tries to inflate the money supply to compensate, the prices of commodities go parabolic.)

In a democracy, 'passion' often tends to gravitate to some immediate happening, rather than being applied to the long-term realities of the situation. 'Passion' now cares about gasoline prices— when it should be focused on our financial independence, as individuals, as institutions, and as a country. Oil at a price, 'set' by a cartel, and paid for by destroying our Trade Balance, is not in our interest. We'd be better off paying more but making it here, and keeping the revenue here, with prohibition against siphoning-off the profits to overseas investors. Not merely tax adjustments, but the overall profits. (Or, maybe, we should start a grain cartel.) It would help expedite the Nation's ability to rescue itself from this incredible quagmire of mis-governance and societal lack of interest (didn't say deterioration) that predominate. The time has come for drilling off-shore, in the ANWAR, and for building as many nuclear power plants as fast as we can! I don't think our children will appreciate the bounties and beauties of nature much if they are starving.

I have been warning that this Goldilocks porridge was toxic for several years, at least— with the most probable date for the dénoument in 2009. It remains so. The price of oil is merely a symptom, and should the price of oil take a dramatic fall (eg, as the recession draws upon us), it will change little.

Normxxx    
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