Here's my take on the macro picture:
We're at the tip of the iceberg as far as the credit bubble is concerned.
Since Y2K we've gone from one bubble to the next. Each bubble has become larger than the last. First the tech bubble, then an even larger real estate bubble, then an even larger bubble in virtually every commodity.
All of these bubbles have been funded with the largest bubble of all, the credit bubble. Now we're dealing with trillions instead of billions.
It seems our government has lost site of the fact that a recession is a normal part of the business cycle and the longer you postpone it the worse it will be when you are finally forced to accept it.
Everyone is focusing on the sub-slime mortgages, but as we have seen with American Mortgage the problem extends far beyond the sub-slime.
Over the last 7 years, credit standards have become looser and looser for all mortgages. It's not just with mortgages either, credit standards have been lowered for auto loans, credit cards and business loans. Wall street ends the party with the most ridiculous of all lending standards for the multi-billion dollar LBO deals. Most of the LBO deals that have been done can barely pay the interest expense and this is at the top of the business cycle where profit margins are at an all time record. What happens when we go to normalized profit margins, or even worse below average profit margins when the next recession hits? How many here have received offers from credit card companies for zero interest loans with credit limits 4-5 times what they should be? It’s easy, just deposit the enclosed check and you have no interest for the next 5-6 months. For many those zero interest loans will become 21% or higher down the road and the borrower becomes nothing less than an indentured servant to bank under the current bankruptcy laws.
So, let’s step back and ask ourselves why this happened? It's called "Structured Finance", where the most brilliant investment bankers flock to. In the past, banks and S&L carried their own paper and were liable for the risks. Today wall street packages up everything including credit card debt, auto loans and mortgages in very creative packages to achieve the highest possible credit rating and sells them to the bag holders overseas. In addition, the LBO debt is also sold off to investors with the banks keeping the large fees for putting the deals together.
So where are we today? The music is stopping and everyone is looking for a chair, but you have to get rid of your CDO’s before you can sit and no one wants to buy them. Investment banks are sitting with $10-30 billion each of unfunded LBO commitments. If they can sell them in today’s market, it will be at a discount which will eat up their fee income. If they fund them and hold them they will be forced to write them down to market soon after they are funded. Either way the investment banks will lose and lose big.
Many of the bag holders have already stated that they don’t want any more of our paper, and this was before the markets woke up and started to recognize the losses.
This is the start of a credit crunch the likes of which we have never seen before. It will take years for all of this to wash through the system and in the mean time no one is going to want to fund any more of this crap and we will all witness the pendulum swinging too far in the opposite direction.
To make matters worse, the fed has it's hands tied as inflation increases from food inflation to energy inflation to inflation from an ever declining $USD as more and more bag holders shy away from dollars. The truth is inflation has been between 5-7% for the last several years for everything that anyone needs to survive.
It’s time to short the rallies and take profits on the days of heavy selling.
JMHO,
Jim |
