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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (5131)	10/10/1998 2:35:00 PM
From: Ron Bower	Respond to of 78572

Paul, "Well my opinion is that the Fed will loosen rates and allow easier credit. So the banks will continue to loan money." Lower Fed rates do not necessarily mean easier credit and the banks will always continue to loan money, but under what conditions? Banks must continue to profit. If they have an increase in NPLs, they must offset these with solid loans and loans at higher spreads between deposit and loan interest rates. Japan has had low rates for years and recently lowered rates from 1.5% to 1/2% to stimulate their economy. The banks have so many NPLs and losses that they cannot make new loans and the new loans must be at higher rates. And Japan's banking restrictions are the loosest in the World. US consumer debt on credit cards is higher than ever. So is the amount of default. That's why credit card debt is so high, offsetting the defaulting card users. If we enter even a weak recessionary period, the defaults will be even higher. Real estate values have increased substantially over the last few years due to the economy and low interest rates. Banks have been loaning as high as 90%, even 100% of the sale price. With a mild recession property values will decline and in may cases it will go below the mortgage loan amount. (Mortage limits in Hong Kong were and are 70% and the banks have gotten hurt) Banks have been loaning huge amounts to hedge funds and suffering losses. International banks are having major loan defaults on loans. These losses must be recovered. It doesn't take much of a fall off in the economy for banks to be forced into much tighter loan policies. Because of US banking restrictions, a small number of NPLs can cause a bank to lose a substantial portion of it's ability to lend. Most banks have currently pushed these limits to the edge and are not in a very good position should the economy go weaker. I know I'm not telling you anything you don't already know, just explaining how I derive my comments. I am not one that thinks we are entering a recession, but I do feel we will see a weakening, similar, but a little worse than the 90-92 period. Something to make us realize that the economy is cyclical and economic growth can't be a continuous thing. We are having a Schumpeter period that weeds out the weak and rewards the strong. JMHO, Ron