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Today's Market WrapUp 07.09.2008 Mon Tue Wed Thu Fri Puplava Archive
Those most pessimistic on the economy and stock market have been proven right over and over again over the last year and a half, with those who listened to their calls for caution preserving their wealth instead of watching it evaporate, which has been the fate of those following the permabulls. Wall St. economists, financial pundits, and government talking heads have been dead wrong and led many astray, though what has been most surprising is that investors continue to follow the advice of those who didn’t even see this train wreck coming, with examples provided below.
Compare those comments to those who were laughed at with their dire projections last year who have been proven right, such as NYU’s Professor Nouriel Roubini, who argued early last year for credit losses north of $1 trillion.
Frank Barbera, who writes the Tuesday WrapUp, has long warned FSO readers of the impending trouble facing the economy and financial markets as a few of his archived examples illustrate:
One of the main points that the pessimists seem to grasp is that the debt binge of this decade got way, way out of hand and would have major repercussions for both the economy and stock market. For example, bank credit as a percent of GDP rose to more than 60%, nearly three and a half standard deviations from the long-term average of 44% as lending standards fell by the way side.
Though default rates are still low relative to the last two recessions, the key point is that these defaults rates apply to loan levels that are three to five times the size of previous recessions and are still accelerating. What has many of the pessimists concerned is what the fallout would be if default rates reach the levels seen during the last consumer-led recession in 1991 as overall bank credit has significantly expanded. For example, FDIC commercial bank residential and commercial real estate noncurrent loan rates are well below levels seen in the 1991 recession, though the value of loans outstanding has expanded significantly over the last two decades. The result, even though noncurrent loan rates are still low, the value of real estate loans in noncurrent status is approaching levels seen back in 1991. If noncurrent loan rates reach 1991 levels or higher, the financial fallout will be devastating and we will continue to see more financial write downs ahead.
The current stress in the financial markets is unparalleled to previous financial crises. Commercial and investment bank stress can be seen when looking at depository institutional borrowing from the Federal Reserve, which is off the charts. What’s more, the Federal Reserve has swapped its balance sheet with Wall St. by exchanging its U.S. Treasury Securities for mortgage backed securities that can’t find a bid. Unprecedented credit lending has led to unprecedented losses.
Outside of the financial economy, things aren’t looking much better either as both personal and business bankruptcy filings have roughly tripled over the last two years and show no sign of slowing.
As both the economy and the financial markets have deteriorated over the last year, the Federal Reserve and government have stepped in to bring stabilization; the Fed by lowering interest rates and the government through its stimulus package. However, their collective efforts have actually brought a destabilization to the markets as the U.S. dollar has deteriorated significantly as is shown below with the U.S. dollar falling relative to a basket of currencies, even the Mexican Peso despite the so-called “STRONG DOLLAR POLICY.”
The credit excesses built up over the past three decades can not be simply swept under the rug and will continue to plague both the stock market and economy as the financial excesses are wrung out of the system. Signs of stabilization remain absent with the path of least resistance still pointing south. As such, the drum beat continues to remain capital preservation, not capital appreciation. Chris Puplava Copyright © 2008 All rights reserved.
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