I had a conversation yesterday with someone who originally thought I was rather nuts and overly pessimistic; he no longer things I’m overly pessimistic. He said to me “this can’t be over this easily, what do you think will be the next crisis that ends this rally?”
In reality I don’t think it will take a new crisis but the simple progression of what’s already going on to bring about the next downward leg. Credit is still contracting despite the giant stimulus plans of most major governments, while banks have been raising money and taking government bailouts they have been losing a great deal of that money and shrinking limits on credit cards and credit lines. As long as credit is held back these so called green shoots cannot grow and prosper, instead I see them withering in a prolonged credit drought. Of course the same withering could take place without spending the money so why bother?
Of course there are very sound reasons for personal credit access to be shrinking so don’t expect to see this change unless governments step in and mandate loaning. An article in the NYtimes which may or may not be hidden behind a subscriber wall reported
According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could reach $141.5 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business. It could top $186 billion for the entire credit card industry.
This $186B is more than $100 billion larger than the worse case scenario used in the recent bank stress tests, so how valid were those stress tests? Additionally the unemployment rate used in the Government calculations has already been achieved so additional job losses will nullify the assumptions made in their tests. These stress tests were bogus and have understate the problem they same way they've understated this crisis from the get go.
Just today, Advanta a small business credit card company (one that I had never actually heard of) announced it was shutting down all 1 million accounts to preserve capital after defaults hit 20%. Advana will attempt to pay off its investors at somewhere between 65-75 cents on the dollar and close shop. This collapse leaves 800,000 businesses that were paying their bills without credit as of June 10. Many of these companies will have a very hard time finding new credit in this market. Green sprouts my ass!
The commercial real-estate market has certainly not bottomed and I don’t see how it can until retail bounces back. The big question is how can retail bounce back with 25 million unemployed and growing in the U.S. and personal credit being cut back? That’s right, it can’t!
China has just announced its exports are off 22% , the U.S. trade deficit is up and their budget deficit for 2009 is admitted to be heading for 1.8 Trillion by year end. I’m banking it will be well over $2 Trillion.
So see! We don’t need a new crisis we just have to wait for the ones we already have to finish unwinding.
From the how bad can it get file:
How about tearing down nearly complete homes because they are would cost too much to complete and sell?
This absolutely freaking insane, they were actually wrecking better stuff than I can hope to own! Man I wish I was close enough I could have scavenged a $40 granite counter top or new house windows for $20 in order to fix up my little hovel. Another story about the same development mentioned a lady who got enough lumber to build a shed in trade for a 6 pack of Corona.
Of course sometimes tearing down cities makes sense like in Flint where they are considering a consolidation of the city by tearing down nearly vacant communities and allowing people to move to other areas where there are enough people to support communities and retail. This is actually a brilliant proposal but even more so if they converted some of these empty blocs to urban farming creating some local jobs, keeping more of their food money local. Empty land near existing commercial buildings or residential blocs could become parks with huge community sized geothermal heating plants under them. Flint could become a model for sustainability.
Gold and Silver
I’m quite pleased to see a little strength appear in the metals market albeit later in the season than I would have expected; most years we start to tank about now and wallow until the summer holidays are over. This year perhaps the mantra will be not sell in May and go away, but something more like don’t be mental, covert to metal. Hey I don’t claim to be a poet! Silver is outperforming gold right now but after the beating we took last year it needs to outperform just to stay in the game.
I still can’t find 5, 10, 20, 50 or even oz bars locally but the silver shortage seems to be getting somewhat better with silver Maples and Eagles appearing in stores again even if their premiums still seem ludicrously high. Many coin stores/banks are charging a $5-6 premium for Maples when First Majestic Silver can be caught some days (before they adjust their prices) selling bars and rounds at premiums as low as .50 Personally I’d prefer a much bigger pile of silver rounds rather than pay a premium ranging around 35% for Government coins and then get dinged for provincial taxes on top. Majestic also has the hard to find 5oz, 10oz and kilo sizes with a commitment to add a 50oz bar soon.
Last months reduction in Comex silver of about 10 million oz was a nice surprise but rather than a new trend to clean the stockpiles out it seems this was probably just the silver ETF taking delivery of some of the silver its fund was short. Are they balanced now? Let’s hope not, I’d like to see them draw off another 10-20 million ounces before years end. Bwahahahahah