Monday, June 30, 2008

Grasping at the Last Few Threads of Fabric from a Debt Based Economy

Hello all loyal readers, as well as anyone else that stops by. Last week was a very difficult time. It is hard sometimes to try and get back into your routine after losing anybody in your life. Everything can seem unimportant. But alas, we all must go on. I enjoy posting my ideas and thoughts on the economic issues facing us today, so back at it!

Last Week Wrap-up
There was a ton of action last week, and I cannot possibly recount it all here. Technical levels were breached. Talking heads finally were exposed as silly as they were changing their tunes almost daily from "the worst is over" to "second half recovery is a bust". The best full on wrap of the major issues going on right now can be found at Mish's site, this article in particular:

Yes, I am on board with Mish in the Deflation camp. His logic is sound and the evidence overwhelming. While oil, gold, and other commodities may rise even higher in price, the definition of deflation is a collapse of credit. That is exactly where we are going.

Indymac Bank Will Win the Dead Pool
In the last poll Indymac Bank (IMB) got two votes for most likely to go bye bye. One of those votes was mine, so there is one other genius out there that voted. The structural issues facing IMB are too serious to overcome. It is now endgame time. Can the FED prop up IMB? It is doubtful with most of their balance sheet already gone. Can some kind of merger be forced? Maybe, but what entity can take on IMB? JP Morgan is already looking pretty smug about their Bear Stearns gift, and Bank of America is going to have to litigate lawsuits for years over CFC. Who is left?

Perhaps the FED may have learned their lesson and will allow a terrible bank to go bust. This bears watching to see how the situation is handled. IMB will not be the last to go, so how the close out is done will be of value information wise.

Grasping at the Last Few Threads of Fabric from a Debt Based Economy
It has long been a central theorem here at Economic Disconnect that last summer the FED, the banks, the home builders, and the entire financial system tried to take a deep breathe and hold it as long as possible in a vain attempt to ride out a collapsing real estate debacle. I can kind of understand. The major players are well aware how ridiculous 80% of the mortgages written over the past 3 years are, they know how bad things will get now that prices are not rising. rather than attack the issue at the roots, everyone tried to pretend a miraculous 2nd half recovery would somehow, someway reignite the housing bubble.

Well, time is up. The FED is empty this summer. IMB is going down, and many others are not far behind. The stock market seems to finally caught a clue and is trending down. Home foreclosures are still accelerating. You know the drill. So what does this mean?

This summer will be a season of many firsts. Creative bank closures. Deleveraging of monoline useless insurance. Massive bank losses. Even more bone head moves by the US Congress.

There are still some out there that think continuing on in the same way that got us here is the answer. Even Robert Shiller, an early housing bubble caller, feels that stimulus plans should just be a perpetual thing to keep demand for junk artificially high. The US financial system is near a crisis because too many people felt they were entitled to live like a celebrity. For some time credit was easy enough to make a stab at it. Now too many are so deep in debt, there cannot be any reasonable expectation of debt payback. Exhaustion has finally been reached by the consumer.

And this will hurt. It will hurt everyone. Nobody likes a mess. I am not happy about what is going on. But the process must happen. It was delayed after the 2000 market bust, and now there is nothing to replace home equity. Nothing. What we need are grown ups that will steer the country through this mess and back to sustainable growth based on solid fundamentals. I have no idea where those people are going to come from, but rest assured none of them are in positions of power today!

I am looking for post ideas and topics as I settle back into writing, so leave a suggestion if interested.

Have a good night.


watchtower said...

Well I went over and checked Mish's post out and he is really convincing.
I will be the first to admit that I'm not the sharpest knife in the drawer and I have ran across this before in the past but I guess it just didn't sink into my thick skull, Mish said:
"Finally, the Fed cannot force banks to lend or businesses or consumers to borrow."
Plus I feel he is dead on about wage inflation not happening.
Or at least I don't see it in my neck of the woods.
I guess what I am wondering is, can you have 1930's style deflation with a currency no longer backed by a tangible substance?

I had also noticed this past week that Fortis had joined Barclays, and RBS in banging the drum about a possible financial collapse happening fairly soon.
It was interesting to get Mish's view on Barclays from that same post too.

@ GYSC, I really enjoyed your post tonight, glad your back.

Rob Dawg said...

I think I voted for WaMu based on the fact they have the biggest corporate skyscraper. It just looks like a bullet trough the heart kills faster than terminal cancer.

Anonymous said...

I'm in the deflation camp also but I think this may be worse. Right now we are headed down the Japanese rabbit hole. R/E bubble collapse, zombie banks, over indebted consumers, rate cuts, massive government spending programs, which caused the currency to fall like a rock and take out even semi healthy consumers and businesses as the cost of necessities and unemployment skyrocketed.
The difference is they didn't have the worlds reserve currency, the Japanese people look at the equities markets as gambling, their savings were deposited in the postal savings system which was then used to purchase Japanese government bonds.

The US is in the same situation but as our economy slows the money used by foreign government to purchase our debt falls even as our deficit rises and the income to pay the interest falls. We don't owe it to ourselves. I look for a situation more like Argentina, currency collapse, bond market collapse, equity market collapse, depression.

I Could be very wrong, the only thing holding this together is the financial ignorance of the American people. Maybe they can be conned one more time and it can be delayed a few more years.


watchtower said...

@ Kevin
I thought your comment was good, so good in fact that I emailed it to my brother.
My brother and I have discussed the inflation vs deflation scenario a few times in the past and I thought he might enjoy your comment.

Anonymous said...

Watchtower that is what I see coming but I may also be so completely wrong it would make an absolute idiot look like a genius. I have a good part of my funds invested for a scenario like this but when I get it wrong I tend to do it to the max.


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