Everyone is on bubble watch nowadays, me included, as central banks flood their respective countries with mountains of money. While the US has done a ton of printing of dollars it is often overlooked that the Chinese have also printed a ton of Yuan as well. While there are definite differences in the economies of the US and China, we could argue those difference all day long, the one thing we could all agree on is that China a lot of flaws in its system. I would counter by saying their flaws are probably pretty severe, but no worse than the US.
Regardless, I have been reading a lot about the bubble in China, especially in their real estate prices. I do not doubt that as property values have gone parabolic in the country, some areas make the peak price increases in the US look like pathetic in comparison, but is it the same bubble that the US had? The answer is, no one really knows for sure because the data is spotty at best. My guess is that the price bubble is probably worse than the US, but I am willing to bet that mortgage fraud, home equity loans, securitization and the host of other issues that basically collapsed the world economy are not the same, at all.
So, at the end of the day, we will see a price collapse in China which will lead banks to have losses on their books, but it will end there. It will likely be as bad as the early 1990’s in the US banking system compared to the 2008 collapse that the US had and it will more than likely not spread globally like the US credit collapse did. However, it is problematic for the world to have the second, it surely has beat out Japan by now, largest economy approach a huge bubble so early in its quest for world domination, especially when it is the manufacturing center of the world.
If the bubble pops, which it will, it will take capital to fix which means that money will not be loaned out to manufacturers. When that happens the cost of capital will increase driving up prices which means your trip to Walmart will not be as cheap as it once was, especially if Washington forces the Chinese to strengthen its Yuan as well. That will be a problem for us and the rest of the world as China led the world out of the recession, if you believe it is actually over that is, so if China contracts it will lead the world right back into a recession, or make the one we are in even worse.
It is just interesting that Americans always assume that everyone acts like they do and spend all of their money. The Chinese are fanatical savers and it is highly unlikely that they would leverage their home, i.e. home equity loans or lines of credit, to buy junk they simply do not need like Americans do. I remember when Lay’s potato chips were trying to make headway into China and one women interviewed said why would I spend that kind of money on that when the same money can buy me potatoes for a month? That is their mentality and they do not spend what we do not have and pay for it later like what we do, that is what I admire about their culture. This is why if or when the bubble pops it will be a major problem, but nothing like what we saw here or in Europe.
With that in mind I am not crazy about investing in China because I believe that the bubble will pop and it will slow their growth down dramatically. Depending how the government handles the issue it could be a nonevent or a huge problem with, believe it or not, political instability. Plus, so much money has flowed into China through BRIC’s it is kind of crazy to keep money there right now. I am way more interested in India and Russia than China and Brazil, but all emerging markets have me a bit nervous because when everyone agrees that is where you should be, well, you know, do the opposite. Regardless, I believe the bubble will pop, but before the China bubble pops the US equity bubble will pop first.
I have been a vocal critic of the Federal Reserve over the past decade as they have created this current mess and now demand credit for cleaning it up. I liken their current demand for praise to the following: Ben spilled a glass of cherry Kool-Aid on his white carpet then quickly ran over to my house finding my most expensive white cashmere sweater, taking back to his house and cleaning up his carpet. Those of us understanding the staining reaction of Kool-Aid know that his carpet is destroyed and my very expensive sweater is also destroyed, but this guy wants praise for fixing the problem even though the issues are still right there in front of us.
Ben deserves absolutely no credit for fixing anything and deserves to be fired along with having history branding him, and Greenspan, branding them as the two who destroyed the financial system. Of course there are a whole slew of Congresspersons and economists who deserve to go down with them, they are too numerous to name, but I am sure you can guess the top 10 or 20 off the top of your head as they are still wildly popular and in office today. None of this changes the fact that I know exactly what Ben is trying to do and, this will be a shocker to most of you, I do support what he needs to do, but I have so little faith in the man that I know he will fail. My knowing he will fail is why I criticize him so.
We can all agree that the efforts of the government over the previous 12 months have benefits one group of Americans, bankers. Thinking that any of the actions have benefited anyone else is ridiculous to say the least. Your credit card rates have increased, your banking fees went up, people lost their jobs, credit is contracting, income for workers is down, taxes are heading up and banks are making record profits and bonuses that is a rather lopsided list. Ben is not oblivious to this fact, but what he was and is trying to do is create inflation. However, the Fed can create money at the stroke of a few keys on the computer keyboard, but what the government cannot do, ever, is create credit.
Without credit or credit demand, which there is very little of, there cannot be inflation. Another term for this is money velocity and, again, we can all agree that there is no money velocity happening as bank balance sheets are swelling at the Fed right now. This is why I firm believed that the government will open term lending facilities directly to the public or small business in the near future, which will be a huge mistake, in my opinion, because we will go from massive deflation to massive inflation overnight, but that is for another article and let’s focus on what Ben is trying to do.
We know that Ben knows what he and Congress have done is wildly unfair to the public and his inflation creation is his gift to you. What he is trying to do, through devaluing our currency, is raise your pay by weakening the currency through the printing press. By doing this your pay will increase, but your debts will remain the same and as long as he leaves interest rates at 0-.25% your debt servicing costs will also not spiral out of control. This was also taken care of for unsecured debt with the credit card reform act passed earlier this year, is this all making sense yet?
Now, this is not all for you, don’t be silly, this is also for Uncle Sam as well. We have $12T in total US debt, $7T in US treasuries with $2.8T maturing next year. We will also have to spend between $1-1.6T in deficit spending next year as well which means we, the US, will have to raise some $3.8-$4.4T in treasury sales next year, that has never been done before. The US has also restructured most of our debt to mature in <10 years on a rolling basis, I have no idea why other than creditors demand shorter maturities, which is scary. Regardless, the US cannot raise interest rates to a meaningful level ever again. Let me repeat that, the US cannot ever raise interest rates to a meaningful level ever again.
I can hear you saying that I am nuts or do not know what I am talking about. Maybe, but guess again. At the current rate of spending, not including health care, within 10 years at the current interest rate levels the debt servicing costs will be so great that we will not be able to spend money on anything else. It is not me saying this, it is mathematics based on demographics, projected unemployment rate and a bunch of other major issues. What I am getting to is the only way out for the US is to inflate our money supply, exactly what Ben is trying to do now. Who cares that we are the reserve currency, it doesn’t matter as everyone has accepted that this is our only solution or accept a US default on our debt. That is the truth and there is no strong dollar policy, that exists in media sound bites to make people like me happy, that is it.
Back to Ben and you. If Ben is successful, which is doubtful, then he will inflate our way out of this mess. You will earn more money and your debt will remain flat which means you will be able to pay it off in no time at all. However, new debt will be hard to obtain and terms will be very unfriendly as the administration has made rate increases for lenders difficult. Here is the real catch, while the Fed will not be able to raise interest rates, the market will demand much higher rates on government debt so kiss that 30 year bull market in treasuries goodbye. This will translate into higher rates on other debt across the spectrum. Basically, credit will continue to contract at a continued record pace for consumers and, in my opinion, high yield debt defaults will be through the roof.
With all of that said, you want Ben to succeed, as strange as that sounds. You want him to implement this plan and then pull it in on a timely basis because that means banks will be made whole and the consumer, yes, something for the consumer, will also be made whole. Not only that, but it will allow the government to continue down its reckless path of spending and funding its idiotic projects without directly taxing you to death. Notice I said directly taxing you to death? Because you have to remember if Ben pulls this off your energy bill, on top of and cap and trade BS, will go through the roof, your food bill will go through the roof and any other commodity based purchases will be sky high which is a hidden tax. All of those purchases have a hidden tax that you are unaware of, they are always buried in the small print, but nevertheless they are there and fund the government especially on the state and local levels. In this case, the higher the prices, the higher the tax revenue which will fund the local, state and federal governments without taxing you directly. Don’t blame me, you all voted for these people.
Never fear though, this plan by Ben is failing and will fail. As I said earlier, the Fed can print all the money it wants, but it cannot create credit no matter what it does. That is our issue right now, not only do banks not want to extend credit, but no one wants credit. Without extending credit we do not get the important inflationary impact of money velocity which makes Ben’s plan useless. Never fear though, President Obama and Tiny Tim is here to mess everything up as I bet they will announce a public lending facility very soon to “initiate job creation” with leftover TARP funds. This will not only create some perverted unforeseen form of inflation that no one has ever seen before, but it will skew all sorts of numbers as well. I cannot wait to see how the employment report looks after these new programs are announced!
Even if I am wrong about Obama and Tim the Fed will fail at what it is trying to do, I am sure f it. The organization has failed at everything it has tried to do previously and no one should have faith that it can succeed in doing what it is trying to do. Ben tried to talk the Japanese into monetizing their debt in 2003, that made sense. Ben applauded Greenspan’s cheap money policy in 2003 and said he should keep it longer, what? He did not see the asset bubble building when you could get a $500K no document, nothing down mortgage, are you kidding me? I am sorry, but if you did not see this coming with that type of garbage out there you are an idiot, but this guy is running the Fed and says no one can see bubbles coming. The irony is the market is the next big bubble to pop because of his cheap money policy, for the love of God, it trades with the USD/EURO pair, that is the sign of a bubble!
If we look at the Fed’s balance sheet it is impossible for them to drain the liquidity in an orderly fashion. Banks are basically refusing to reverse repo out the liquidity, why would they want to? I wouldn’t when I am making riskless money by borrowing at .13% and loaning it to the government at 1% for a year. Not to mention that the banking system itself, because they will have to bring their SIV’s on balance sheets, are very insolvent in reality so the Fed cannot bring in the liquidity for only God knows how long. Frankly, with the current US debt load and projected debt load, combined with the Fed’s balance sheet we are not getting the inflationary impact Ben wants. We are getting the worst part of it, a falling dollar (Just a note here, the dollar was much worse under Bush before the crisis than under Obama, so cut the guy some slack there) without wage inflation. That means you pay more for gas and food while earning less, not a good thing.
In my opinion, Ben has failed as Fed Chairman and should go back to teaching and that is even questionable. There is no way his plan will work because there is simply no demand for credit out there. Americans are in the middle of a secular shift to frugality and not willing to expand their balance sheets. This is especially true with unemployment ballooning up to where it is and sure to get worse, unless you believe the last employment report (if you did believe the report than please contact me for some excellent investment opportunities in Pakistan and Afghanistan). I hope his plan does work because the consumer could use the wage inflation to pay down their debt, but given the last reports about consumer credit, fat chance. Companies desperately need credit, but they are closing shop so fast that banks do not want the risk. Basically, if you are IBM, you got credit, but if you are Ma and Pa Kettle, sorry, too risky.
The worst part of it all is that while Ben is trying to devalue the dollar to create inflation, which is dumb without any money velocity, he will lose control of the process. When FDR did this in the past, which is what Obama likens himself to, he had one very important thing going in his favor, the gold standard which allowed him to set the devaluation amount. Obama and Ben do not have that luxury. This time there are 100,000 trades around the world that will pile onto a short sale of the USD driving the value down to nothing. This is the primary issue that has me concerned, they ultimately have zero control over the devaluation process. What can they do to stop the devaluation process, print more money? That makes the problem worse, not better. Luckily, for now, we have deflation in the US with an international problem of devaluation so we simply exported our problem, thanks China.
Deflation is here to stay, get used to it. High unemployment is here to stay, get used to it. The federal government will continually interfere and make things worse, get used to it. We will see some funky things happen from some very self important, politically motivated individuals that will create problems we have never seen before, so be prepared. The Fed will fail in its attempt to fix what is created, but you knew that. Wait for gold to come down in price a little more and buy a ton of it because while we will not get inflation like Ben wants, we will get massive dollar devaluation that will eventually come home to roost and it will not be pretty when it comes home.
Looking through the company’s earnings I see nothing that makes me think the crisis has really ended or that credit is even close to expanding or delinquencies are subsiding. They have a very complex balance sheet so picking it a part is not an easy task and who knows what they have in off balance sheet items, I am sure it is pretty ugly whatever is sitting in La-La land in the Caymans.
Here is what I see, lending is down across the board, except for foreign lending. Total commercial lending is $318,886 vs. $333,484 which is clearly down, but not horrible but not good either. On the consumer side it is not much better as we see $450,784 vs. $458,036 which, again, is down and shows the direction of lending. The number is much better than the YoY number, but that is not surprising. However, are these numbers indicative of the rapid recovery that we keep hearing about on CNBC? Not a chance.
The other side of the credit story is the build is reserves for credit losses which look not so bad in WFC’s case of only an additional $1B. This is on top of billions already and the firm has a total of $24B in total loan loss reserves, not a good side. Remember the Pick-a-pay loan? That is the reverse amortization loan Wachovia screwed people over with? Yeah, they are modifying those like crazy, some 900,000+ and counting, but we know those modifications fail within 90 days so look for more defaults in the near future.
Not only that, but total nonperforming assets for 3Q equaled $23.45B for WFC, and CNBC can’t figure out why the stock down ticked on the earnings. Not only that, but those damn Pick-a-pay loans keep coming up and there was a negative change in the balance on these garbage loans, a negative adjustment in the value of $18B in fact. Of course, this did not impact the earnings of WFC because Congress and the FASB allow the company to lie to you. There is also a section in the report where it shows another $18B in loans that are 90 days late, whether this is the same item or not is unclear, but it is likely that it is. Either way, this confirms that the credit quality of all banks across the country is deteriorating.
Would I own WFC? Not a freaking chance, not even with your money. They have $57B in reverse amortization mortgages on the books that they are working like mad to modify, but we know the modifying these things still fail. Not only is the firm keeping $57B in the loans on the books, but the average LTV is 105% and the actual total carrying value out of that $57B is $37B, unreal. We are also seeing WFC take $6.5B in commercial real estate losses, yup that other shoe that is dropping or that we are told is not dropping, but it is dropping. Now, the PCI or nonaccrual PCI data in the WFC earnings do not impact the earnings, but the negative adjustments show what is to come.
Like I said, the WFC balance sheet is incredibly complex and we do not know what is held off balance sheet. However, what is on there, IMHO, is not pretty and even though much has already been written down, it does not look like it is getting much better. In fact, much of the problem assets seem to be getting worse, from what I can see. Piecing together from what other big and small banks have reported, credit is extremely tight and getting tighter and the quality is deteriorating which means more losses to come.
One would think that the repo business, and debt collectors, are having a field day at this point in our wonderful, excellent, and recovered economy, but not so. Yesterday collection firms said they will wait to buy debts from banks because they are expecting a sharp increase in delinquent accounts which will drop prices on buying such debts. Now, repo business owners are saying they are loosing business because now anyone with a tow truck will undercut the pricing of “professional” repo people and banks are more willing to let people take more time to pay before they try to repo their car.
Why would a bank not want to call a repo person on a delinquent auto loan – They want to wait because as soon as they repo the car they will, more than likely, take a loss on that loan. It is estimated that the bank would only receive about 1/5 of the loan value if the car is auctioned. This leads me to believe that thee will be more credit problems down the road since banks do not have to write off these loans until that loan is really delinquent. Some firms are allowing borrowers up to 4 months to make a payment, which is crazy.
To repo a car is also expensive which is leading banks who have no choice but to repossess a car to bid for the lowest cost. Typically it costs about $350 to repo the car, plus storage charges and, as just stated, the loan is written off. Now, regular tow truck operators are bidding on these deals to make extra money and are under bidding the “professionals” by about $200 a job.
The point being is that things are not even good in the lowest form of business, debt collecting and repossession. On top of that this is another warning that credit troubles are still alive and well.
Another example of credit troubles that are plaguing our economy. This is why we need to get our act together and get a manufacturing base back to the US. Yes, we are the largest exporter of technology, weapons systems and large machines, i.e. excavators and dump trucks. However, we do not export hammers, nails or other useful products, China does.
Here is what the ABA, American Bankers Association, said about credit; “the rate of consumer loan payments at least 30 days late to rise to 3.23 percent in the January-to-March period from 3.22 percent in the 2008 fourth quarter, the American Bankers Association said. Credit Card swipe
Fallout from a still deteriorating housing market caused the rate of consumer loan payments at least 30 days late to rise to 3.23 percent in the January-to-March period from 3.22 percent in the 2008 fourth quarter, the American Bankers Association said.
Delinquencies were the highest since the ABA began tracking the data in 1974. Late payments on home equity borrowings set records, rising to 3.52 percent from 3.03 percent on loans and to 1.89 percent from 1.46 percent on lines of credit.
The overall delinquency rate actually understates consumer pain because it excludes bank-issued credit cards, where credit deterioration was severe.
Delinquencies on the value of all card debt soared to a record 6.60 percent from 5.52 percent in the fourth quarter.
The rate of delinquent accounts rose to 4.75 percent from 4.52 percent, near the record 4.81 percent in the spring of 2005.
U.S. consumers ended March with $939.6 billion of revolving credit outstanding, a rough approximation of credit card debt, according to Federal Reserve data.
Delinquencies rose to 3.01 percent from 2.03 percent on direct auto loans, to 3.70 percent from 2.96 percent on mobile home loans, to 3.47 percent from 2.88 percent on personal loans, and to 1.52 percent from 1.38 percent on recreational vehicle loans.
They fell to 3.42 percent from 3.53 percent on auto loans made through dealers, to 2.04 percent from 2.35 percent on marine loans, and to 1.46 percent from 1.75 percent on property improvement loans.”
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