Are We There Yet?

Are We There Yet?

By Bearmountainbull | 20 August 2008

Bennet Sedacca, in a two-part series (part 1 and part 2) on the difficulties financial institutions are having raising capital at reasonable prices, says "NO, we're NOT there yet!"

"Are we there yet?" is about as common a phrase as one can imagine. We’ve either said it or heard our children ask it during a long car trip. Obviously, this piece isn’t about car trips, but about the secular economic and market cycle that we’re currently living through. Many say that we’ve hit bottom in equities, and that the worst of the credit crisis is behind us. Everyone’s entitled to their opinion; I’ve certainly made mine rather clear over the past few years, particularly of late. When I survey the economic landscape and business owners, review economic data, and study the credit market, I continue to come up with the same answer: We’re not there yet. In fact, I‘ve never seen the credit market, economic data and the stock market at such odds in my career. What I mean by that is this: Given the data and given the state of the credit market, the stock market is the most over-valued it’s been in my career. And yes, that includes 2000, when the secular bear market in stocks began. At least in 2000, the credit market was operating normally, many stocks were actually cheap, the wonderful world of Credit Default Swaps (CDS), Collateralized Debt Obligations (CDOs) and other esoteric securities were in their infancy. So when I ask myself, "Are we there yet?"— where "there" means the point at which we can [once more] take on loads of risk— I continue to get a resounding NO. Over the years, I’ve written extensively about the historic build-up of credit. Now, we’re at Zero Hour: Credit builds, the economy slows, the ability to finance debt ends and debt creation ceases to have a positive impact on the real economy [[primarily because 'credit' (in the form of 'alphabet soup' named derivatives) is vanishing many, many times faster than it's being 'created', mainly by the CBs : normxxx]]. While I thought this day would come, I admit that it came a bit faster than I was expecting. Financial entities like banks, broker/dealers, regional banks, finance companies and insurance companies need credit at reasonable rates in order to finance themselves [[ie, just in order to conduct their 'normal' business: normxxx]]. I’ve been concerned for many years that the door to raising new capital in debt markets would finally shut on banks, brokers and others. For many regional banks like KeyCorp (KEY), Zions (ZION), Regions (RF) and National City (NCC), the door is already shut; if they wanted to raise capital in the debt market at the levels at which their outstanding issues regularly trade, they would have to pay 12 to 15%— hardly economic levels. GM (GM) bonds trade near 27% yields. Washington Mutual (WMU) trades north of 15%. I keep thinking back to a piece I wrote called Credit Crisis, Part 2. There, I referred to a hurricane scenario, in which we’re hit with the first wave, followed by a bit of a lull; then comes the full-fledged frontal assault. The credit market, to be sure, has dramatically worsened since that time. As I’ve stated, it’s [long since] ceased to function normally in the financial space. I now think it’s the stock market’s turn. When will we be "there"? When everyone stops asking if we’re there yet.

At least that’s how Frank Barbera sees it:

For now, the problems at hand remain the Housing Crisis and the Banking–Credit Crisis, but in our view, as time passes, the odds will continue to grow that all of these problems morph into an even more serious 'Currency Crisis'. In this vein, we view the current strength in the US Dollar as ultra transitory, and opening the door for the Federal Reserve to begin its next wave of interest rate cuts aimed at supporting the banking system and Wall Street. As more defaults are seen in coming months, the Fed in our view will have little choice but to begin 'monetizing' these problems and creating fresh doses of digital dollars, all out of thin air. For Helicopter Ben, the new Super-Duper Helo is about ready to lift off, with one mission and one mission only— paper over all of the bad debts and keep the system from bursting at the seams. For the US Dollar, the path of least resistance will once again be a relentless slide to new lows, this time likely accompanied by rising long-term interest rates as foreign capital abandons the long ensconced patterns of mercantilism and vendor finance. The torpedo explosions now resonating throughout the bulkheads of the sinking GSE’s cannot be ignored, as the unwinding of derivative positions at these institutions could well be the trigger event to place foreign capital into full retreat. With balance sheet impairment and collapse, will follow debt downgrades and the beginning of a potential exodus— a run from US GSE Agency paper. Fingers have been plugging up the dam thus far, but the pressure behind the walls appears ready to burst. For those who think the markets have been volatile in the last few weeks, get ready, cause we believe you haven’t seen anything yet.

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Normxxx    
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