Macro Trends Spell Doom for Banks and Their Profits

by: Marvin Clark August 26, 2008 | about stocks: XLF    

Marvin Clark

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The rise and fall of debt is continuing without abatement. In the U.K., bankers refuse to write new mortgages. U.S. consumers are tapped out. Businesses are finding their cost of borrowing prohibitively expensive to continue certain lines of business, i.e. consumer auto leasing at Chrysler Financial, all the while asset-backed portfolio valuation is tenuous and overvalued, at best.

After 30 years, two generations of consumers and businesses relying on hyper-credit to generate an enviable lifestyle for the middle and working class, trumpeting painless capitalism – all winners, no losers, and endless increasing corporate profits, that bubble has burst.

This perspective should be viewed from two positions, first, historical and secondly, relative to global living standards. The U.S. is the largest economic engine in the world. Household debt has tripled in the last 25 years.

In 2008, the inability to service debt is akin to the credit depression of the 1830's. Europe in the 1820's became mesmerized with transcontinental travel by train and flooded America with credit. The term transcontinental attracted money then the way dot.com attracted funds in the 1990's. A land rush, sponsored by the government, coincided with this period. Between servicing the railroad bonds debt and the leveraged real estate debt, remaining disposable income left little domestic spending for growth. Expansion became contraction. The great depression of the 1930's was more a function of technological advances increasing output, relative to consumption, thereby collapsing demand.

Our savings rate is the lowest in the developed world. It has dropped below 1 percent. Yet, we also buy more things than anyone else using maximum credit. Credit cards, home equity loans, secured and unsecured personal loans, loans against retirement accounts; any loan that continues the buy now, pay later, merry-go-round, until recently, without question and interruption, was marketed and consumed. Ironically, brokerage firms' margin accounts, the villain of the stock market crash of 1929, is our most conservative usage of debt, today.

Currently, home equity, which rose on cheap capital and hid stagnate wages this decade, has reversed while its cost has risen. Homes that were once ATM machines only three years ago are being repossessed in the tens of thousands each month by banks. Equity in an individual's home once was his or her greatest investment. Servicing debt on growing negative equity is becoming harder to do, both financially and philosophically, for underwater consumers. Prosperity from the mirage of supply-side economics has vanished for the masses.

Looking back, in the 1980's, deregulation through supply-side economics redefined risk and value. In the 1990's, heretofore, imprudent levels of credit, a peace dividend from the end of the cold war in the 1990's, and the integration of cheap global labor, provided the west a temporary and significant head start re-imagining comfort and convenience for the working and middle class.

Looking forward, new banking regulations, regardless of the outcome of the November elections, will restrict the future of credit and leverage for commercial and investment banks. The defense industry peace dividend was consumed years ago by the endless war on terror. Wages in developing countries are rising, and so is the cost of limited natural resources. And, the true bill on previous runaway debt created and consumed in a lax atmosphere is past due.

We are heading into a global recession. The IMF projects at least $1 trillion in total write downs. Total U.S. residential single family home real estate value is expected to fall another 5 per cent to 20 per cent; easily another $1 trillion in value. Bankers are considering reducing outstanding credit lines in the next two years by at least $2 trillion dollars.

Yes, banks and their profits are in dire straits.

Stock position: None.

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This article has 15 comments:

  •  
    Aug 26 06:12 AM
    I have read 10-13 words of it,maybe you are right.
    Recession,not recession,who cares how one calls it.
    I embrace recession with open arms,as being short seller of index futures there is no better sunshine than a market crash.
    If every one of SA raders liquidated his long equity positions,that would be great,as in a short time this positions probably will be liquidated by a broker on a margin call or by investor for whom 70% loss on the best in the world bluest of blue chips will be too much to swallow.And then the real crash will start,not when the DOW will be at 9000-8000,the crash will start at DOW 6000.Just wait a bit and you will be a witness of all the fraud on Wall Street that went for 20-30 years.
    Reply | Link to Comment
  •  
    Aug 26 07:28 AM
    American society can no longer afford to award large profits to a financial sector of any kind. Going forward, true productive enterprise will be rewarded, not financial.
    Reply | Link to Comment
  •  
    Aug 26 09:17 AM
    I apologize for being so critical, but this is typical of all the negativity that is driving investor sentiment that is NOT commensurate with the overall financial facts.
    You are too negative on the world and US economies. You do not mention record exports from the US, the worldwide record GDP growth especially in emerging economies, the endurance of the US consumer, the relatively benign US inflation (yes food will be up around 5% this year and energy is up but only related to about 7% of GDP and a smaller percentage of income than anywhere else in the world), historically low or moderate unemployment, low home interest rates. All the talk about our national debt is wrong too--the US government needs to be looked at like a business. If it can borrow at a lesser interest rate than it return on assets, then debt is good (and 10 year bomnds are below 4%!).
    Corporate profits are BEATING the estimates -- outside of financials, airlines and autos, and housing, the US economy is simply GREAT. Winners are Info Technology companies like IBM and others, McDonalds had record revenues and profits as did Walmart, industrials like MDR/ABB/Corning/Cummin... mineral and commodity producers like Freeport McMoran/Rio Tinto/BHP/Vale/Exxon/e... energy services companies like Schlumberger/Pride/Tra... ag equipment like Deere and ag chemicals like Mosaic/Monsanto/Potash... generic chemicals like Dow/Monsanto/etc, commercial construction (offsetting the residential construction woes) with strong business done by CAT and Terex, Boeing is doing noicely and a huge US employer.
    Get a balanced perspective and don't dwell on the negatives like the "ain't it awful" US press.
    You must be short the market to only report negatives. Unfortunately that is typical of the vast majority of the US press and media that can't wait to deliver negative news, or make it up if it isn't there to report. Most of the press/media folks are 'newbies' as part of cost reductions, their industries are in a cost reduction and "change period" where print advertising and media advertising are migrating to on-line services. Their perspective is coloured by their own situation. Energy in the US is still cheaper than almost any other stable economy in the world, the US is the most prolific and productive economy in the world (our GDP is GROWING), our food is cheaper as a percentage of income than most developed economies, the 'savings rate' does NOT count 401K/IRA/home equity/etc so is only a distorted picture of REAL net worth (and that is GROWING per capita in the US).
    We generally live in a free, safe, productive, healthy, comparatively wealthy, enjoyable society that is the envy of the world. We're are all very lucky to be living in the US in 2008!
    Reply | Link to Comment
  •  
    Aug 26 09:58 AM
    Thanks for the history lesson, Marvin.
    I'll put my Swiss Francs in the mattress, and finish my half-empty glass...
    Reply | Link to Comment
  •  
    Aug 26 10:08 AM
    User 251091: If all you say is true, why is the market down 20%?
    Reply | Link to Comment
  •  
    Aug 26 10:48 AM
    Mr. Clark,
    As they say, 'the truth hurts'. Not too much new hear but for me, it's always good to review the facts to arrange the best plan for short-term trades and long term investments.
    Reply | Link to Comment
  •  
    Aug 26 11:18 AM
    Why all the negativity? Becaus talk is cheap and good news doesn't sell papers. Although the fundamentals are still good the global slowdown in the developed nations is real. Our economy is starting to rebound but could be stalled again if steps aren't taken to bring energy supply and demand back in line. China's Olympics are over and thier factories and cars will be humming along in no time driving commodity prices back up and weakening the reemrging dollar. Face the facts when the moritorium on drilling the OCS expires on SEPT 30 2008 it will not be extended. So lets drill as much as we can as fast as we with the proper environmental safe gaurds of course and don't forget to buy stocks in drillers and support companies.
    Reply | Link to Comment
  •  
    Aug 26 03:13 PM
    Negativity that is based on truth is an excellent warning and "voice in the wilderness"..

    And that is what this article was. Thank you sir.

    When I think if negativity, I think of Isaiah.
    Reply | Link to Comment
  •  
    Aug 26 03:56 PM
    User 251091: Do some due diligence on the numbers you are using in your appraisal. GDP and inflation are understated just as employment is overstated. Consider that the government has revised the formula for these figures many times in the past 20 years - always leading to better numbers, never worse ones.
    Reply | Link to Comment
  •  
    Aug 26 06:14 PM
    An economy that is using its wealth to fight in Israel, Iran, Iraq, Afghanistan, Georgia, South America, oh ya, must be great to be a working stiff in America.
    Reply | Link to Comment
  •  
    Aug 26 07:26 PM
    A good piece and on point as near as I can tell. Not to negative, but frank for the most part. So many Americans are accustomed to having the icing put on thick to cover the wicked desert. We need to stop hoping for the export sector to bail us out, when our trade deficit is running 50 billions a quarter, exports merely cut the deficit, but it is still a deficit owed the world. When we pay in bonds that drives up the demand for tax revenues. The end will be either very poor US citizens , or national insolvency and a lot less security. Live with it, its here and nothing is changing it. The truth if worth something, isn't it?
    Reply | Link to Comment
  •  
    Aug 26 09:50 PM
    do you think the romans were too negative?
    Reply | Link to Comment
  •  
    Aug 26 10:36 PM
    the strengthening of the dollar is not good news for exports. worldwide gdp growth may be limited to india and china. watch usa exports falter. there appears to be 10 big negatives on the horizon and no positives - this may explain why the news is so negative.
    Reply | Link to Comment
  •  
    Aug 27 03:15 AM
    Dear Mr. Cosby,
    I really love that "Fat Albert" skit you used to do.
    -A Fan.
    Reply | Link to Comment
  •  
    Aug 28 12:10 AM
    User 251091 your argument is a poor as your name choice. Beware the age of de-leveraging and the global recession we had to have.
    Reply | Link to Comment
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