(Please go to the previous link if you are in need of a refresher course.)
As I began to relay my concerns I was met with the same derision I faced in 2004 and 2005 when I had the poor taste to point out that Oil was going to $100+ and the housing market was going to sh-t the bed. However, once I got through on the creation of money in our system, it seemed some light bulbs were indeed going off in their heads.
If energy costs stay at the these or higher levels, the housing crisis and trade deficit, which was terrible at $80 per barrel and $2.75 per gallon, will be demonstrably worse at $135 and $4.15 respectively. If energy prices, and hence the trade deficit, continue higher my contention is that the system would begin to breakdown that much faster.
Banks create money by making loans. Most loans made by commercial banks are backed by assets, or collateralized by Real Estate - and the value of Real Estate is in free fall at the moment. (Please don't confuse your anecdotal experience with the empirical evidence. The inventory of unsold homes and excess commercial space is growing fast.)
The incentive for homeowners to pay their mortgage falls with the any increase in the price of fuel to get to and from the home, and with any increase in unemployment. Once the resale price falls below the mortgage on any household experiencing a serious illness, a divorce, or a job loss, that home is on the fast track to foreclosure.
In my $250 per barrel scenario, the number of homes this happens to will be in the $millions, with losses in the $trillions.
A reader was kind enough to email me and point out that the 90% of the mortgage market going to the GSE's was recent business, not the overall portfolio. Thanks, that is correct.
2 things:
- The source I linked noted that Fannie Mai and Freddy Mac had gone from 40% to 80% of the market. Clearly, when the portfolio they hold from when they were 40% of the market is just that - 40%. The point is that the REST of the market place has conceded this business to the government.
- It is the packaged CDO's that the banks and brokers are holding that are destroying their valuation in the market place. If the GSE's were in fact holding 90% of the paper going back to 2002s, it would be the GSE's that would be in free fall.
The banks are, for the most part, trading under "Book Value". The market is not dumb, and the market knows that these banks are leveraged 25 to 1 to VERY questionable "assets". If these assets are mispriced/mismarked by just 4% THE BANKS ARE TECHNICALLY INSOLVENT.
I WILL BET ANY (ONE) PERSON READING MY RANTS A FAT STEAK THAT THE ASSETS ARE OVERSTATED BY 4%.
In point of opinion (rather than fact) my bet is that the asset values of the banks portfolios are over stated by 20 to 40% - or $2 Trillion to $4 Trillion. Since the banks HAD equity of $1.1 Trillion at year end 2007, wrote down $350 Billion and raised $150 Billion... "Houston, we have a problem".
I think that is what you are seeing in the pricing of their stock values in the market, and I think you ain't seen nothing yet (provided the price of Oil does not collapse. If Oil were to trade back to say $50, the banks and the home owners could very possibly get through this). "Az nischt - iz nischt" If not... then not!
More tomorrow....
Mentatt (at) yahoo (d0t) com
8 comments:
I will not take that bet Greg. And it's not because I don't eat meat anymore but because I think you are absolutely right on the money with your estimates. The banks have been shot in the head but they still haven't figured out they are dead. Or if they did figure it out, they are certainly not going to be telling us about it, are they. Like this Lehman thing. First they tell you they don't need money, then they raise 6 Bil. Then they chop some heads to show the market that they are "accountable". Bunch of liars, that is what they are.
The more intriguing question is what is better an AK47 with a lazer sight or A 12 gauge pump shotgun for home protection? Any ideas?
Chuck H.
A pistol, Chuck. You can holster it far easier & its far more usable at close quarters.
Even more effective - having a critical mass of neighbours around that you're on good terms with. Being isolated makes your home protection situation untenable, no matter how well armed.
To the gun owners out there, almost every Iraqi household had an AK-47. Didn't stop Saddam from doing his thing, didn't stop George Bush from doing his thing and certainly didn't stop the militias.
If it does devolve to total chaos you will submit to a warlord or gang and be one of their troops. Just like the Dark Ages. Or actually the rise of feudalism out of the ruins of the Roman Empire. Could happen.
But more likely, I expect a long,slow, muddling, decline...more authoritarianism..a possible police state...a lot of poverty with the oligarchs in guarded gated compounds. Even more crime. Everybody else hustling to get by.
And the banks won't "collapse", they and the government will tell all the lies necessary to keep the fantasy show going. Just print the numbers that work, like the BLS inflation stats right now. Or freeze accounts like Argentina.
Whatever works....making it up as they go along down the long slow decline.
I think you are on the mark, Greg. The debt/money system depends on continuous growth to pay back the loans with interest. When the energy supply fails to grow, the economy fails to grow, and the loans don't get paid back, and very soon the tower of debt falls over in a heap.
What knock-on effects will that have? Some experts are saying the USA could experience spot shortages of gas this summer. If banks start failing in large numbers we may see more than spot shortages as gaps in the distribution network appear where the banks collapsed.
The trucking strike in Spain illustrates how quickly things can get out of hand: after just a few days the grocery store shelves are emptying out. We have a JIT delivery system for food in this country, and as Arnold Rimmer said, "every society is only three meals away from ... anarchy."
ZMan
Agree with everything you guys say. Can't have a hand gun in my country. Against the law. So faced with a choice of a long gun. In any case, of course the answer is both :-)
As far as a critical mass of good neighbors, got that in spades. Should be OK then. Good luck to you all.
Best regards,
Chuck H.
I am not as gloomy on the prospects for us as people. WHen the Soviet Union collapsed, anarchy did not develop. Of course bad guys get better organized, but for the most part I am not worried about having guns to protect myself. If I were, I would MOVE, right now.
What I AM concerned with is a SERIOUS economic disruption and all that that entails. Food, heat, clean water, healthcare, and government services like trsh collection sewage treatment all require a functioning banking system and currency to work properly.
This is what is truly at risk.
Further, if and when it is determined that this outcome is a CERTAINTY, it would make little sense to keep on digging a hole for most folks, doing a job they hate to make money to buy shit they don't need or wont be able to afford in any event.
I really do think that some kind of banking crack up is the most likely outcome. Let us continue to examine this.
I applaud the lack of gloom and doom on your site. It is a very practical site. Keep up the good work. Collapse is a natural part of the cycle of all civilizations. Every other civilization has done it already and this is probably our time. Unfortunately ours will be a fast collapse as far as collapses go. Like a large, multistory building that gets a foundation blown out from under it will collapse faster, kill more people and make a bigger mess then a mud hut, our global civilization will make a heck of a mess when it implodes. As long as you are not part of this collapse you should be OK. If you are then it is game over for you personally. Not the end for the species as a whole hopefully.
The key thing is to be countercyclical. But this means you have to think differently from other people. Most of the time thinking differently from others is a problem but during a time of change it can be a highly adaptive behavioral trait. Feeling optimistic or pessimistic will do nothing to improve your chances. Just like a mouse scurrying around the floor in front of a cat will not significantly improve its chances of survival through positive mental attitude. You may even argue that being pessimistic could be an advantage. A less confident mouse may have never got into the house in the first place so it would have been better off.
The one nice thing to remember is that for the most part, people seem to be resilient. Much more resilient then their mechanical systems.
Best,
Chuck H.
Correct me if I'm wrong but I could have sworn that aside from the collateral that the banks are supposed to have, if you put $1000 into your bank account that bank can now loan out 5-9 times that amount. The money never gets created other than put on paper or electronic digits from one bank to another. It's almost laughable to think that the banks want to give us 1.5% on our checking or savings accounts when they are making 400-900% in reality with our money. I recently pulled out half of the money in my bank account and am hiding all that cash. I am reading online every day and when I hear the news I need to hear I'll be pulling the rest out. I recommend a movie you can watch for free on Google Video called "zeitgeist". Millions have seen it and it was given 5 stars. If you're not awake yet you will be after you watch the whole thing.
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