Sunday, August 24, 2008

The Crisis In Words


Here’s what a credit crisis looks like on a chart:

Despite the Fed’s best efforts, the broadest measure of money supply in the U.S., including outstanding credit -- known as M3 -- has fallen off a cliff. July saw the biggest one-month drop in M3 since the government started keeping track in 1959.
“It takes new money to keep a credit bubble inflated (or to keep it from deflating),” says Dan Denning, watching events from down under. “If the figures from the Fed can be trusted, and if they show that new money isn't forthcoming, then it may be a sign of even greater financial asset deflation in the months ahead.
“Translation: It's going to get a lot worse. If stocks are cheap, they're going to get even cheaper. It means if good resource projects are good values now, they'll be even better values as the market falls.
“Not that it's an easy thing to stomach. But let's remember what we're watching here. As investors delever and pay down debts, they sell assets to raise cash. It's a bull market in cash. And money that is used to pay down debt is money that is not spent on stocks or new cars or the things people spend money on when they aren't worried about debt.”
As if to put a point on the issue, mortgage applications fell to their lowest level in nearly eight years last week. The Mortgage Bankers Association’s application index fell to 419.3 today, the worst score since December 2000 and a 61% crash in volume since February 2008. For reference, that same index peaked at 1,856.7 in 2003.
“The U.S. is not out of the woods,” chimed in Harvard professor and former IMF chief Kenneth Rogoff this week. “I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come.”
Speaking at a conference in Singapore, the former head of the IMF said, “We're not just going to see midsized banks go under in the next few months; we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks… Probably Fannie Mae and Freddie Mac -- despite what U.S. Treasury Secretary Hank Paulson said -- these giant mortgage guarantee agencies are not going to exist in their present forms in a few years."
Goldman Sachs also warned today it expects this fall may not be such a great time for financials. Goldman analysts cut third-quarter and full-year forecasts for Citi, J.P. Morgan Chase, Lehman Brothers, Merrill Lynch and Morgan Stanley yesterday -- all in one fell swoop.
“We believe a major recovery is still a few quarters away," wrote lead analyst William Tanona. “We assume no or negative earnings for the majority of firms in our universe this quarter.”
Heh. Not that we disagree with Goldman on this one, but it must be nice to be able to downgrade all your major competitors. Nope, no conflict of interest there.
One last word on Goldman… quants on the other side of the building reiterated their call for $149 oil today. Back in early summer, Goldman said oil was poised for a “superspike” to $200 sometime before 2009. In June, they promised $149 barrels by the end of the year, and today they proudly claim they are holding fast.

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