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huge stock market slide, just the beginning ?

Alex D. from TRIBE on Utility Room

judge wopner

TRIBE Member
another chilling analysis by Mish, this guy has made some epic calls the past year or so, ( i cant seem to get the charts to come up though.)

http://globaleconomicanalysis.blogspot.com/2009/01/brink-of-debt-disaster.html


Brink of Debt Disaster

John Kemp at the Guardian is making a case that the US and UK are on the brink of a debt disaster. Let's investigate the discussion and charts.

The United States and the United Kingdom stand on the brink of the largest debt crisis in history.

From the 1970s onward, the economy has undergone two profound structural shifts. First, the economy as a whole has become much more indebted. Output rose eight times between 1975 and 2007. But the total volume of debt rose a staggering 20 times, more than twice as fast. The total debt-to-GDP ratio surged from 155 percent to 355 percent. Second, almost all this extra debt has come from the private sector

Despite acres of newsprint devoted to the federal budget deficit over the last thirty years, public debt at all levels has risen only 11.5 times since 1975. This is slightly faster than the eight-fold increase in nominal GDP over the same period, but government debt has still only risen from 37 percent of GDP to 52 percent. Instead, the real debt explosion has come from the private sector.

Private debt outstanding has risen an enormous 22 times, three times faster than the economy as a whole, and fast enough to take the ratio of private debt to GDP from 117 percent to 303 percent in a little over thirty years.

The charts strongly suggest the necessary condition for resolving the debt crisis is a reduction in the outstanding volume of debt, an increase in nominal GDP, or some combination of the two, to reduce the debt-to-GDP ratio to a more sustainable level.

From this perspective, it is clear many of the existing policies being pursued in the United States and the United Kingdom will not resolve the crisis because they do not lower the debt ratio.


Kemp's article is an excellent read that inquiring minds will want to explore further.

The key point is the path that Central banks are taking cannot possibly work. Buying distressed debt or playing shell games with good and bad banks will not resolve the basic problem which is too much private sector debt that cannot possibly be paid back.


Bankruptcy or Inflation

Clearly GDP needs to rise or debt levels reduced to reach a sustainable path. Kemp argues "widespread bankruptcies are probably socially and politically unacceptable."

While I agree with that statement in theory, practice is another matter. I do not believe government has a realistic choice in an environment of global wage arbitrage, changing consumer attitudes towards debt, and demographics of boomer retirement.

Attempts to inflate out of this mess, cannot possibly work for three reasons.

1) The burden of consumer debt will only decrease under inflation if employment recovers, wages rapidly rise, and outsourcing of jobs to India and China stops. The odds of that happening are extremely slim.

2) Government cannot really "create" any jobs per se. It can raise taxes and shift private sector jobs creation to government jobs creation (typically a malinvestment), and it can bring production and consumption forward for those jobs that are genuinely needed (filling potholes), but once the potholes are filled, one has to ask the question, "What will we do for an encore?"

3) Even if by some miracle the economy rapidly picks up, interest rates will rise. Homeowners who now are seeing rates fall, will once again be put in jeopardy by rising rates. Furthermore, interest on the national debt will soar. The National Debt is $10.7 Trillion as of January 7, 2009. As interest on the national debt rises, so will taxes have to rise to cover it. In Fiscal Year 2008, the U. S. Government spent $412 Billion of your money on interest payments to the holders of the National Debt.

In short, there is no free lunch of inflating consumer debt away. Attempts to do so will only create bigger problems elsewhere.

Expect to see a long-term period of extremely slow growth with the economy slipping into and out of deflation and recessions for years, to come. This is the path of Japan, not the path of the Weimar Republic.

Mike "Mish" Shedlock
 

2canplay

TRIBE Member
^^^, yup, good stuff. Unfortunately, the only way out of this mess is to let it all go. I am a stronly left-leaning dude, but I have to admit, the only way out of this mess is the Bankrupcy courts, for a lot of people/companies.
 

2canplay

TRIBE Member
Oh, and regarding the Canadian Banks and Insurers, Dividend Cuts are a lock. If they are raising money at 9.5% to look stronger dividend cuts are a foregone conclusion. This occured to me this morning!
 
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judge wopner

TRIBE Member
Oh, and regarding the Canadian Banks and Insurers, Dividend Cuts are a lock. If they are raising money at 9.5% to look stronger dividend cuts are a foregone conclusion. This occured to me this morning!

curious to see who will break first.

something is up at royal bank, down almost %30 the past few weeks. no sign of a turn, no statements from them about what it might be. i wonder if they may have been tied up in a UK bank more than they wanted to admit.

td not looking hot either, and they just raised their dividend last year.

seems like it would be a matter of pride to hold out and not be the first one. it might make it easier for the others to follow suit once this happens though.

im picking Royal to cut first, then BMO.
 

416

TRIBE Member
Oh, and regarding the Canadian Banks and Insurers, Dividend Cuts are a lock. If they are raising money at 9.5% to look stronger dividend cuts are a foregone conclusion. This occured to me this morning!

%9.5? Prefereds where just issued for %6.25.
 

atbell

TRIBE Member
Bank Tier 1 Capital Reserves

As I pointed out earlier the nubmers quoted seemed extremely low. I did a review of my notes and found that most numbers in the European banks were closer to 8%, with those on the low side consistently stateing that they were using funds already allocated to boost thier ratios.

This may have changed recently but I have not found anything on the subject yet.

Here are the notes:

Barklays tier 1 - 5%
http://www.economist.com/finance/displaystory.cfm?story_id=11412777

Bank of American target tier 1 8-8.5%
http://www.marketwatch.com/news/sto...x?guid={B90FFE3D-8E08-4B3D-80EF-479B170C19CC}

Royal Bank 10.1%
http://www.isn-inc.com/news/news.aspx?nid=411&cid=4

ING; end of sept 6.5%, 8% as of printing, 10% target
Financial Times, Oct. 20

KBC 8%
Financial Times, Oct. 29

Credit Swisse 13.7%
Financial Times, Oct. 15

Deutshebank 10% without any government support
Financial Times, Oct. 14

Swedbank 9.2%
Financial Times, Oct. 29

D. Postbank 6.3% June, 5.5% Sept, 6.9 % as of writing, target 7.5 - 8.5%
Financial Times, Oct 29

Erste (Austria) 7.5%, 10% target
Financial Times, Oct. 30

UK average 8%, France average 6.5%
Financial Times, Oct. 30

Swiss government recomendation 12 - 13%
 
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Ms. Fit

TRIBE Member
%9.5? Prefereds where just issued for %6.25.

yeah i'm pretty sure i read 6.25

no one wants to be the first b/c of the EXTREME lack of confidence this will cause. the share prices will tank to extremely scary levels..anyone know the last time a cdn bank cut their dividend?
 

Ms. Fit

TRIBE Member
^^

http://www.globeinvestor.com/servlet/story/GAM.20081125.REXPLAINER25/GIStory/

No Canadian bank has shrunk its dividend since National Bank cut its payout in half in 1992, but when was the last time a big bank's dividend was completely suspended?

The last time that happened was when National Bank eliminated its dividend in mid-1982. It reinstated the payments about a year later. That's the only time a bank has completely killed a dividend in recent decades - or centuries, actually.


i don't know if it'll happen or not. if little pissant jr. investment bankers are still taking home a bonus of any sort, then no way in hell is it fair to cut the dividend rate:mad:
 

2canplay

TRIBE Member
Anyone see TD Banks new notes announcement?

http://biz.yahoo.com/cnw/090115/tdissues_cats_ivnotes.html?.v=1

Long and short - issuing notes worth 9.523% per YEAR at least until 2019....

that is insane returns. I would love to get in on those!

This is the Note - not preferred, but Capital Trusts (quasi preferreds, but taxed like a credit product).

Bet the mortgage on a dividend cut. No one ever comes out and tells you that they are going to cut...you have to watch the signs, and this is a big one.
 

2canplay

TRIBE Member
I really think your best bet is to let go of the Financials until the dust settles, look for good bargains in utilities or trusts, and short resource stocks. There are still some companies valued WAY MORE than the price of commodities would justify.

Actually, I should say that the financials are OK, long-term, but I think there are much safer and better deals out there... As well, I would not be surprised to see one bank in Canada, go away. All it takes is some worry and it can happen in a few days. All you need is a large debtor running into trouble (ie., Brookfield Properties?) and that exposure plastered all over the newspapers. AND, believe me, there are going to be some whopping bankruptcies in 2009.
 
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Confused

TRIBE Member
Dear E*TRADE Canada Customer,

We are pleased to inform you that E*TRADE Canada is now participating in the following issues through our IPO Centre:

# Bank Of Nova Scotia 6.25%
# National Bank Preferred 6.60%
# Royal Bank Preferred 6.25%
# TD Bank Preferred 6.25%


oh baby
 
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