A Melman Minute
By: Leonard Melman
August 6, 2008
Today's markets are taking a bit of a breather after
yesterday's major moves which saw American markets soar; Canadian markets
decline and natural resource stocks suffer through yet another major hit.
Clearly, debate seems centered on whether the
world's economies in general and the American economy in particular can weather
the various storms triggered by the collapse of real estate values in the USA
and the effects of that collapse upon the entire home mortgage structure. Much
of the attention has been focused on the "sub-prime mortgage debacle", but a new
York Times story just published this week indicates that the subprime mess may
have actually been only the first wave of mortgage defaults with another - and
much larger one - to follow. The article refers to the world of more
conventional mortgages.
As the article, authored by Vikas Bajaj, puts
things, "...The first wave of Americans to default on their home mortgages
appears to be cresting, but a second, far larger one (our emphasis), is quickly
building...Homeowners with good credit are falling behind on their payments in
growing numbers." In his article, Mr. Bajan quotes James Dimon, Chairman and
Chief Executive of JP Morgan Chase as follows: "...he expected losses on prime
loans at his bank to triple in the coming months and described the outlook as
"terrible." "
Our own concerns go even deeper. We have seen many
examples in our own personal life while visiting area shopping venues of people
charging food, toiletry items, clothing and other day-to-day expenses on their
credit cards, thereby incurring interest rates as high as 18-24%. We have also
heard anecdotal stories of people borrowing against the unused portion of their
credit card limits just to continue with their real estate payments.
Based on our own experience in credit and mortgage
lending, a point can easily be reached where no further credit can be obtained
and the level of payments and indebtedness has passed far beyond the consumer's
ability to repay out of current income - and at that point, calamity occurs with
loss of homes, loss of autos, furniture, credit standing and, for the mortgage
lenders in particular, the loss of the borrower's ability to continue with
installment payments.
But what also must be considered is the potential
devastation to the receivables of the credit card granters for, once the
consumer has passed beyond the point where he can "borrow from Peter to pay
Paul", the ability to continue payments on his credit card installments also
vanishes - leaving the companies or banks owning the credit card operations
vulnerable to immense losses - and that is the problem we foresee over the
coming one to three years.
So, real estate values are continuing to decline,
the mortgage problems may rapidly accelerate, and the variety of credit granters
who find the quality of their receivables in rapid decline could be increasing.
In our point of view, that is a potentially toxic
brew for the economies of the world to contemplate.
One person who has looked into that future and been
troubled by his viewpoint is noted economist Nouriel Roubini, Professor of
economics at New York University's Stern School of Business. In a wide-ranging
interview just published by Barron's Magazine, Professor Roubini expressed
serious concerns about the economic future.
When asked where we stood in relative terms
regarding the present period of difficulties, he replied, "We are in the second
inning of a severe, protracted, recession which started in the first quarter of
this year..." (our emphasis). Expressing a similar view to the New York Times
story noted above, Professor Roubini added this comment about banks in general:
"...many, given the housing bust, will become insolvent. Their losses are
mounting because they have written down only their subprime loans so far.
They haven't started writing down most of their consumer-credit losses...there
are hundreds of millions of dollars outstanding in home-equity loans that
eventually could be worth zero, too." (our emphasis again)
Most important to consider, in our estimation, were
his comments regarding the American consumer's ability to 'spend the economy
into prosperity' as so many government bureaucrats might hope: "The U.S.
consumer is shopped out and saving less. Debt to disposable income has risen to
140% from 100% in 2000. Hit by falling prices, the consumer can no longer use
his home as an ATM machine..."
Not a pretty picture at all, we would say. And yet,
stock markets have managed to rally somewhat and the U.S. Dollar has actually
strengthened over the past few weeks - not enough, in our opinion, to change any
trends, but enough to make a dent in the short-term downtrend for the DX Index,
as noted on the attached chart.
Markets this morning show precious metals a bit
stronger with gold up (all prices US$) about $3, silver ahead by 15 cents and
platinum recovering from earlier selling with a strong $30 gain. Base metals
are trading on average in narrow ranges close to 'unchanged' on the session.
Financial markets show a divergence with the Dow Industrials down about 11
points, but the TSX ahead by over 140 as of 9:30 AM PDT. Most notably, the U.S.
Dollar Index has moved sharply higher while crude has dropped another $2.00 to
the $117 per barrel area.
◄ Previous Minute
Next Minute
►
