Posted on June 28th, 2008 in Daily Stock Market / Economic News - The Real Story
What they have in common is all have recently predicted a massive unraveling of the US financial ‘system’ within a few weeks. It is not as if this prediction or being on the verge of a meltdown is something new. The financial system has come apart several times in the past year but the Fed has always stepped in with something that has caused the markets to calm down (on the surface) and stocks to rally. Bonds, however, have never responded in quite the manner of stock market participants who each time in the past have become irrationally exuberant when Bernanke says that ‘all is good’ or decides to throw money around such as the couple of hundred billion to the investment banks in March. In my mind having to create facilities like the TAF in the first place meant the situation was dire.
In the past few weeks fear has come back in full force complete with blown out credit spreads and crashing financial sector stocks. However, this time around the Fed does not have the fire power nor the market confidence behind them because every measure they have taken thus far has only drained their reserves, delayed the inevitable, caused other problems elsewhere for the US and global economies and has not fixed the problem.
From day one the banks, Government and talking heads on bubblevision have been in denial or resorted to outright lying, in an orchestrated attempt to talk the markets into healing instead of doing what needs to be done, which is admitting there is a problem and taking necessary measures and lumps. Oppenheimer’s Meredith Whitney has been preaching this for a year about the banks in particular. In March she said she had downgraded bank’s earnings estimates 22 times in three months and coming out of the closet is the first step to balance sheet repair.
When this many get together and say the exact same thing, I listen. However, on Monday morning I am sure bubblevision and a little loud bald man will tell you ‘the glass is half full’ and ‘BUY BUY BUY’. – Best Mr Mortgage
My good friend Bill Fleckensteinof Fleckenstein Capital wrote in his daily commentary on Thursday:
Then today, Fortis’ Chairman was quoted as saying:
American ‘Meltdown’ Reason for Capital Raising – Fortis
28th of June, 9:10
De Financiële Telegraaf
BRUSSELS/AMSTERDAM – Fortis expects a complete collapse of the US financial markets within a few weeks. That explains, according to Fortis, the series of actions by the bank of last Thursday to raise €8 billion. “We have been saved just in time. The situation in the US is much worse than we had thought”, says Fortis chairman Maurice Lippens. Fortis expects bankruptcies amongst 6000 American banks which have a small coverage currently. But also with Citigroup, General Motors, a complete meltdown in the US is beginning.”
Amerikaanse ’meltdown’ reden geldinjectie Fortis – De Financiele Telegraaf
Royal Bank of Scotland has a similar view as reported by FT:
“The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.
“A very nasty period is soon to be upon us – be prepared,” said Bob Janjuah, the bank’s credit strategist.
A report by the bank’s research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as “all the chickens come home to roost” from the excesses of the global boom, with contagion spreading across Europe and emerging markets.
“The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets,” he said.”
Barclays thoughts on the matter do not vary much as reported by FT:
US central bank accused of unleashing an inflation shock that will rock financial markets, reports Ambrose Evans-Pritchard
Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall “below zero”.
“We’re in a nasty environment,” said Tim Bond, the bank’s chief equity strategist. “There is an inflation shock underway. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth.”
“This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that’s possible. It has lost all credibility,” said Mr Bond.
The bank said the full damage from the global banking crisis would take another year to unfold.
“In a few weeks time (after the next G8- and other organisations-meetings have taken place), when it will be confirmed that there is no way to stabilise the US currency (not to mention the eccentric idea of pushing it up) because the US economy is sinking always deeper into the recession and because the world is already filled with US Dollars no one knows what to do with, then the global financial system will burst out in various sub-systems trying to survive as much as they can before a new global financial equilibrium is found (4). As he is embarking on this road to nowhere, consciously or not, voluntarily or not, Ben Bernanke is signing the end of the current financial system”