Home > Economy
Squeezing Stomachs and Financial Markets Down to Size
President Bush threw the first pitch in the Washington Nationals' newly built stadium last night before a crowd of baseball fans who gave forth an equal mix of cheers and boos. Today, his Treasury Secretary, Henry Paulson, threw out his first pitch for a major overhaul of the way the U.S. financial system is regulated – also to an equal mix of cheers and boos.
But the really big story and marketing pitch of the day belongs to the purveyors of something called gastric banding, which helps overweight people lose excess weight via elective surgery. It's the medical equivalent of the squeeze that the financial markets are experiencing right now, thanks to the credit crunch – although the credit squeeze seems more like emergency surgery rather than elective surgery.
The Wall Street Journal had the stories about Paulson's regulatory overhaul pitch as well as the gastric banding story. In terms of which held my interest, the gastric banding story won hands-down. Because which one really carries more weight? A story about a proposed overhaul of the U.S. financial system that will probably never be implemented, or a story about people losing hundreds of pounds thanks to a silicone band placed around the upper part of their stomachs to squeeze them smaller?
Two reasons why this relatively new elective procedure is catching on, according to the Journal:
- It can replace gastric bypass surgery, which is more invasive.
- Allergan, the company that makes Botox, and Johnson & Johnson are vying to bring gastric banding to more bariatric patients. They see a grand opportunity, because, "only an estimated 1% of the nation's 15 million morbidly obese people, typically those who are 100 pounds or more overweight, have undergone surgery."
Meanwhile, heavyweights in the government and the financial markets are weighing in with their opinions about the Bush Administration's new financial regulatory overhaul proposal that Paulson said would take years to implement if approved. Larry Summers, former Treasury Secretary in the Clinton Administration, pointed out that the timing might not be ideal:
"It's probably a bad idea to spend too much time debating the organization of the fire department while the fire is still burning and no independent investigation of the cause of the fire has yet been completed." (Wall Street Journal, 3/31/08)
We couldn't agree more. Particularly since business on Main Street is stalling out thanks to bankers not wanting to lend money, and borrowers not wanting to borrow more. Our analysts, Steve Hochberg and Pete Kendall, describe the squeeze on residential mortgage loans, commercial real estate loans, consumer credit and commercial and industrial loans in their just-published Elliott Wave Financial Forecast. In a special section, titled, History Catches Up to the Credit Bubble, they point out that people are beginning to come to their senses about the massive financial mania of the past few years. And as they do, they realize that they need to take shelter from the bursting credit and debt bubbles. Here's an excerpt:
The new force of reality is recognizable in an 89% fourth quarter earnings slump at Blackstone Group and countless stories of a "Staggering Weight of Debt" that cripples the private equity industry. But the panic is still mostly ahead because Blackstone recently managed to raise $1.4 billion to buy bonds and loans at "fire sale" prices. Blackstone has yet to invest the money. "Our view is that things will get worse before they get better," says Blackstone's president. Even the leverage-loving kinds of the great debt bubble are reticent.
This is the conservatism that figured so prominently in Conquer the Crash's forecast for a deflationary depression. At such times, Conquer the Crash [Bob Prechter's business best-selling book] said it doesn't matter what the Fed does, lending officers will become afraid and call in loans and slow or stop their lending "no matter how good their clients' credit may be. Corporations likewise reduce borrowing for expansion and acquisition, fearing the burden more than they believe in the opportunity. Consumers adopt a defensive strategy at such times by opting to save and conserve rather than to borrow, invest and spend."
The resulting economic ripple effect is clear in charts of the year-over-year change in lending standards and loan demand. Mortgages lead the way with an incredible 85% of banks tightening standards and 69% reporting slackening demand; thus the sharp plunge in mortgage originations. Commercial real estate is not far behind. Consumer installment loans and business lending is still growing, but the willingness to lend and borrow in these sectors is also in well-established declines. As one headline puts it, banks are "hoarding cash," and for good reason. It is only a matter of time before these rates of change cross the zero line. When that happens, the economy will tank, and consumers and businesses alike will have even more reasons not to lend or borrow….
That's a perfect description of the financial gastric band that is now squeezing the stomachs of lenders and borrowers alike. Read the whole special section and see the four-in-one chart that accompanies it by subscribing to the Elliott Wave Financial Forecast. For more details, click here.