In the words of renowned financier Warren Buffett: “Only when the tide goes out do you discover who’s been swimming naked.”
The tide of the U.S. credit industry is out. And everyday, more and more titans of finance are found standing in the shallow water without swimming trunks. Take your pick -- Bear Sterns to UBS, Morgan Stanley to Merrill Lynch, Wachovia to WaMu, Lehman Brothers, Goldman Sachs, and the number one U.S. bank Citigroup...
...ALL have been caught with their earnings, profits, share price, and ratings pants down as write downs totaling $399 Billion (and rising) expose the vulnerability of the banking sector.
Following the industry’s latest wave of layoffs, cutbacks, and shortfalls, the Bank For International Settlements (BIS) issued one of the most “somber” annual reports of its 88-year history. The Cliff’s Notes version: “The global economy may be headed for a deeper crisis than expected and a bout of deflation in the world’s biggest economies is now a possibility.”
I repeat: D as in Deflation is now a possibility. Soon after, the other dismal “D” word appeared when the Dow Jones Industrial Average suffered its worst June since the Great Depression. Double Doh!
Which begs the question: Could one foresee BEFORE hand that the credit tide was going to recede?
According to the mainstream experts, N-O, no: In their words: “The write-offs have been far worse than anyone would have imagined.” (Bloomberg)
And -- “It was impossible to know at that time [the year 2003] that a period of ‘free money,’ abetted by ultra low interest rates would stoke a new bull market in debt and fuel a giant housing bubble.” (Barron’s)
(Deflation, Depression, and credit Disaster. Unimaginable scenario? I don’t think so. In his 2002 best selling book Conquer The Crash, Elliott Wave International president Bob Prechter foresaw them all coming to pass in the years ahead. Learn More)
“Knowing” exactly that, however, is the long-standing achievement of Conquer The Crash. There, Bob Prechter revealed five major conditions that “pose a danger” to many banks. Among them: “Low liquidity levels, dangerous exposure to leveraged derivatives, the inflated value of the property that borrowers have put up as collateral on loans, and the substantial size of the mortgages that their clients hold compared both to those property values and to the clients potential inability to pay under adverse circumstances.”
He also added: “What screams ‘bubble’ – giant historic bubble – in real estate today is the system-wide extension of massive amounts of credit to finance property purchases. Confidence is the only thing holding up this giant house of [credit] cards. When real estate prices begin to fall, lenders will experience a rising number of defaults on the mortgages they hold.”
Soon after, the September 2005 Elliott Wave Financial Forecast stepped in with this urgent message: “Banks seem to be blind to the danger of overpriced collateral as they continue to stuff their balance sheets with mortgage-backed assets… Lenders are still behind the curve, but once they see the writing on the wall, the rug will get pulled out from under the economy in a hurry.”
The blindness continued, as participant’s invented riskier and riskier ways for U.S. banks to bundle the $600 billion mortgage securities market. In the January 2007 Elliott Wave Financial Forecast, the point of no return had been reached. “2007,” we wrote. This would be “The Year of the Financial Flameout.”
Know beforehand which way the financial tide will flow. Get a risk-free subscription to the complete Financial Forecast Service today. Happy Swimming.