Sunday, March 23, 2008

After financing, foreclosure, then what?

Following last write-up, they have been so much going on with the credit issues which led to unprecendented corporate activities such as Jamie Diamond checkmates the once mighty Bear Stearns at humiliating price of slightly above USD2 a share, comparing to its all-time high of USD160 a share during its hayday which was not a distant past. Is the end near for financial institutions with credit crisis? My simple reading is far from it. Expect more. Here goes the prediction:

a) The next follow-up credit crisis will be foreclosures. When too many assets to be auction off, expect bargain-hunting to come in along with deep scepticism on whether the dust has finally settled down. The expected verdict of this conviction is harsher punishments in term of uncertainty and quick deteriotation of asset quality.

b) Next, another type of credit-related crisis is expected to be unfold, but may not be of the same scale as sub-prime but enough to further derail the already ill-economy of US and the world. Guess which one? Consumer credit default is the answer. Surprise? Firstly, consumer credit is defined as mostly short- and intermediate-term credit extended to individuals, excluding loans secured by real estate (according to Federal Reserve Statistical Release). Based on the Fed Statistics on March 7, 2008, the total outstanding of USD2.5 trillion (revolving USD959 b and non-revolving USD1.59 t). With the expected decrease in household incomes in the US, assuming the bottom 10% of income hierarchy takes a hit which resulted in writing-offs (remember most consumer credits will have little foreclosure values so recovering the debts will be even harder than mortgage), this will be translated into a loss of USD250b, and the sum increases if more population is affected. Such an effect will not paralyse US economy on its own but together with the mortgage crisis these combination could be lethal.
For many years, the Americans have been living beyond its means. Surely any logical person will conclude that such an act can’t go on for too long but it does. Now, the ‘long’ is expiring. The reckless consumers have come to realise it is a little too far and too late to unwind this irrationality as the earning will slow and to many it simply means no longer able to service the outstanding debts and when rollover is no longer possible expect the invincible hand to reign in. Consumption, which is the driver of US economy will dratically adjusted down. In aggregate the demands for imports will have to come down and the sliding USD will further ensure this happen quickly. For simplicity sake, i will say the global economy that is fueled by rapid consumption is weakening, real fast.

You may refer to the url for quick review on the magnitude of consumer credit in US.

http://www.federalreserve.gov/releases/G19/Current/ and http://www.federalreserve.gov/releases/G19/hist/cc_hist_mt.html

c) I dont know about you, but i think those talks about Asian decoupling from US economy is nothing but rubbish. Unless you are Myanmar, dont expect being isolated from whatever that are happening in US. If still unconvinced, just substract 50% of China’s export to US and see what is the sum like and decide whether or not China will remain as robust in the midst of recession in US. If you still disagree, i would suggest you find an isolated island and a mate named Friday. Happy living there.

No comments: