GLOBAL RESOURCES ANALYSIS


HEADWINDS | CREDIT CRISIS 2.0


The current credit crisis is the second one that hits the global economy. The first one was in the early '80ties, when banks also has thrown capital (much less than now, even after inflation correction) to bad debtors, who paid interest as long they could do that by obtaining new credit lines. The Tier One Capital (own capital reserves) of many banks have become negative. This happed one time earlier in the early '80ties due to payment problems of the developing countries, only this time the amounts are much and much more higher. See FED made data image below. One picture tells more than 1000 words ever can. In the US the FED these days borrows 'reserves' to banks, so that they still 'fit' in the global banking regulations known as Basel One. Nobody knows the real damage of the subprime crisis yet. Banks are well know in hiding losses in the pipeline till better times give better possibilities to write downs. This has happened once again in the early '80ties, when all global banks are confronted with huge write down of the capital they had lent to emerging markets, capital they had lend from the first wealth of the oil nations. Only this time the amounts are much and much more higher. The economy of the US is feed by 15 years of huge capital imports, money that had to be invested. The US economy is not 50% (equal balanced between consumption and production) but 70% based on consumer spending, based on two big issues: increasing house prices and the huge request for dollars. The housing bubble has exploded, that house prices could not rise for ever (and that a financial system based on that has a limited lifetime) was clear to some banks (Goldman Sachs for example) but not for others, the banks that understand the market, package the top part (the top 30% from 70 to 100%) in CDOs and sell this risks to not so cleaver/bright financials with no/less basic economic system understanding (like the fact that capital had value and must be earned), often covered by even more dumber Triple AAA insurers (mostly called monolines). Much house owners could not pay the adjusted interest rates (after the 1 or 2 year discount rate). This has lead to a foreclosure wave and a foreclosure wave has first stopped the rise of house prices (and stopping the over consumption part of the US economy that was build on it) and than has started a free fall, causing five problems: 1) drying up bank liquidities that are feed by mortgage payments 2) causing banks and financials to major (never seen before in size) write downs 3) shrinking under laying assets and by the value of these securities and by this bank's own capital positions 4) this makes capital acquiring by banks more difficult 5) the insurers face claims of the insurances they have provide to the CDO buyers, and the insurers could never pay out this by as snow in the sun disappearing CDO pledge value collapsing damage, so banks don't force them to Chapter 11 or bankruptcy because this will lead certainly to a zero value of the COD insurance and than the lost must be published in the books 6) and if (Triple) AAA insurances actually become worthless, than it not effects the subprime CDO values, but all the bonds that are issued by these insurers can be valued as worthless 7) this results giant falls in secured capital exposure for bank, placing severe parts of their balances from (Triple) AAA covered to not insured 8) this once again hits their balance positions in terms of Tier One volume against risk exposure 9) acquiring capital become even more severe by this domino like serial effects 10) the financials that are to deep in CDO capital melt down, 11) this capital melt down maybe even can doubled by Credit Default Swaps (CDS) problems when economies start to cool down and some companies come in bad whether. A CDS crisis will also lead to a new attack on /drain off insurers capital/ratings, with the above mentioned indirect capital effects of that for the banks. In all these conditions, banks which had already low Tier One capital ratings, or has other headwinds (like Societé General with the Kerviel case), or a combination of these will certainly need new Tier One Capital. This will new capital will come from the only true sources that are available: the Governmental Wealth Funds of both Carbon Rich Nations and Emerging Nations, who really like to convert their dollar stocks into dollar assets and are strong enough to play hard ball. Two years ago there was legislation in process against this development, today everybody is happy by this available only way out. Therefore almost every financial keeps as much as possible in the pipeline, hoping (against better knowledge) that the US house market will recover, but everybody knows by heart that market top levels are top levels and not average levels. By the fact that the US economy heavily was feed by cashing each year risen house prices feed mortgages increasing and not by real economic production, there are new problems coming. When capital become scarce, people can spend less, this lead to less economic activities (certainly in a nation where 70% of the economy was about consumer spending), which lead to less jobs and so on till this negative development stops on a level of actual real economy. But that's not all. All issued consumer credit lines will be effected by the subprime disease. Many people with less capital to spend will first delaying payments and later on maybe even stop paying creditcard debts (causing a new, a little smaller, but also huge subprime crisis). Many people with less capital to spend will first delaying payments and later on maybe even stop paying car finance debts (causing a new, a little smaller, but also huge subprime crisis) and this will hit the mobility (car) industry severely, causing a new lower real economic bottom the market. And the same can be said for general consumer credit. Many people with less capital to spend will first delaying payments and later on maybe even stop paying their general consumption credit debts (causing a new, a little smaller, but also huge subprime crisis). After all this on fictive based consumption is drawing out of the market and everybody has taken their losses, the US economy will again getting strong, because it's a very vibrant economy with a history of getting strong again events, the US business are strong despite the heavy headwinds the US will face the next years. But unfortunately for the world, 1) the US is the leading economy and 2) every financial worldwide has financed the US house bubble and will face major write downs. The US housing bubble and all its side effects will hit all financials of the world severely. It will undermine the financial sector enormously. It will damage the trust the world has in the US, financially and economic, trust is something the US needs a lot, otherwise the needed excessive governmental budget funding can dry up. But the credit crisis has an other huge effect: PeakOil asks for huge (1 or 2 times total global/world GDP, often called GWP) investments in a very short time. The financials that have been damaged will have less volume capacity. First: the huge central investments needed by addressing Carbon Depletion: Maybe the conclusion is right that the finance of the gigantic in number volume huge central investments of $ 0.1 billion ($ 1.000.000.000) till $ 10 billion ($ 10.000.000.000) will not be done by banks, the certainly will have no power for these types of investments. But when the collaterals and third party securities are not good, but splendid, the central banks (FED, ECB, etc) maybe will provide these huge needed capital streams under guarantee of these splendid collaterals and third party securities. Second: The massive non carbon install base investments. If general transition focused not starts very soon, (and match with economic lifetime of products) the increased write down speed on carbon fueled installbase will cause a next subprime wave, but than not only US based, but globally, ever not at time with transition of the installbase started economy. A double dip will occur certainly, better said: in Western Nations the prosperity levels will go done structural. The Western World is too old (demographics), too spoilt (by credit instead by production earned wealth), too energy intensive and becomes even too low educated. The last 30 years (Reaganomics) are the years that the West wasted its future. Credit Crisis 2.0 will take down banks, pensionfunds and governments: you can't live on credit too long (even if you have the global reserve currency as wind fall asset).


Author: Gijs Graafland


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