USA: American Financials - IV
Summary
Where have all the lenders gone? Subscribers to the Economic Clock® know that we have highlighted America's "excess demand for money" for many moons: that excess demand stems from unwilling banks, not from an unwilling Fed. Therein lies the rub: banks' decisions are profit-driven; those of the Fed are policy-driven. So banks take longer to decide when to re-enter the lending fray than the Fed does...
Today we provide further gloom, and (yet again) suggest an instrument that has made/lost you a great deal of money, depending on your timing. I, for one, am not a great timer, as one avid reader correctly has suggested; instead, I want to contribute to catalyzing your thought processes.
Topics Covered
- Further reasons not to lend
- How to make money off this idea
Background
1. Further reasons not to lend
David Ignatius, columnist for the Washington Post, provided a trenchant editorial in today's South China Morning Post, p. A11 "Bailout infusions are the new toxic assets". I cue from his good work.
Basically, the market for asset-backed securities (ABSs) is dead. Banks issued $250 billion of such ABSs- excluding mortgage-backed ones - in 4Q06; by 4Q08, that issuance had wilted to $5 billion. So investors are not buying the story any more.
Meanwhile, sellers of such ABSs aren't willing to sell the story so much, either: Mr. Ignatius notes that "private lenders are extremely wary of having the federal government as a partner...fear of federal partners has become...acute." You know of the whys and wherefores.
My point is easy: if the buyers of such ABSs don't want to buy, and the sellers don't want to sell, well: who is going to keep issuing loans that cannot be offloaded on greedy suckers?
Seems to me like lending will keep drying-up, all the more so with the intensification of America's rising unemployment: it leads bang into an ever deeper excess supply of goods.
So how can borrowers make money with which to re-pay loans? The worker is without a job, so he cannot service his debt; the corporate is without sales, so they cannot service theirs, and the lender is without buyers of ABSs, so they cannot offload dicey debts...
You get the picture: America's excess supply of goods is going to intensify her excess demand for money - regardless of what the Fed and Treasury do.
2. How to Make Money Off This Idea
- Always consult your financial adviser first.
- Have a look at SKF:US, an ETF through which you can short U.S. financials. We have been wrong for a long time on this one. But, it has been rising in price and volume since 8th May, and two technical indicators suggest that a "buy" is safe. But, with my timing mistakes, you better had consult a technical expert before climbing in.
