Although I'm used to their style of communications as a subscriber to ther quarterly bulletins, the latest prelims had me chuckling at the shear (and justified imo) venom they released against the authorities -"The Chairman, Robert White, said: “Once or twice in my Chairman’s Statement in recent years I have wondered for how long an economy could be deemed to be ‘growing’ when it was based on a consumer boom financed by borrowing against apparently ever rising property values coupled to massive Government spending and employment. Well, now we know. The credit crunch, far from being almost over, will in our view continue to worsen. Given that consumer debt in the UK is now greater than GDP, the unwinding process is likely to be long and painful... As you will read in the Managing Director’s Report, the UK banking system is now in serious disarray. When the banks all raised their dividends in February they obviously failed to appreciate how the credit crunch was evolving. Their subsequent deeply discounted rights issues reflect not so much a liquidity crisis as a potential solvency crisis. It is obvious that the glut of UK mortgage loans on the balance sheets of UK banks have not been marked to market. Nor have we yet seen any realistic accounting for commercial property losses and hedge fund losses still to come.Superficially, perhaps the most astonishing aspect of these events is that the major share indices are still within 7% to 10% of their all time peaks. One is almost left to conclude that the loss of hundreds of billions by the banks followed by the raising of huge sums to shore up wounded balance sheets was a matter for rejoicing.The Managing Director, Ian Rushbrook, said:..Although the problem of subprime mortgages did not surface until July 2007, the bubble began long before. During his reign as Chairman of the Fed, Alan Greenspan not only frustrated every effort to regulate the hedge fund industry and the derivatives market but in 1999 also facilitated the repeal of the Glass-Steagall Act, passed in 1933 to ensure the separation of commercial and investment banking. Repeal of Glass-Steagall gave carte blanche to the banks to start working on a perpetual motion money machine to be operated from their basement boiler rooms...Major losses must inevitably exist within the hedge fund industry, a major buyer of subprime mortgage-backed securities which they then geared up to increase returns. Why have these losses not yet surfaced? In theory, collateral is posted by hedge funds with their prime brokers and is marked to market. However, prime brokers know that if they call for more realistic margins they may have to assume ownership of assets they are desperate to keep off their balance sheets. So they wait, hoping the Fed can be forced to lower the Fed rate even further and that the subprime rubbish may be adequate to cover the banks’ loans without further write-offs. How the credit crunch evolves is of fundamental importance to our strategy for 2009. UK consumers have borrowed over £1.4 trillion –– exceeding the entire UK GDP of £1.25 trillion –– and are struggling to meet the interest payments as other household costs soar. The Bank of England (“BOE”) and the Treasury say the credit crunch may be coming to an end but we suspect that this is just whistling in the dark to try to keep the nation’s courage up...House prices in the UK have declined by 5% from their August 2007 peak and April’s fall of 1.3% suggests an accelerating rate. UK mortgage approvals in March fell by 44% year on year, while repossessions in the first quarter of 2008 rose by 17%. The UK banking system is still precarious, however, because previously extended mortgages still have to be funded; and the problems in the real economy are only beginning. The UK economy, furthermore, is under greater threat than that of the USA. Our decade of GDP growth and economic stability was sheer illusion, born of ever mounting government and consumer debt. The UK’s current account deficit is 5.7% of GDP compared to the US’s trade deficit of 5.1%. The UK budget deficit is projected at 3.3% of GDP compared to the US’s 2.9%. UK mortgage housing debt represents 84% of GDP compared to 75% in the US...Although parallels are being drawn with the Great Depression, which followed a long, debt fuelled US boom, Bernanke’s preoccupation with the 1929 Crash (on which he is a world expert) has not helped the world’s banking system. A truer comparison is with the early 1970s, when inflation was unleashed in attempting to avoid recession. Today’s crisis is not one of confidence or liquidity, but of banking solvency. The Fed grossly underestimated the scale of the subprime problem, ignored the effects of contagion on similar high risk financial securities and assumed that the answer to too much debt was to lower the Fed rate in order to generate even more debt and to float all the stricken ships off the rocks. When the credit crunch struck, the financial system screamed blue murder and brought huge pressure on the Fed to cut the Fed rate. Bernanke gave in to blackmail and the Fed’s reckless monetary policy since then has accelerated the Dollar’s decline. A continuation of this policy almost guarantees both destruction of the Dollar as the world’s reserve currency and much higher inflation...The banking system, faced with near-destruction of its capital base, must withdraw a significant portion of the outstanding debt it has extended. Contrary to popular belief, the credit system has not seized up because of mistrust amongst banks in lending to each other. Rather, it is because banks have a keen understanding of their own potential funding requirements arising from foreclosure on collateral they hold on loans extended to the ‘shadow banking system’ (in particular, the hedge fund sector). However, the most profitable (but highest risk) business the investment banks have is acting as prime brokers to their hedge fund associates. They would rather dump the consumer and the corporate sectors before restricting the activities of their hedge funds, so (as I mentioned earlier) they are desperately letting these run on in the hope that a miracle will provide some value to the lenders...I believe that equity markets are deluded. The US can expect at least two more years of falling house prices, very high rates of mortgage default and foreclosures and falls in corporate earnings. The real economy and the financial system are a unified whole; changes in one affect the other. Without a well-functioning financial system, the real economy will seize up through a reduction in credit availability. Not only in terms of ‘moral hazard’, therefore, but also to defend the real economy the Fed should not be providing vast funding just to support hedge funds’ leveraged holdings of dubious financial assets.This is a crisis which, through mishandling, could end as a cataclysm. We therefore remain 100% liquid."http://www.investegate.co.uk/Article.aspx?id=200805231632262...ISTR that in a previous bulletin they said that, since the turn of the century, GDP had not increased, if the effects of the excessive level of credit were removed. I'd be interested to see a breakdown of GDP if anyone knows of such a source.Daytona
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