Wednesday, May 30, 2007

Conflicting Data From Financial Institutions Regarding Our Future

This article by Kabir Chibber and John Glover at Bloomberg tell a tale of two scenarios.

One the one hand, we learn that major banks around the world are hiring "distressed-debt bankers" to handle an expected credit crunch.

[Thanks to for the image.]

'"People have been forecasting a meltdown in credit in the next 12 to 18 months,'' said Michael Gibbons, head of the special situations desk at Paris-based BNP Paribas.'

It is true that credit and risk products are at a scary untested record volume.

Others say:

'"When the turn does come, it will be unlike anything we have ever seen before,'' said Iain Burnett, 43, managing director of Morgan Stanley's special situations unit in London. "The scale of it could be considerable because of the size of some of these leveraged deals...."'

'"It's like a hangover, people will wake up and say, 'what have I done?''' said Michael Weinstock, who helps manage $3 billion of distressed debt at private equity firm Quadrangle Group LLC in New York.... "Record-high levels of financing now mean record levels of defaults in the future. There's every reason to believe we're near a market top.'''

'"The risk in all of this is that the higher we fly, the further we could fall as and when the market turns,'' said Paul Watters, S&P's London-based director of debt recovery ratings. "Many borrowers are tacitly acknowledging the growing vulnerability.'''

Then you get this piece of wisdom from the same Mr. Gibbons cited above:

"We tend to crash when we least expect it, rather than when we forecast it.''

So with all of these gloomy forecasts, that puts us back to square one.

But one thing that seems certain: The market is jittery. You have the central bankers and optimists putting up a front of confidence ("soft landing" talk), the bulls trying to wishful-think more loose credit into the system, and the "permabears" like me (as AIER likes to call us) predicting a flight from the dollar, preceded (or not) by a reinflationary or stagflationary episode a la 1970's, or perhaps even by a falsely non-inflationary or -deflationary 1920's.

Item: Small green valley above Salt Lake City, population 5400. At 2.58 people per household (Source), that's about 2093 households. There are almost 200 living units for sale. That's 10%. In one condominium complex of 150 units, 50 are for sale -- plus the ones the developer is refusing to list because he has too many and it makes him look bad. That's over 30%. You draw the conclusion.

If the debt situation our bankers fear comes to pass, this show will be a lively one.

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