Five Things You Need to Know: Banks Still Hate Each Other
Good companies still out there, but increasingly harder to find.
Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Banks Still Hate Each Other
OK, here's the crucial issue the market will begin to discover next quarter: Despite the return of Depression-era monetary policies aimed at relieving the debt crisis, banks still hate each other.
An article on Bloomberg this morning looks at the basic problem. Banks such as Citigroup (C), Bank of America (BAC) and even Wells Fargo (WFC) - the best apple in the rather large basket of rotten apples - are facing their lowest capital ratios in years. The net result is that despite record attempts by the Federal Reserve to provide banks with liquidity, that money is not making it past the banks' balance sheets.
The Bloomberg article, "Citigroup, Wells Fargo May Loan Less After Downgrades," focuses on credit rating downgrades, but what you need to know is that the combination of bad debt, risk aversion and a growing avalanche of government regulation will by next year have effectively dismantled the banking industry as we now know it.
What does that mean for you? Why should you care? If you're an entrepreneur it means you are going to need to be more creative in financing your business. If you're an investor it means you need to stop staring at the tickers of the financial engine companies - basically any company whose business involves relying on credit creation, and the slicing and dicing of credit into smaller, more leveraged parts - and replace those tickers with companies that make things people need.
That sounds much easier than it is. If you look closely at companies today in just about any industry you may be surprised to find the extent to which their business model is in some way reliant on credit creation. The market will be surprised to discover this too, probably sometime next quarter. There are still good companies out there, companies that make money by producing things that people need, but they are increasingly harder to find.
2. Pending Home Sales (FILL IN YOUR OWN DIRE VERB HERE) in February
If banks still hate one another, imagine how realtors and home sellers feel. The National Association of Realtors' pending home sales index fell 1.9% in February. The index is now at 84.6, the lowest reading since record-keeping began in 2001, and 21.4% below the February 2007 level.
This index is based on signed contracts for previously owned homes, but which haven't yet closed. So it's viewed as a reasonable indicator of what future home sales will look like.
3. Consumers Smoke 'Em If They Got 'Em
Not cigarettes. Credit cards. Consumers are, quite literally, smoking 'em. Consumer credit numbers released by the Federal Reserve late yesterday afternoon showed consumers took down $5.16 billion in February.
The news reports quickly herded toward presenting this as a "less-than-expected" figure, indicative of consumer credit growth slowing. Sure enough, on the face of it this would appear to be true. But there's a darker reality hiding behind the face of the numbers. Simply put, consumers are cutting back on the use of credit for purchases of big-ticket items such as cars, major appliances and boats, and ramping up their use of credit for smaller necessity items.
Compare the numbers. Non-revolving credit, the type of closed-end loans used for major purchases, rose by $497 million. Revolving credit, credit cards, rose by a staggering $4.66 billion, or 5.9%.
4. The Socionomics of Alan Greenspan
We ran across the perfect Alan Greenspan story on Bloomberg this morning. It was small, just a brief crossing the wires recapping a Wall Street Journal story on Greenspan's defense of his decision-making as Federal Reserve Chairman, but it captured perfectly the socionomics of the transition Greenspan is making from real person to bear market simulacrum; an inevitability of the structural bear market we predicted would happen years ago.
"Greenspan, 82, said he's now being criticized for the same hands-off approach to the economy he used to be praised for, the newspaper reported," the Bloomberg brief read. This is precisely what a shift in social mood looks like. That which was once praised as an endearing hallmark of the boom is often vilified as social mood darkens.
The lasting legacy of Greenspan as simulacrum will not be as steward of the greatest boom in American post-war history, but as signifier of excess and frivolity, a dark triumph of style over substance.
5. The Return of the Philosophy Major
As we said, what which was once praised as an endearing hallmark of the boom typically is vilified as social mood darkens. And that which was once rejected during the boom as frivolous - often anything not directly associated with act of speculation - is embraced. We ran across the perfect example of this happening even now in the New York Times over the weekend
In a New Generation of College Students, Many Opt for the Life Examined
"Once scoffed at as a luxury major, philosophy is being embraced at Rutgers and other universities by a new generation of college students who are drawing modern-day lessons from the age-old discipline as they try to make sense of their world, from the morality of the war in Iraq to the latest political scandal."
At first glance this would seem to run counter to what economists would claim people "need" during economic downturns; jobs, money, the ability to produce and consume. But socionomics shows us that this is precisely what people turn to as social mood turns negative:
"The economic downturn has done little, if anything, to dampen this enthusiasm among students, who say that what they learn in class can translate into practical skills and careers."
The line between Speculari Ergo Sum and Cogito Ergo Sum is thinner than one might imagine.
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