If by now you’re still not convinced of the magnitude of the financial crisis before us, consider this: In Europe, the Helicopter Ben Bernanke equivalents of the Bank of England and the European Union are expected to now come to the rescue of the US Fed.
With the credit crisis entering its ninth month, Bank of England Governor Mervyn King and European Central Bank President Jean-Claude Trichet are on the verge of new steps to spur lending and increase liquidity, say economists at Lloyds TSB Group Plc and Royal Bank of Scotland Group Plc. Interest-rate cuts may be next if the crisis persists.
“We’re inching closer to the great global monetary easing,” says Joachim Fels, co-chief economist at Morgan Stanley in London.
It’s a brutally nasty reminder that the problem facing our economy is by no means limited to just our economy. The banks and investment houses that played it fast and loose with derivatives are global companies, not just US ones. European and Asian companies too have exposure to trillions in toxic debt. It’s clear that the US can no longer fix this problem alone.
Lloyds predicts King’s next step will be to accept more types of collateral for loans. Trichet will pump more money into banks, RBS forecasts. Such measures would take Europe’s two biggest central banks further down the path laid out by Bernanke this month.
The Fed chairman needs all the help he can get. In addition to lowering interest rates at the fastest pace in two decades, Bernanke has committed as much as 60 percent of the $700 billion in Treasury securities on his balance sheet to expand lending. The Fed has also offered a $29 billion loan against illiquid securities to assist the buyout of failing securities firm Bear Stearns Cos.
That of course would be unprecedented. European central bankers are scared out of their mind. They see themselves having to pull the same sort of lending legerdemain that we’ve had to do just to stay afloat, and furthermore they know the US Fed is now running dangerously low on cash on its balanace sheet.
“There is a barrier in terms of the size of the Fed’s balance sheet as to how much it can do” short of printing more dollars, says Neil Mackinnon, chief economist at London-based hedge-fund ECU Group Plc, which manages about $1.5 billion. “If the European central banks were to adopt more Fed-style measures, it would go a long way to helping the Fed tackle the crisis. This is not only a problem for the U.S. to resolve.”
The ECB and Bank of England have so far failed to restore order to money markets. The cost of borrowing in euros and pounds last week rose to highs for the year. The three-month London interbank offered rate for euros climbed 5 basis points to 4.73 percent, the highest level since Dec. 27. It fell today for the first time since March 3, according to the European Banking Federation.
Deutsche Bank AG, Germany’s biggest bank, said last week that “very challenging” market conditions will make it harder to meet its profit goal. The Bank of England was forced on March 19 to deny speculation that HBOS Plc, the U.K.’s largest mortgage lender, faced a cash shortage as interest rates surged.
But as I’ve said time and time again throwing more money at the problem will not solve it. Confidence and trust cannot be bought with mere billions when these same banks know they are counterparty creditors…and debtors…to hundreds of trillions in leveraged derivative time bombs. If even one of these major global banks goes down with these trillions on their books and unable to pay it, it’s over. Everybody in the game owes everybody else, and that debt has been leveraged in order to keep these insolvent companies afloat. If these debts go bad at once, if another major bank goes the way of Bear Stearns, who knows.
With Eurozone core inflation approaching 3.5%, these banks are being screamed at to cut interest rates. Remember, Europe isn’t having a massive deflationary housing depression right now. They still face the same problems we do, on several fronts, they have to buy oil in US dollars, and the price of oil is going through the roof. We would be seeing much worse inflation here if ironically the housing crash wasn’t as bad as it is now!
And keep in mind today’s the last day of the first quarter, March 31. Earnings for the first quarter will start to come in over the next few weeks, and those outlooks are nothing short of dismal.
Wall Street analysts have cut their first-quarter earnings forecasts for U.S. companies and are now projecting a sharper decline, figures from Reuters Estimates showed on Monday.
Earnings for Standard & Poor’s 500 companies are now expected to fall 8.1 percent in the first quarter, compared with the 5.5 percent decline projected last week.
At the beginning of the quarter, analysts projected 4.7 percent earnings growth during the period.
Nice call there boys.
The worsening global credit crisis has significantly damaged the outlook for many major U.S. companies, particularly in the finance sector.
Financial companies are expected to take the hardest hit, with Reuters Estimates predicting the sector will suffer a 49 percent decline in quarterly earnings.
Consumer companies are expected to see their earnings decline 10 percent, as consumers continue to be pinched by rising food and energy costs and declining home values.
Earnings slashed in half for the finance companies, meaning more stock problems, layoffs, and more balance sheet problems. And these problems will continue because the long-term trend is that the smart money is leaving US and European stock markets.
Investors worldwide pulled close to $100bn (€63.3bn) out of equity funds in the first three months of this year – a record shift that accelerates a longer-term trend away from US and western European stock markets.
Equity funds suffered outflows of $98bn in the quarter ending March 28, according to Emerging Portfolio Fund Research, which tracks retail and institutional flows. The funds had inflows of $19bn during the same period last year and inflows of $49bn in the same period for 2006.
EPFR said the outflows were because “the credit squeeze linked to the US subprime debt mess weighed on investor confidence and global growth”.
The outflows also accelerate a trend for investors to put their money either in ultra-safe cash options such as money market funds, or into riskier markets and high-fee products such as hedge funds. They are abandoning the middle ground of mainstream equity and fixed income funds, especially in the developed markets.
Investors pulled $70bn from US, Japan and Western Europe funds during the quarter, compared with inflows last year and in most previous years.
Funds enjoying inflows were nearly all focused on Taiwan, Russia, the Middle East and Africa. Emerging markets funds as a group had outflows of $20bn, compared with a small outflow of $1.6bn in the same period last year.
Things have gotten so bad that Africa, the Middle East, and Russia are now seen as safer and better investment opportunities than the US and Europe. What does that tell you about where we’re headed?
Without foreign investors buying US debt and investing in US markets, we’re in massive trouble. The market money is either on the sidelines or being invested in these developing markets, not here. Can central bank divestment of the dollar be far away? As the global problems keep getting worse (keep in mind it’s only been about nine weeks since I started really writing about the markets now in this series) and the pace of the problems keep accelerating, something’s going to give. Eventually, some major player is going to say “We can no longer afford to prop up the US economy. We’re getting out.”
When that happens, what then? I’m betting we’ll find out sooner rather than later.
Be prepared.
