Bank Losses Mount - Globally

Good day… And while I hope it’s a Wonderful Wednesday for you, I have sad and shocking news for us at EverBank. Yesterday, we were shocked to learn that our colleague and friend, John Kimsey had passed unexpectedly. Thoughts and prayers are with the family. John had joined the World Markets desk in November of last year, after a career in our Mortgage Division, and made an immediate impact with his personality, and his love of his family. His laugh, and smile were contagious, and will be missed.

I have no experience in dealing with the loss of a colleague, so I’ll just leave it there, and move on. This will be short this morning, as I’m just not in the writing mood.

The dollar continued to rule the roost yesterday, as the story that I broke regarding the Eastern European loan losses weighing heavily on the euro (EUR), really gained steam as the day went on. I have to apologize right here, right now, for contradicting something that my friend John Mauldin and I each said yesterday. I did not mean to do that, and it shows what happens when you write pre-5 AM. I was of the thought that the U.S. losses were larger than those in Europe (overall, both East and West)… But upon further review, I see that NOT to be the case. It all goes back to lending ratios, which in good times people don’t pay attention to… But in bad times, they begin to be as self-evident as a hatchet in one’s forehead. U.S. banks have a loan ratio of around 26 to 1… And European Banks have one that is around 60 to 1… Uh-Oh!

My long time friend, and sometimes colleague, Ed Bonawitz, sent me a note yesterday showing the rot on the vine… This stuff isn’t for anyone under 13 to view, folks; it’s nasty. Here are some facts to make you cringe… “Ireland’s external debt, at $1.8 trillion, equals 900% of the country’s $200 billion GDP. The United Kingdom’s external debt of $10.5 trillion equals 456% of its $2.3 trillion GDP. Switzerland’s external debt of $1.3 trillion equals 433% of its $300 billion GDP.”

So… Now that the credit markets are locked tight, renegotiating the terms of these loans is virtually impossible. The IMF will need to step in Big Time, and as badly as I don’t want to even say this, but have to, the Bundesbank, Germany’s central bank, will have to step in also.

There’s news this morning that Germany will take over Hypo Real Estate Holding, Inc. thus paving the way for the first German Bank nationalization since the 1930s.

So… Here’s the deal, folks, the way I see it… These countries are dealing with their own problems, and soon they will move to protectionism measures to keep trade at home. This will happen all over the world, and for my money, it will be akin to pushing trade over the cliff. No way trade is able to recover from a blow like global protectionism, until it ends.

So, again, there’s “uncertainty”… And the uncertainty hedge is here to help! Yesterday, I watched gold move higher all day – to the tune of $28 – bringing the price of gold to $970! This morning, there has to be a ton of profit taking, as gold has backed off by $6. I’ll say this again for anyone missing class on two different occasions last week… It appears that the large investors are moving to hard assets, like gold and not to fiat currencies.

The TIC Flows data yesterday surprised on the upside, with a total of net security purchases by foreigners rising to $34 billion, while the previous month’s negative $21.7 billion was revised down to negative $25.6 billion… So, if you average out the two months, we have a net of around $9 billion, which is not enough to finance the deficit… And that just gets added to our financing needs down the road.

So… Europe is having problems with banks, just like here in the United States… But keep in mind that at least Europe was dealing from a position of strength when this all materialized, and the financial meltdown began, while the United States was already deep in the deficit hole.

Today in the U.S. we get Housing Starts, Building Permits, Industrial Production, and Capacity Utilization all for January… And all should continue to show bad things for the U.S. economy. But as I said yesterday with the deficits rising, and everyone becoming comfortably numb with the numbers, they have long been comfortably numb with the rot on the data’s vine here in the United States. It’s not that people don’t care… It’s that they see it, and realize they can’t do a darn thing about it!

OK… GM was at the back door begging for more drugs, I mean bailout money, yesterday… Here’s what the Wall Street Journal had to say about it…

“General Motors plans to ask for access to an additional $16.6 billion in federal aid. The company said it will run out of money by next month without additional aid. GM also said it would close 14 U.S. plants, five more than previously planned. GM also would cut 47,000 global hourly, salaried jobs.”

If I were “the man” doling out the bailout funds, I surely wouldn’t want the closing of 14 plants and the loss of 47,000 jobs on my conscience… But! I wouldn’t write the check, until GM gave me a few things in writing… 1. A plan to pay it back 2. Why they believe this $16.6 billion will “do the trick” for them. 3. What there plans are to get back in the black given that the United States is in a recession, and not buying automobiles!

Well, the President signed the “new and improved” stimulus bill yesterday, and I totally misread what stocks would do with that news. I was fully expecting stocks to rally with the news… But instead we got a 300-point sell off in the DOW… Don’t look now, but the Dow is now within less than a point of its November 20 closing low of 7552.29. Financials led the way for the stock losses yesterday as they took the Nestea plunge once again.

Good thing I’m not even your last pick for a “stock jockey”…

Yesterday’s move pushed the Dow to near a -14% loss year-to-date. Even with the large investors trading in fiat currencies for hard assets (read gold!), these currencies are still in better shape year-to-date than the DOW… And most of the red in the currencies has come in the past week.

Norway leads the G-10 currencies versus the dollar so far this year.

Someone asked me, (they are always asking me about Swiss!) to talk about Swiss again… Well, from the above note about loan loss problems, Switzerland is not going to go Ollie, Ollie Oxen free. They’ve got some real banking problems, and that’s the reason the Swiss franc (CHF) has seen a 9% decline this year…

I got a chance to talk to an old Mark Twain Bank colleague yesterday… Craig Caringer called to check up on my health… What a great person he always was, and apparently still is! Craig is a bond trader/sales guru down in Florida. He tells me there are scant signs of liquidity returning to the markets, but scant for sure… Craig was the absolute best golfer I ever played a round of golf with. He is a Mizzou alum, and we had a blast talking about our Missouri Tigers ranked #10!

OK, I’m watching the euro trade higher this morning than when I first came in… The range is small, though, so it will be interesting to see if it can add to the gains I’ve seen already this morning. The trading pattern for some time now has been for the overnight markets to push the currencies higher, and for the U.S. markets to pull them back down.

There’s a writer out there in writer-land who wrote a piece this last weekend, saying that the banking problems in Europe were too big, and that the euro was doomed. WOW! Those are some strong words! I saw the report, and I just cringed… For we’ve heard these wild forecasts before… There was the so-called collapse of the euro right after its issuance in 1999… There was the so-called collapse of the euro right after Denmark voted “no” to joining the euro… There was the so-called collapse of the euro, after France voted “no” to accepting the constitution… And now this…

I’ll say this now, just like I said during those previous crises… The euro is here to stay, folks… The level of the euro versus the dollar may lose ground because of this problem, but it’s here to stay… So, don’t let yourself get all caught up in the sensationalism going on… Which reminds me of the Y2K stuff… Remember that?

OK… This went on a little longer than I anticipated… So let’s go to the Big Finish together…

Currencies today 2/18/09: A$ .6385, kiwi .5115, C$ .7920, euro 1.2610, sterling 1.4210, Swiss .8525, rand 10.21, krone 7.01, SEK 8.81, forint 242, zloty 3.8350, koruna 23.09, yen 92.60, sing 1.53, HKD 7.7545, INR 49.97, China 6.8375, pesos 14.66, BRL 2.3390, dollar index 87.66, Oil $35.02, Silver $14.05, and Gold… $963

That’s it for today… Again, thoughts and prayers to John’s family. That’s all I’ve got for today… I hope you have a wonderful Wednesday…

The Daily Reckoning