Sniffing Out the Meltdown

“The Coming Credit Meltdown” is the title of an article in yesterday’s Wall Street Journal.

It is also the subject of most of our daily reckonings. Ever since 2005, if we recall correctly.

That there will be a credit meltdown we have no doubt. When it will be and what will bring it into being, we have no idea. We’ve been waiting…and waiting…and waiting…to find out.

But every day is followed by yet another day just like it. Or, we should say, almost just like it. Just like it, yes, but at the same time different in significant ways. One day has an over-abundant supply of credit; another has not enough.

In the present state – which has now endured for many years – we find we are shut out of major stock and bond markets. They are too expensive…too bubbly…too rich and reckless. Based on today’s prices and yesterday’s history, you really don’t have much reason to expect them to go up; they’re already up.

So, we’ve had to content ourselves with investing around the fringe of the great bubble – in Japanese stocks, for example. They went down for 16 years; now, they seem to be in a growth trend. Mining stocks, too, seem to have some potential. Gold, for example, spent the Reagan Years, the Bush I Years, and the Clinton Years – more than two decades altogether – in a bear market. Now, the price has been rising during the Bush II years and seems likely to continue rising.

We’re finding some opportunities in real estate too – again, on the far-edges of the bubble economy. In London, Paris and New York, everything is too expensive (though, we did buy something in Paris, for family reasons, and against your editor’s better judgment). But, like the Bush family, we’ve found some deals down in South America.

You may be thinking, dear reader, that we have quite an eclectic investing strategy…a little bit of this, a little bit of that – but it’s worked out pretty well for us. You can position yourself the way that we do, by taking advantage of our most exclusive service, the Agora Financial Reserve. With the Reserve, you get all of our best trading services and investment advice – for life.

But come the credit meltdown – and we’ll be able to return to the major markets. Because it is EZ Money that’s holding up prices all around the world.

The Chinese stock market is booming again, for instance. After a close encounter with sanity, the Chinese quickly lost their wits again; yesterday, they bid up prices to a new record high.

And here in London, this week is expected to produce the richest art sale in history – with maybe as much as $1 billion worth of the stuff changing hands at the auction houses.

But every day brings another whiff in the air that the meltdown cannot be far off. Temperatures in the core reactor are rising.

We read this at MarketWatch:

“The outlook for U.S. home building is the worst in 16 years, the National Association of Home Builders reported Monday. The builders’ housing market index fell by two points to 28 in June, the lowest since February 1991.

“Said David Seiders, chief economist for the builders: ‘We expect housing to exert a drag on economic growth during the balance of 2007.'”

Meanwhile, the Mortgage Bankers Association reports that a record number of homeowners are set to lose their houses through foreclosure, while delinquency rates on subprime loans are still rising. Moody’s cut its rating of 131 mortgage backed bonds and says it is looking at 247 more of them.

And down in Miami, the temperature is heating up in other ways. Alan Farago writes that police arrested a couple having sex on a construction crane. It was not immediately clear, to us anyway, what their crime was, but we’re sure the fuzz will think of something. These days, nearly everything is illegal, unless it is specifically authorized.

“For the foreseeable future,” Farago continues, “renting out crane cabs for sex would generate a higher percentage profit than selling condominiums in unfinished buildings. What is happening to Miami real estate markets and its skyline dotted with cranes atop unfinished condominiums is both predictable and terrifying…damage in Miami’s condominium, mid-price and upper price housing markets is just beginning, cuts in tax revenue piled atop declining tax base are setting the stage for recession and social unrest. The billion-dollar Boca Development – that focused on coastal condos – is trying to shed hundreds of millions of assets. Production home builders are burning cash under conditions of tightening credit and ballooning inventory.”

A credit meltdown has already begun in Miami’s condo industry. Will it come soon, to a neighborhood near you? When will we get a chance to get back into mainstream investments at bargain prices? We will soon see…

Bill Bonner
The Daily Reckoning
London, England
Tuesday, June 19, 2007

More news:


Addison Wiggin, reporting from hot and humid Charm City…

“A Bear Stearns-sponsored hedge fund is revealing the true underbelly of the subprime bust. Last year, the High-Grade Structured Credit Strategies Enhanced Leverage fund (doesn’t that just sound greasy?) borrowed $6 billion from various banks to begin investing in packaged securities comprised of subprime mortgage debt. After losing 23% in the first 10 months of the fund’s existence, investors are asking for their money back, and so are the banks. But as you might guess, there is no money to give back.

“Yesterday the fund’s three biggest lenders, Merrill Lynch, Citigroup, and JP Morgan Chase, all asked Bear Stearns to fork over more capital. But Bear Stearns, as it turns out, is not the only one behind the eight ball…”

For the rest of this story, see today’s issue of The 5 Min. Forecast


And more views:

*** The Financial Times, today, heralds “the New Capitalism” in a special news analysis. We read it carefully to find what is so new about it. What we discovered is that it is new in every way, except the essential ones.

Brave New World? New World Order? New, New Era? New Deal?

Or the same old false shuffle?

The forthright answer is yes; it is all those things.

Everyday is a new day. And every day is still much like the one that went before.

What is new about today’s financial world is that it is much more worldly and much more financial than the old one. A big investor in Germany no longer looks only at his portfolio of German stocks. He is likely to own stocks overseas too – maybe even in markets that didn’t exist when his father was investing. If he had told his papa that he was going to buy Shanghai stocks a quarter of a century ago, the old man would have wondered where his son was getting drugs. Back then, even buying stocks in East Germany was a fantastical idea. The East was still under the control of communists. And it was so until 1989, when Ronald Reagan urged Mr. Gorbachev to “tear down [that] wall.”

Now, Reagan is dead, and his successors are putting up walls of their own. But the barriers against money flows have been falling for the last two decades.

Not only can an individual investor diversify into different markets, the financial industry itself has turned into a Babel of cross-border transactions. A large takeover might involve a target in one country, a buyer in another, backed by financing from several others…organized by multi-national financial intermediaries…and listed simultaneously on several major markets.

This new globalization means that problems and risks are less local than they used to be. Those with sunny dispositions will point out that it is a little like the globalization of grain markets in the 19th century. Globalization of the agricultural sector helped prevent local food shortages. With the advent of cheap transportation, people in the afflicted area simply bought the food they needed from an area where crops were bountiful.

But dollars do not spring from the earth like cabbages. And one country may have a drought, while another enjoys more rain than usual. But market conditions tend to be similar almost everywhere. When it rains credit in the U.S.A., it tends to pour down cheap dollars everywhere. Just look at the stock charts. Every major market has had rising stock prices for the last four years. And look at credit conditions. Yes, there are anomalies…some of them rather dangerous…but when yields rise in the United States, credit becomes more expensive throughout the world. A crisis in the credit market would almost certainly be felt almost everywhere.

The “New Capitalism” is not only more global than the older form, it is also more focused on finance. Imagine a man who makes his living digging ditches. He may hire himself out at a daily rate of, say, $25. The old capitalists would have paid no attention to him – he is just one of millions of small entrepreneurs getting by in life.

But today’s financial hustlers will spot the opportunity. Let’s take him public, they will say. We’ll raise his daily rate to $30…pay him his $25…and the rest will be our “profit.” We’ll sell shares to the public at a P/E of 20…let’s see, 20 x $5 x 250 days per year = $25,000. All of a sudden, the ditch digger has a capital value of $25,000. Then, they borrow $20,000 from a hedge fund…and pay it to themselves for structuring the deal. Now, the hustler has $20,000 in his pocket; the hedge fund has a high-yield bond worth $20,000; the shareholders have $25,000 worth of stock; and the poor man is still digging his ditches.

Then, an even more ambitious wheeler-dealer will come along and decide to “roll up” the whole industry – bringing the ditch diggers together into a multi-national consortium. Now they can all do cross-border transactions…including derivatives. And now ditch-digging is a major business, suitable for large investors…with more investment coverage and a higher P/E ratio. Soon all the world’s banks, pension funds, insurance companies, and hedge funds have some of the ditch digging paper – debt or equity – and billions in fees and commissions have been squeezed out of ditches by the financial industry.

That, patient reader, is the way (the world-over) that industries and assets are now being bought, sold, refinanced, leveraged, re-jigged and resold. In the old days, companies went to investors or to banks for capital and cultivated a relationship with them that was long and fruitful. Now, it’s all wham-bam-thank-you-ma’am capitalism. Inquiring capitalists now only want to know one thing – how fast can we do this deal? How many points can we get out of it and how much leverage can we get? And whom can we dump it on, when we’re done?

“But wait a minute,” you say. “Investors aren’t stupid. The buyers are going to want real value, aren’t they? And the lenders are going to need some reliable standards in order to lend, no?”

Oh, dear, naive reader…this is the New Capitalism, remember? And New Capitalists do things differently.

“Use of ‘cove-lite’ deals spirals in spite of loss-exposure warnings,” reports the Financial Times today. “Deals where borrowers give no guarantees and lenders ask for none are ‘snowballing,'” it adds, gravely. Then it deadpans, “This makes it difficult to monitor the risks attached to instruments created from pools of loans, such as collateralized loan obligations.”

What does the Financial Times take us for? Of course, that is the whole idea.


The Daily Reckoning PRESENTS: The time before a presidential election is always a bit like a dog and pony show – but this time around, the theatrics seems to be starting early, and with a sense of urgency. James Howard Kunstler explores…


At the beginning of the month, CNN was frantically advertising a set of “live” debates between the presidential candidates – Democrats Sunday and Republicans Tuesday, with loads of “color commentary” before and after. This big media show was staged in New Hampshire, whose once-significant early primary election has been reduced – like so much else in our national life – to merely symbolic status now that fifteen other states have crammed theirs into the super-duper primary day of February 5, 2008. Since I believe that a collective unconscious operates among groups at all levels of the social hierarchy, including the national level, this extraordinarily early staged contest says a lot about how insecure we must be about our leadership, about our place in the world, and about where we are headed.

US election campaign periods have never been regulated in terms of a set number of weeks or months, the way some other nations do. But the 2008 US election is the first in my lifetime that ramped up to such an intense and formal level of activity so far in advance. If nothing else, the amount of money that the candidates need to raise – and burn through in airplane charters, staff salaries, and staged events – puts them all in jeopardy of corrupting themselves to the various donors desperate to preserve their prerogatives under the status quo.

What everybody seems to sense semi-consciously is that the status quo is dragging the United States into an abyss. But so far, no one among the declared candidates has been able or willing to express a coherent view of what it is in the status quo, exactly, that is doing the dragging. One undeclared figure, Al Gore, has presented the climate change part of the story and pretty much stopped there – perhaps sensing that if he ventured to offer views on anything else, he’d start sounding like an actual candidate. But my guess is that the really important issues will never be articulated in the course of this campaign because they are too painful for the public to hear. And so all the premature debating and posturing will amount to a smokescreen of words meant to conceal the fact that we are a nation without confidence that any leadership can guide us into a plausible future.

In the background of all this sits the pathetic figure of President George W. Bush. He’s pathetic because he has been in a position – not facing reelection – to tell the American people the truth, but he’s shown no capacity for apprehending it. If he represents anything, it’s the idea that the truth is optional, that if reality is disappointing, just create your own reality.

Here are the some of truths that we seem unable to face:

Very soon we won’t have the fossil fuel energy supplies to run the U.S.A. as it is currently set up, and no combination of wished-for alternative energy schemes based on so-called “renewables” will allow us to keep running it, either. Meaning, that we’d better start making other arrangements immediately for how we occupy the landscape, how we grow our food, how we move people and things from place to place, and how we reconstruct an economy consistent with these new arrangements.

The longer we put off making these new arrangements, the harder we’re going to slam into a wall of reality, and when it occurs a lot of things will shake loose in this country. It will become self-evident that the things we’ve invested all our wealth in will not retain value – especially suburban real estate and all the activities related to car dependency, from the interstate highway system to national chain retail. It will also become obvious that we can’t base our economy on building more of this stuff.

Our current military adventures in the Middle East, are predicated largely on keeping the old arrangements going. We’re in Iraq because we built Dallas, Atlanta, Orlando, Houston, Phoenix, Los Angeles, and Long Island the way we did, and the only way we can hope to keep these organisms going even a little while longer is to keep open our oil supply line to the Persian Gulf. The truth is, these organisms will not survive the oil-scarcer future in the form they’re in. The American people need to come to grips with this. No amount of chest-thumping around the globe will change it. In any case, sooner or later we’ll exhaust our military and bankrupt ourselves trying to project our influence into these places overseas – meaning, sooner or later we will withdraw back into our own hemisphere. I wonder if Wolf Blitzer of CNN will ask any of the candidates, what happens then?

A basic rule of reality is that you can’t get something for nothing. Sooner or later the financial sector will have to come to grips with this rule, meaning that that debt is not wealth and the revolving reallocation of debt in the form of credit does not amount to wealth creation. The United States will arrive at a magic moment when the full force of this reality reasserts itself, and it is likely to make itself manifest in the collapse of the entity most closely associated the idea of wealth: the dollar. Assets vested in the dollar’s legitimacy will follow its fate. The implication is that an awful lot of the presumed wealth held by Americans could vanish into thin air. Do any of the candidates for president recognize how this works, or have any idea how much disorder this phase change will send thundering through our sociopolitical infrastructure?

With the election campaign revving up so prematurely, it is very possible that all the candidates now in the arena will exhaust, bankrupt, and even disgrace their campaigns as they desperately pirouette around these painful truths, and that none of them will survive the process with their political legitimacy intact. In the meantime, unsettling events on the outside will intrude on the protective bubble in which the public has taken shelter -more bloody disturbances around the Middle East, dangerous shenanigans in the financial markets, untoward weather events in vulnerable places.

The premature election campaign, with all its reassuring televised ceremonies of pre-cooked debate and formal posturing, may end up having the opposite of its intended effect. It may expose the more frightening reality that our political system is not up to the challenges before us. And then what will we do?


James Howard Kunstler
for The Daily Reckoning
June 19, 2007

Editor’s Note: Don’t forget – you can hear Mr. Kunstler (along with all of your favorite DR editors) speak at this year’s Agora Financial Investment Symposium in Vancouver, British Columbia. This year’s theme is “Rim of Fire: Crisis & Opportunity in the New Asian Era” – and it’s your first look at investment opportunities, global market concerns, and the best investment bets across the globe.

James Kunstler has worked as a reporter and feature writer for a number of newspapers, and finally as a staff writer for Rolling Stone Magazine. In 1975, he dropped out to write books on a full-time basis.

His latest nonfiction book, “The Long Emergency,” describes the changes that American society faces in the 21st century. Discerning an imminent future of protracted socioeconomic crisis, Kunstler foresees the progressive dilapidation of subdivisions and strip malls, the depopulation of the American Southwest, and, amid a world at war over oil, military invasions of the West Coast; when the convulsion subsides, Americans will live in smaller places and eat locally grown food.

You can get more from James Howard Kunstler – including his artwork, information about his other novels, and his blog – at his Web site:

The Daily Reckoning