At the risk of sounding like an alarmist I’m going to reveal a few things that’s been bouncing around my head ever since the Fed abruptly dropped rates by 75 basis points that sunny January morning (hey it was sunny in Phoenix). I’m normally not like this, but it hasn’t helped that there are two foreclosures in my neighborhood and one bank owned property down the street. And I’m worried about one other neighbor -the weeds keep growing and I haven’t seen them put garbage out for a few weeks AND the lights are never on at night. Did I say I was going to ramble a bit here? Again kind of unusual for this blog.. but I digress…
Here is my line of thinking. Gold prices are highest since the early 1980s. The old rule is that the price of gold is like a canary in a mine, and the higher its price moves the greater the economic woes. Oil is peaking, banks are losing money, the war keeps draining tax dollars and so on and so forth. The news is just bad, everywhere you look, bad, bad, bad. Then, I read this today at the Financial Times:
US banks have been quietly borrowing massive amounts of money from the Federal Reserve in recent weeks by using a new measure the Fed introduced two months ago to help ease the credit crunch. The use of the Fed’s Term Auction Facility, which allows banks to borrow at relatively attractive rates against a wider range of their assets than previously permitted, saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February.
So, basically the Federal government is propping banks up. The article later on tries to give some kind of explanation. I don’t buy the spin folks. I just don’t. With the Fed set to further reduce rates in it’s up coming March meeting, the Feds are obviously seeking to keep liquidity up because the credit squeeze is spreading and there are potential problems in “opaque corners” as the article references.
So, my question now is how far away are we from a collapse of the unsecured consumer debt market (credit cars, auto loan etc.)? How about commercial property? Funny, that I should raise this issue because Professor Nouriel Roubini of New York University’s Stern School of Business has created a list of the 12 steps to economic collapse - the mother of all meltdowns! Prof. Roubini accurately predicted the current situation we’re in way back in July 2006, so he’s not a fear monger. Fortunately, he supposedly has a lit of cures, but I haven’t read that yet.. (did I say this was a ramble?)
So, anyways, I’m concerned. The Feds know there is something coming down the pipeline that will cause massive harm to the economy, I think they are thinking depression not recession. That is the only rational explanation for the 200 basis point drop in rates (in a few months). There has to be something they see happening and that is why they are breaking from traditional US policy and “propping” up banks.
My question is: What is this? What is going on? Did the ship hit an iceberg and they’re trying to fix the hull? Or, are we about to hit an iceberg and they’re trying to steer clear? As I stare at the weeds growing in the foreclosed homes in my neighborhood I keep thinking… what… what.. what…. is going on? Am I going off a cliff here? Please leave a comment so I can know… Or do you suggest I go to a Obama rally and get inspired… oh wait I hear you faint at those things… nah… not my cup of tea….. anyways.. or should I just buy gold?
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on Feb 19th, 2008 at 5:48 pm
[...] Am I Crazy or Are We Headed For A Catastrophic Financial Meltdown?, by Shailesh Ghimire. [...]
on Feb 19th, 2008 at 7:22 pm
[...] then, I read Shailesh’s concerns about the potential for a catastrophic financial [...]
on Feb 19th, 2008 at 8:37 pm
Hi Shailesh,
I too read “the 12 steps to economic collapse”, and I am seeing the same signs as you are in most neighborhoods. It doesn’t make anyone feel very confident.
However, I think Phoenix is a different animal than most parts of the country. We’re not centered around a particular major employer or industry; it’s our weather that attracts over 100,000 net new residents every year. And weather doesn’t care about the economic conditions. I don’t want to drink any special kool-aid, but I don’t think our local economy is going to get as bad as people are predicting (just as I didn’t believe the hype that Phoenix real estate would appreciate at 2005’s rates for an extended time.) - it’s never as bad or as good as people think.
It might get really ugly over the next year, but that won’t stop people from getting married, or divorced, or having babies, or moving here, or many of the other key reasons people buy houses. And eventually the cycle will move back towards the center…
I’ve written a couple of posts on a similar topic:
More about the Fed’s 75 basis point cut
and My Common Sense Market Forecast
on Feb 19th, 2008 at 10:55 pm
I don’t think you are crazy. Personally, I believe that the general public has no idea in what danger the US economy and subsequently the global economy is. Next time, at the coffee shop, just ask somebody if he or she knows what a credit default derivative is, and I bet you won’t get an answer.
If you ask me, the Titanic is on collision course and the crew is trying everything to avoid the iceberg. The only problem is that the ship does not turn on a dime, its too close to steer completely clear and a collision is inevitable. Passengers on the ship just noticed that something is wrong but are still enjoying the cruise while the captain is getting ready to brake the bad news. Hopefully the crash won’t be too hard and the ship as enough lifeboats to accommodate all passengers.
It may not be a bad idea to buy some gold.
Now I am getting paranoid again and hope that I am sooo wrong…
on Feb 20th, 2008 at 8:15 am
I don’t think you’re crazy but I think you (and I) are lending in the eye of the hurricane; our perspective is awfully skewed because of the carnage we witness daily.
Complete deflationary collapse is possible but somewhat improbable. As the rest of the world experiences our woes, lower oil prices and a stronger dollar will materialize.
on Feb 20th, 2008 at 8:59 am
Chris B,
I agree that Phoenix is a different animal. I’m not so much concerned about the local economy and the local market as much as the global picture of the financial markets and the stuff that is happening there. I think an aura of invincibility has overtaken the manager types in Wall Street. I think the banks are over extended. I think the Fed is flying blind. So, that is causing me worry. Just a thought. I hope I’m wrong. I hope very much so actually.
Chris S,
Yes, as I said to Chris B above, those who should “know” are flying blind right now and I can forgive the average Joe about not knowing. I think there is a disconnect between earnings/savings/consumption and this imbalance at the micro level is being played out at the macro level. A government that continues to spend money like there is no tomorrow, a market culture that thinks the old rules don’t apply.
Brian,
I think you’re right. I get about 5 e-mails a day from borrowers in distress. I have taken about 5 applications a week where the borrower is over extended, upside down or both. So, maybe being in the line of work I am in I am getting a first hand look at the real financial health of the economy and it’s not pretty. If this is the eye of the hurricane I can only imagine what it will be like once the hurricane has passed.
on Feb 20th, 2008 at 4:05 pm
I wish I had brought a ton of gold 18 months ago… just like Kevin at Housing Panic suggested we all do. If I had I would have tripled my money in 18 months. But then he’s a raving lunatic right?
The time to really throw money into gold has probably passed. I know this because I’ve seen a few “OMFG Look at the price of gold?!?!” news reports on the evening news. Meaning, it’s too late to catch that train.
As to what to do… accept that income may be spotty at times for the next few years, but that what you do will lay the ground work for the up time after that.
on Feb 20th, 2008 at 7:33 pm
Athol,
Very true. There is a local morning talk radio host who has been telling people to buy gold for at least three years. He’s been saying the exact same thing for that time period and has been predicting this economy. I laughed him off back then. I wish I had listened. But it’s too late now…..
on Feb 21st, 2008 at 10:12 am
[...] question of a great blog has been bouncing in my head since then. (There have been a few other very weird things bouncing in my head lately, so I’m a bit groggy at times). I’ve been asking myself what makes a blog great, brings [...]
on Feb 21st, 2008 at 4:52 pm
I’ll risk being the contrary viewpoint here.
Shailesh, you said — I think the Fed is flying blind.
That’s where we take different paths. I think Bernanke has handled this the same way he implied he would in his book. He’s possibly one of the world’s foremost experts on the Great Depression, what led to it, what triggered it (unnecessarily mind you), and what made it orders of magnitude worse than it needed to be.
Long story short, he’s been doing exactly what should have been done back in 1926 or ‘27. It’s his core belief the real estate collapse of ‘27 was the first falling domino. Furthermore, it’s my opinion, based upon his actions as Fed Chairman, he believes it’s deja vu all over again.
Fortunately we should see one way or the other, maybe by Labor Day, whether the light at the end of the tunnel is the beginning of recovery or a train barreling right at us.
As final thought, if we were indeed headed for the mother of all meltdowns, would multi-billionaire’s be investing in the bond insurance business?
on Feb 22nd, 2008 at 5:43 pm
[...] Shailesh Ghimire has Am I Crazy or Are We Headed For A Catastrophic Financial Meltdown? [...]
on Feb 23rd, 2008 at 9:00 am
Jeff,
Thank you for taking the time for such a constructive comment. I read a few weeks ago about the “Education of Ben Bernanke” and I do recall his expertise being the Great Depression. That was a great piece in The Times but I never finished reading it. I need to go back.
I think what you say is very true. Perhaps the 0.75%drop in rates was a difference in style between Greenspan and Bernake - maybe it shows Bernake as being more confident in his actions. Whichever is the case I certainly am not at ease at the moment with the current situation.
I know what I’ll be doing more of in the future. That is reading your blog to balance out my thinking.
on Apr 18th, 2008 at 4:09 pm
[...] Shailesh Ghimire has Am I Crazy or Are We Headed For A Catastrophic Financial Meltdown? [...]
on Jul 7th, 2008 at 7:09 pm
Hi Shailesh,
Just a perspective from Oz.
Our ecomomy has been booming for a while, but like the US, private debt is at levels not seen since before the great depression. We have a 2 speed economy. Mining is booming thanks to China et al. And the rest of the economy is challenged. Official Interest Rates are 7.25% and mortgage rates are about 9%.
Fortunately Public debt in Oz is moderate.
The sharemarket is expecting a signifiacnt slowdown (it has dropped 20+% since October 07).
So we have only got a few breezes from the Hurricane but expect it to start picking up speed. The average Joe in the street will soon see their retirement savings returns for the 2007/08 year and will not be happy (average of 10% down).
There is debate about whether we are immune from a US downturn given our trade with Asia now.
I don’t think we are by a long shot. Who is going to buy all the stuff that China makes?
Then there’s food and fuel. The food situation is really scary. Our food bowl (the Murray-Darling basin) is drying up
There is consensus that we need to tackle climate change head-on, but nobody wants to pay for the cost of change.
I think we need our politicians to start giving it to us straight.
There are no quick fixes. We have to change things, and it’s going to hurt, and it’s best if we share the pain.
Instead of waiting for a world war to sort out the economy, let’s start a world war on non-sustainable living.
We need forth-right far-sighted political leadership of the sort that we haven’t seen for decades.
How’s that for a ramble.
Cheers
Tas
on Jul 8th, 2008 at 7:21 am
Tas,
Thanks for an almost poetic set of ideas here. You raise some valid points. A lot has happened since I wrote this post in Feb. With some bad news coming from the financial markets and gas prices through the roof, things are not looking good. The mood in the USA is very negative. I believe voters will take it out this November and there will be a major shake up in the power structure. For better or worse.