How far are we down the rabbit hole?

how far into the credit crunch are we?How far into the credit crunch and liquidity crisis are we? Banking stocks would have you think that it’s all upwards from here on in but how can you be sure? The Regulators in the USA were prepared for 100 to 200 bank closures in the 12-24 month period from the end of 07′. Thus far we have only seen eight actually close.

The total amount of assets involved is €38 billion. That might not seem like much when talking about bankers money, but keep in perspective that its 38,000 units of a million, its twice the size of AIB, its more than all of the lending market in Ireland for the whole year of 2007. And of course this is just the portion that have gone under, the actual ‘writedowns’ that other banks are surviving are (when added together) much larger, which means that some banks are just better able to take their blows than others. The worrisome thing in some cases is that the amount of assets under control was not much greater than the amount held on deposit (First Integrity Bank and First Heritage Bank both had about 90% deposits versus assets), actually let me rephrase that, there was 90% that their ‘balance sheet’ said it had on deposit, the actual money had obviously been lent out and was not available to them in a liquid form.

irish house pricesPriceWaterhouseCoopers did a report in the U.K. and if you think the banks took a hit then look no further than British society to get an idea of another group who are getting hit, namely Joe Consumer. PWC believe that £600 billion (€766 billion euro) has been wiped off the values of the total wealth reserves in the UK and they figure that the figure will rise to somewhere between £12 – 16 billion sterling. Talk about dizzy phone number sums in losses. £200 billion was lost on the stock market, the other £400 billion (£400,000,000,000 just so you can see it with all the zeros) is property related.

financial losses 2008In another report half of home owners in the UK believe that their home will have dropped in value by next year. In that report they state that ‘sellers who don’t have to sell are adopting a ‘wait and see’ leaving only the ‘motivated’ sellers in the market and it is them who are accepting large price drops due to the decreased number of transactions’. The interesting thing for a seller trying to ‘hold out’ though is that it has the inverse effect of meaning that when they do get around to selling (unless it is in many years time) they will probably lose more than if they took the initial hit.

There is a huge derivatives unwind happening in the world, de-leveraging, de-gearing, call it what you want but there is still some distance to go until we see the ‘end’ of the financial issues which are focused on the financial sector. The interesting thing is that the financial sector (love it or hate it – that’s down to your personal opinion) underpins almost every aspect of industry in the world, even microsoft has a bank account (I have the pin code if you want it, it’s ‘666’… oops, forgot the last digit… which is also a 6[mini-rant over]).

derivatives unwind carry trade unwindIt is our opinion that we have not seen the end of the current issues, and we also feel that financial institutions have not all been totally forthright in what they have told the market for fear of the repercussions it may have, for reasons such as these we believe that there will be several more ‘confessions’ by banks and that in turn, due to credit and sentiment that property prices will fall further through 2008, with some stability in 2009 (although ‘stability’ can mean ‘no further falls’ we are not saying prices will rise). Until the wider economy and sentiment experience some turning point this is landscape we feel will exist for investors in the short term.

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