Way back in the last decade, the world fell apart, financially and economically. The unraveling brought many countries to the brink of financial ruin and, for many folks, that was exactly the case. The reasons for the “Great Collapse” are many, some subtle and some not so. One of the reasons on the “not-so” side of things is that everyone, and I do mean everyone, overleveraged, borrowed too much money, built too much debt.
- The financial crisis of 2008 and 2009 emanated from ultra-loose lending standards that led to a collapse of the subprime mortgage business and the downfall or near-downfall of some of the industry’s biggest names.
After the financial meltdown, banks tightened up lending, and rightfully so, as governments around the world clamped down hard on their greedy and self-abusive trading practices. This created a cash-on-hand problem for the banks. Caught in a trap, banks had no other choice but to revert to what banks did before the government unleashed their greed by tearing down the wall between commercial banks and investment banks and eliminating the 6:1 ratio of debt to cash-on-hand.
- In short, banks will become banks again in order to keep the revenue coming in. Banks will have to start lending again in order to keep their stock from collapsing.
I wrote the above some three years ago, and the transformation has been slow, but it is happening. The price paid, however, has been sluggish economic growth, as borrowing money, or leveraging, is a key component of any economic system.
- Still-tight lending standards explain why the U.S. economic recovery was so lackluster in the first few years after the recession ended.
The lending game is changing now as lending comprises a larger percentage of revenue streams for banks and trading comprises less. Banks have become banks again in the traditional sense of the word, and they are now competing for lending business.
- Lending conditions, particularly for businesses, are finally beginning to thaw after five years of financial lockdown, according to the latest Fed Senior Loan Officer survey.
As I pointed out recently, small-business lending has been steadily increasing year-over year, reaching yearly highs this year, and as we have seen with houses and cars, lending is alive and well. Lending is, for all practical purposes, the only way cars and houses get sold. Speaking of houses selling, the potential for the quasi-private lending firms of the US government collapsing is fading, which bodes well for taxpayers, the housing market, and the US economy.
- Freddie Mac, the No. 2 provider of U.S. mortgage money, posted its second-largest quarterly profit in company history in the first quarter due to rising home prices, falling mortgage delinquencies and increased refinance activity.
Today, in this new decade, countries and individuals are finding their way back from the disaster of the Great Collapse and the stock market reflects that. The stock market rise is not only about the Fed’s easy money policy; it is about company valuations, earnings, economic fundamentals, consumer spending, and perception. Regarding perception (and I cannot resist), the wild-eyed wanderers screaming from the hilltops are fewer in number and far less heard these days, but, alas, two of the crazier ones are still shouting and the breathless media is still amplifying their voices.
Roubini: No Stock Bubble but Crash May Come.
- Stock aren’t in bubble territory as yet, but a “huge rally in risk assets” over the next two years puts markets in danger of a big crash, renowned economist Nouriel Roubini said on Tuesday.
Japanese Rally Will End in Tears, Warns Peter Schiff
- As Schiff sees it, the printing ends in tears for both the U.S. and Japan, the only difference is Japan’s in better shape to handle the fallout.
“Over the next two years” is really going out on a limb for Roubini and Schiff, well, he has been screaming his message for years now. In any case, they are both wrong, as money is flowing again and the global economy will pick up steam, and, then, Schiff is right here, inflation will come, but not just yet. There is still some rebuilding going on and the market is going right along.
- German industrial output rose 1.2% in March, beating economists’ expectations of a small decline, and posting an increase for the second straight month. The DAX surged to a new record high Wednesday.
Trade in the day; Invest in your life …
