by Mish

An Asymmetrical Unwind of the Credit Bubble

Assuming we do muddle through, there is still a strong likelihood for a continued asymmetrical unwind of the credit bubble.
Muddle Through Assumptions

  • Housing is going to continue to be weak
  • Commercial real estate is going to be weak
  • Capital impairments at banks will be an issue
  • Unemployment is going to rise
  • Consumer spending will be weak
  • Credit card defaults will rise
  • Foreclosures will rise
  • Corporate earnings will be weak
  • The Yen carry trade will unwind

Implications of that last point are particularly ominous. A carry trade unwind has the potential to affect nearly every equity class. In addition, there are obvious implications on emerging markets and China if US consumer spending is weak.

Asymmetrical Unwind of the Credit Bubble in Pictures

Citigroup (C) Monthly Chart

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Washington Mutual (WM) Monthly Chart

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Corus Bank (CORS) Monthly Char

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Bank United (BKUNA) Monthly Chart

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Ambac (ABK) Monthly Chart

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MBIA (MBI) Monthly Chart

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Lennar (LEN) Monthly Chart

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Horton (DHI) Monthly Chart

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Pulte Homes (PHM) Monthly Chart

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A Safe Bet


It’s a safe bet that several of the companies above will go bankrupt or be taken into receivership. The amount of capital destroyed already has been immense. Many of those charts sport prices all the way back to 1998 or even before. That is some unwind.

With imploding residential real estate, imploding commercial real estates and with Unemployment Soaring While Private Sector Jobs Contract we can expect dramatically rising credit card defaults as well as millions more repossessed homes.

There is nothing remotely inflationary about any of that.

Gold’s Message

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The message behind gold is simple: Gold is acting like money because gold is money. In deflation, the value of money rises. Money is hoarded. Furthermore, in economic turmoil in general, gold is sought as a safe haven. Gold has both of those things going for it.

With leverage everywhere under attack however, there is a possibility of a sharp pullback. From what level such a pullback might occur is anyone’s guess.

Oil’s Message

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The message behind oil is so simple people cannot see it. Here it is:

  • There is a shortage of cheap oil.
  • There is also a geopolitical payback for this administration’s misguided policies in the Mideast.

Unfortunately, people confuse a shortage of oil and misguided government policies with inflation. Those who think inflation is about prices need to read Inflation: What the heck is it?

Oil is a wild card. If Bush attacks Iran oil can easily spike to $200. There would not be anything inflationary about that either. An oil spike to $200 could even trigger a depression.

On the other hand, as the global recession picks up steam and leverage is forced out of 10,000 hedge funds all betting the same way on commodities, oil could easily fall all the way back to $50.

Copper’s Message

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Copper was on a tear with housing. It is still lofty but that chart looks like a massive double top from a technical viewpoint. As the recession picks up steam I would expect sharp pullbacks in copper and base metals. If leverage is forced out of 10,000 hedge funds as I suspect it will, the drop in some commodities might be spectacular.

Corn’s Message

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Corn’s message is about an artificial shortage caused by misguided ethanol policies from this administration. In addition, a rising standard of living in China is increasing the demand for corn. Finally there is the effect of commodity speculation by countless numbers of hedge funds all willing to bet the farm on rising commodity prices.

Technology’s (QQQQ) Message

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Tech’s message is the anti-3-letter-acronym-play. Tech has nothing to do with housing, CDOs, SIVs, CMOs, and other three letter acronyms that are affecting much of everything else. So investors and hedge funds have once again pushed up technology stocks and the QQQQ to insane multiples.

The rise in QQQQ was an asymmetrical rise with chip stocks (SMH & $SOX) in the gutter and a mere handful of stocks such as Apple (AAPL), Research in Motion (RIMM), Google (GOOG), and Amazon (AMZN) accounting for most of the gains. This same lack of breadth in conjunction with “no price is too high” mentality was present at the 2000 peak.

Headed into 2008 the question is: Will a rally in financials lead the market higher or will tech stocks and other “safe havens” start to catch up on the downside?

With a recession on the way and the housing bottom as far off as 2012 (see When Will Housing Bottom?), technology high flyers and various commodities have a lot of catching up to do on the downside as the asymmetrical unwind of the credit bubble continues.

Mike “Mish” Shedlock

Housing Bubble in Norway

Here is a quick post under the theme “Housing Bubbles Around The World”. This one is from Norway, courtesy of reader Espen Johansen.

Tracking the Amazing Junk Bond Bubbles in the US and Europe

In response to Bubblicious Debate: Greenspan Says “Bond Bubble About to Break”, No Stock Market Bubble, reader AC wants to know how to track it.

Central Bank Hubris Bubbles to the Surface

Albert Edwards at Society General commented today on Central Bank Hubris, deflation, and the flattening of the US yield curve. Here are some email snips.

Credit Spreads Widen

Variant Perception reports US Corporate Debt Near Records, Credit Spreads to Widen. Lets take a look

An End to Credit and Debit Cards Starting in India?

India’s crackdown on cash caused chaos as 86% of the money in circulation vanished overnight. Banks could not cope with the increase in demand. Consumers did not turn to credit cards or debit cards as expected.

Dissecting the Fed-Sponsored Housing Bubble; HPI-CPI Revisited; Real Housing Prices

In the wake of rising housing prices a reader asked if I would revisit my March 2102 article How Far Have Home Prices “Really” Fallen.

Subprime Credit Card Losses Bite Capital One: Income Down 20%, Charge-Offs Up 30%

Capital One missed earnings estimates by a mile as Credit Card Charge-Offs Jump 30%

Serious Credit Card Delinquencies Rise for the Third Straight Quarter: Trend Not Seen Since 2009

Every quarter, the New York Fed publishes a report on Household Debt and Credit.

Saxo Bank CIO Bets on Weaker Dollar, Cites Blowout Equity Bubble

Steen Jakobsen, Saxo Bank chief investment officer, changed his macro allocation model today. Here is the email from Steen describing his model changes.