British-based HSBC Bank has encountered a problem with its US-based lending division. An unexpected rise in sub-prime loan defaults.
“A growing number of debt-ridden Americans defaulting on their mortgages have forced British banking giant HSBC Holdings to increase its provision for bad loans…” -Forbes, February 8, 2007.
“The problems follow warnings from experts throughout last year that a slowing US economy and rising borrowing costs would lead to an increase in bad loans by homeowners” – Gulf Daily News, February 9, 2007
“Signs of credit deterioration from the slowing U.S. housing market have already shown up in recent results of other banks as more borrowers fall behind.” – MarketWatch, February 8, 2007
American based sub-prime lenders such as Delta Financial, Countrywide Financial, American Home Mortgage Investment, Washington Mutual, IndyMac Bancorp Inc., New Century Financial, and Marshall & Ilsley Corporation, some of which are really large outfits, are seeing and will continue to see a rise in defaults. How much of this pounding they’ll be able to absorb is anybody’s guess.
Chicken Smith View:
With such revelations from HSBC, it now becomes a clearer picture as to why their HSBC Direct Internet Savings division is currently offering a 6% interest rates on their savings account. They clearly need the money to bail them out of some really bad investments (sub-prime loans).
Remember the inverted yield curve? I mentioned it in an earlier post or a personal e-mail, regardless, this is a very important indicator of the times we are in. The simplest way to explain it is as follows; money invested for a short period of time earns a higher interest rate than money invested for a long period of time.
In general, a yield curve is not supposed to be inverted. Think of a regular savings account and a Certificate of Deposit (CD). The savings account is liquid and can be accessed at any time (provided the bank is open). Because you’re not committing to keeping your money in the bank for any length of time, the amount of interest you earn will be relatively low compared to a CD which requires the money remain in the bank for a set period of time (ie, 12 months). This is generally how things are supposed to work.
However, when the curve is inverted, the opposite is true. Hence you can put your money in a savings account and earn 6% right now or you can place your money in a CD and earn a paltry 3% over the course of a year. It doesn’t seem to make sense. And it shouldn’t, as Inverted Yield Curves, historically predict a down-turn in the economy.
This, my friend, is what I’m talking about. The signs are everywhere, the defaults, the inverse curves, the outsourcing, the job losses, the weakening dollar, the rising price of gold & gas (just wait), the drop in the housing market, the drop in construction, the loss of manufacturing, the rise in personal debt, the rise in corporate debt, the rise in national debt. It’s all happening at the same time. Each factor is pressing against it’s limits. The good times have never lasted forever, and I doubt this time will be an exception.
What to do?
I’m not telling you to head for the hills, just be aware. Save your pennies, better yet, save your pre-1965 dimes and quarters. Don’t spend your money frivolously, as a dollar devaluation will require more of it to purchase less than you can today. I’m not a big fan of the stock market, and my fear is that it will take a dive right along with the rest of the economy, so a minimal amount of investing in paper currency and stocks would be my recommendation. If you invest in anything, it’s probably best that it be a hard asset, something real and tangible, like a tangerine farm or a chicken coop (with chickens). I’m sure you can come up with better ideas.
Just realize that things are not right, no matter what the press, politicians, your friends, or some bosses try to tell you. Look for the facts. See the signs. If the banks start taking it in the rear, don’t think you’ll somehow escape unscathed.