Signs Are Starting To Show. First Up… Banks.

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.

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3 Responses to Signs Are Starting To Show. First Up… Banks.

  1. Kathy Glynn says:

    Hey are you just there to scare everyone? There is a load of “ring true” in what you have to say. Big time. There is also the fact that lots of “financial conservatives” have been wrong on this score for AT LEAST 25 years. And, I’m sure, longer than that if one is a student of same. But wow, for those of us who are actually in the “middle class” it is a confusing time and I will now read you regularly. It is wrong that the public is asked to increasingly “secure” thier own financial future but given so few informed tools to do so. God help those who don’t even have money to save. Thanks Chicken.

  2. chickensmith says:

    I’m glad to hear my posts have peaked your curiosity. I have no vested interest in scaring anyone, especially since I am a conservative. This blog represents my own fears in what I see happening in the market. My point is to alert “middle class” folks like you or me of what’s happening and what could happen. It is a yellow highlighter of the news as I see it. I welcome any valid points to the contrary, as I hope a lot of what I’m saying doesn’t turn out as bad as all the signs seem to indicate. God help all of us.

  3. You make some good points, but perhaps are unaware that the banks are the only industry which effectively allow them NOT to put money where their mouth is.

    Politics aside, Ron Paul has been speaking common sense, along similar lines to your article here. The difference is he discovered the ‘smoke and mirrors’ trick in the 50’s and 60’s – and has been trying to educate the Congress and the People ever since!

    Basically a bank takes in $100 dollars of gold, then lends out…$900 to customers and records $1,000 on it’s books – as assets. Yet they still only have the original $100 deposit in the vault!

    If that were a warehouse with 100 house bricks, you still have a hundred, regardless of how many promises you make. If you promise things you don’t have, outside of banking, that is called fraud.

    HSBC are in most countries in the world, just not Japan. Which means they missed out on a regular booming economy which had to base it’s industry on a much more sound footing.

    Right now there is a problem and the response should not be to dilute an already weak currency by issuing more notes. The notes should be coming back in – but not at the rate of the 1930’s – which caused the depression.

    We do have a bubble at present, but the data isn’t available directly anymore.

    Is this summer bubble just a result of inexperienced staff handling the ship?

    Back in 1928 (and before that in 1907) a similar thing occurred. Big dive in the banking sector, followed by big buy ups and a seeming rise.

    This year is in danger of the same thing happening. Don’t let the Olympics distract you, the price of oil will rise before the year end.

    This is despite political veribage from the politicians and quangos that make up the central banks.

    Theoretically if Fannie and Freddie do go under, the ‘posession is nine tenths of the law’ rule would apply to around half of all US mortgage holders…

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