Other negative economic factors confirmed

by | Jan 30, 2001 | Archives

Recently I wrote about negative economic factors that can help make you rich.

I have been warning for months that big U.S. banks could be headed for trouble. I enhanced that warning in my last World Reports, which was sent to my International eclub members last month. Here is what I wrote.

“There are negative economic factors; U.S. corporate earnings, retail sales and production are off. This includes the rising problems in U.S. banks and a dangerous house of cards (see my Aug. 2000 WR or go to https://garyascott.com/worldreports/) built by government backed home loan agencies Fannie Mae and Freddie Mac. Now there is more bad news. The Economist’s October 28th article (www.economist.com) page 65 “Banks In Trouble” shows how big banks are messing up. One main problem is the huge lending exposure to telecoms firms. This concentration risk is so grave a special committee has been formed to see how bad it is.

November 2nd USA Today (Money section B, page 1B) wrote “Long Distance Phone Carriers Hanging” states that vicious competition and a tech revolution are pushing traditional firms out of the loop. A revenue drop from 41.2 billion in 1998 to only 40.2 billion in 2,000 is the first tremor in a seismic shift analysts say could end the telecom business, as it is known. Is this a troublesome connection?

Loans to telecom companies are only one of the growing problems for big banks. Bridge loans to companies with debt of three and a half times equity or more have grown and deteriorated at the same time. In 1993 7% of new syndicated loans were leveraged. By 2000 this figure rose to 36%. Recently the Fed and FDIC noted a sharp deterioration in these loans. Loans that may be problematic have shot over $100 billion mark and the worst (called classified) total $64 billion. Lead managers for many of these loans are Bank of America (over $50 billion) and Chase/JP Morgan (over $40 billion). A recent report by Keefe, Bruyette & Woods, a firm specializing in banks, found it interesting so many chief credit officers and other senior bankers have decided to retire or resign recently. This has happened while the U.S. economy boomed. What happens when the economy slows down? We have already seen industrial giants (Xerox was downgraded below investment quality December 5) fall. What shock waves will hit Wall Street if a big multinational bank is downgraded?

Such a seismic hit on the market could actually be good. Shakeouts are needed cleansings. Any time any moron can become rich just buying shares because they always rise, a society and its economy are in trouble. I witnessed this in Hong Kong when I lived there in the 70s. The Heng Seng Index was rising like a skyrocket. From 100 it eventually rose to 18,000. In the first heady days, the market never broke so investors did not know that up has an equal (called down). All the local Chinese jumped into equities. Everyone was (or thought they would be) a millionaire. You could not get a taxi. You could not get an Amah (maid). You could not get any kind of service. Everyone was at the stock market.

Everyone was buying from everyone else at higher and higher prices. Everyone thought they were getting rich. Does this really make sense? If you think so, please come and spend a few days on the farm with us.

Wealth must be a reflection of service rendered to society. If this reality is askew, the society (and its economy) is ill. Expect a sneeze called a severe market correction, tightening of the economy and maybe a recession. Plan to hear and see a lot of doom and gloom. Feel glee! This is the time to genuinely become (not just feel) rich.

This does not mean start investing wildly. Only invest in things you understand, good shares at good prices; ever, anytime bad or good. The odds just improve in bad times. If you don’t see bargains now, don’t push. Clean up your act. Get in a liquid position. Be extra careful. Spread money around. Shift accounts so you don’t have much over the FDIC $100,000 guarantee in any one name in any one bank in the U.S. Be more careful about bank quality (bigger is not always better). Hold assets in several stable countries with banks backed by government guarantees.

Keep your eye on gold and silver. Congress is spending money based on a boom as we move towards a bust! A crisis could create dollar problems while the euro and yen are also fundamentally weak. This would create currency instability leaving few stable avenues. Precious metals still retain all the features of real money. History suggests it is time for a rise in gold. When the yellow stuff goes up, silver usually follows.

Look at real estate. Property is a favorite hedge against currency turmoil plus there could be a drop in real estate demand, which creates opportunity. But look for bargains as the real estate markets depress.”

Now the banking crisis has been confirmed. A front-page story in USA Today recently proclaimed that California utility companies were in such a crunch that they might default. The article so stressed that Bank of America could be in trouble over this that the bank issued a statement saying they were not (when a bank has to do this-this is serious). Bank of America was named the bank with the hugest potential defaults and J.P Morgan also mentioned.

Watch out for a big upcoming economic crunch and get ready to profit from it. Now is the time when smart investors can start to get excited about investing!

I’ll send you more next Friday. Until then, good global investing!