Did you catch the rather shocking quote from Wells Fargo (ASX:WFC) chief John Stumpf yesterday? He told investors, “We have not seen a nationwide decline in housing like this since the Great Depression.” Hmm.
We are inclined to believe him, although you have to wonder about his motives. The housing market has become a bit of whipping boy for financial firms wishing to explain lack-lustre performance, as if poor lending decisions and poorer risk management had nothing to do with it.
Here’s a suggestion. If you have any bad news in your life that you eventually will have to confess to, do it now. That’s what everyone on Wall Street seems to be doing. In the litany of bad news tramping across the front page, your news will be little noticed and soon forgotten. Billion dollar losses are routine. Have we ever seen a confessional earnings season like this?
As for the real economic effect of the ongoing credit market tar baby…it all comes down to the balance sheets. Credit is not money. No one really knows if there is any real economic effect when billions of financial assets traded between banks suddenly become worthless. Easy come, easy go. So what if the derivatives markets collapse?
You will find the credit collapse bleeding into the real economy in two ways. First, and obviously, faced with real losses and upset shareholders, banks will be stingier. The price of money is going up.
Second, if banks are forced to take back liabilities on the balance sheet, they may also be forced to shore up capital to meet regulatory requirements. They can do so by raising cash and shedding liabilities. That means selling assets…which may turn out to be blue chip stocks.
You’d have to look at the financial sector on a balance sheet by balance sheet basis. But we suspect that the financial consequences of the prolonged credit crunch aren’t over. There are more bad loans to write off. And if capital must be shored up, look for more selling of stocks. They could be emerging market stocks or riskier stocks (one way to put the declines in small caps and tech into perspective), or blue chips.
Markets and Money