December 2006 - Dollar / Real Estate / Stock Markets: US consumer's insolvency, a catalyst of the impact phase of the global systemic crisis


- Public Announcement GEAB N°9 (November 16, 2006) -



December 2006 - Dollar / Real Estate / Stock Markets: US consumer's insolvency, a catalyst of the impact phase of the global systemic crisis
The American mid-term elections have now passed and, only a week later, as announced by LEAP/E2020 in GEAB N°8 of last October 15, the “euphorisation” of US voters/consumers and world financial players seems to have already passed wit them. The development process of the global systemic crisis has resumed its course, artificially stopped last July due to the upcoming mid-term elections, as shown by the recent changes in the Dollar’s value and by the latest US economy indicators. In parallel, a series of topics which had curiously disappeared from the pages of financial media these last months is reappearing, such as the end of the “carry-trade” based on the Yen (1), increasing fears of the risk of implosion of the market for derivatives and “hedge funds” (2) and of course the uninterrupted fall of US real estate (3) with its procession of negative consequences on American growth (4) (all these developments generating from now on increasing reflection as to the health of the US banking sector, one depending more and more on unsound debt) (5). For the team of LEAP/E2020, all these trends, which mark the beginning of the impact phase of the global systemic crisis, have a common catalyst, and that is the insolvency of the US consumer in the framework of a generalized degradation of the quality of credit to all US financial and economic operators (6).

Chart 1 – US Household Debt
Chart 1 – US Household Debt
For more than five years the American consumer has been the “cash-cow” of US growth, contributing more than 70% to the resulting progression of the United States economy. Stimulated by the easy money policy promoted by the US Federal Reserve in order to avoid a catastrophic recession feared after the explosion of “internet bubble”, the US consumer rushed into a frenzy of purchases of consumer goods. Encouraged by banks and the whole US financial system, he exceeded his own financing capacities and plunged since 2004 into generalized debt (7) and into a situation not seen in the United States since the dip of the Great Depression post 1929, namely a negative saving rate (8).

The Federal Reserve, the Bush administration and the republican Congress, as well all the financial and banking sectors of the country then fed the fiction of a continuous and fast enrichment via the development of the “real estate bubble” which convinced the majority of the country’s middle class, including its least ‘well off’, to rush into a strategy of purchase, and often of speculation, in real estate. In parallel, the very strong growth of real-estate prices made it possible for the financial sector to offer loans for household consumption, linked with the “value” of the real estate (9). Because of these operations relating to more than 2,500 billion dollars since 2004, these same lenders and other banks have in same time increased considerably their results, gaining the admiration of stock markets by their extraordinary success, whereas these same assessments were potentially seen to be depending more and more on the future evolution of the real estate market.

Chart 2 – Recent collapse of consumer credit linked to real estate (source Safehaven)
Chart 2 – Recent collapse of consumer credit linked to real estate (source Safehaven)
Indeed, the obvious risk of this strategy of the banking sector was due to the possibility of an inversion in real estate trends. In the event of a strong and sustained fall in the prices and volumes of the real estate market simultaneously on the whole of the US territory, the “magic circle” of individual enrichment and the collective growth would become an “infernal spiral” of personal debt and generalized recession. Indeed, households in debt would suddenly become insolvent because of the collapse in the price of the real estate guaranteeing their loans, while the whole of the banking sector would be found in a double trap with on one side an increasing share of the loans not refunded due to personal bankruptcy, and on the other a financial assessment quickly down-grading because of the depreciation of the value of the guaranteed loans (namely the real estate) (10).

For the LEAP/E2020 team, it is from now on time to remove the ‘conditional’ from this scenario. It is currently happening throughout all the United States and constitutes a catalyst of the impact phase of the global systemic crisis. The US consumer, i.e. the US middle class, basically becomes insolvent (11), victim of overwhelming debt, a negative rate of saving, the bursting of the real estate bubble, the rise of interest rates and the collapse of US growth. All these elements are dependent, and mutually reinforcing, to plunge the United States, starting from the end 2006, into an economic, social and political crisis without precedent (12).

Very concretely, this November issue of GEAB sounds two “LEAP/E2020 Alerts”:
- The first relating to banking and finance sectors which, by the way of “hedge funds” and “bad quality credit”, will be at the centre of the impact phase of the global systemic crisis;
- And the other, which again amplifies the Alert published in GEAB N°4, relating to European real estate, with as an illustration, an analysis of the market trends of the British and French real estate.


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Notes :
(1) Source "Dollar drops vs yen after Japanese central banker's comment on yen carry trade;, International Herald Tribune, 10/11/2006
(2) Sources « ‘Panic selling’ hits derivatives markets », Financial Times, 05/11/2006; “Investors regroup as swaps panic hits”, The Australian/FT Business, 07/11/2006
(3) Source : « National foreclosures increase 17% in the third quarter », RealtyTrac, 01/11/2006
(4) Source “Negative numbers keep popping up in the data”, MarketWatch/DowJones, 12/11/2006
(5) Source “Foreclosure : the buck stops where?”, Twincities.com, 22/10/2006
(6) Source “US credit quality in 25-year retreat toward junk-S&P”, Reuters, 02/11/2006
(7) Source “The valley of the shadow of debt”, From the wilderness, 11/08/2006
(8) Source « US savings rate hits lowest level since 1933 », MSNBC, 30/01/2006
(9) US consumers have thus obtained from the banking and financial sectors consumption loans linked with their real-estate amounting to 633 billion dollars in 2004 and 719 billion dollars in 2005. Source « End of the bubble bailouts », Forbes, 29/08/2006
(10) This type of development knows similar examples in History. Cf. « Restructuring the US economy – downward », Kurt Richebächer, FS0, 27/10/2006
(11) The consumer thus becomes the « weak link » of the US economic and financial chain, after being its engine in the past five years. Source CFO/TheEconomist, 10/11/2006
(12) In this field, a very interesting CNN series is worth the visit: « Broken Government »

Jeudi 16 Novembre 2006

GEAB N°61 - Contents

- Published on January 16, 2012 -

Global systemic crisis - 2012: The year of the world’s great geopolitical swing
This GEAB issue makes it six years that the LEAP/ E2020 team have shared their anticipations with their subscribers and readers of their public briefing on the development of the global systemic crisis each month. And, for the first time, in the January issue which presents a summary of our anticipations for the year to come, our team anticipates a year which will not result solely in a worsening of the world crisis but which will also be characterized by the emergence of the first constructive elements of the “world after the crisis”… (page 2)
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USA 2012: on the way towards the tragedy of QE3
Today, US financial policy is confronted by the sovereign debt crisis of which it will be the ultimate victim in 2012. As LEAP/E2020 anticipated, the 2011 European debt detonator has truly ignited the 2012 American sovereign debt bomb, even if the media coverage desperately tries to make us believe the opposite. The massive sale of US Treasury Bills by the planet’s major central banks in the second half-year 2011 perfectly illustrates this situation incidentally… (page 7)
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ANTICIPATIONS 2012 - ‘20-UP AND 15-DOWN’, THIRTY FIVE KEY TRENDS FOR 2012
Up or Down? The United States' political paralysis; The City and Wall Street ; The rise in interest rates; The forfeiting of value to Wall Street and the City; The value of Chinese reserves; The Pound Sterling (and Gilts); Euroland as new European sovereign; The USA-China “little cold war”; Italy; The importance of the US Dollar in world trade transactions; Rating agencies; The “great European public borrowing” (GEPB); MerkHollMont; Ron Paul; The number, size and influence of Western banks; The continuation of gold’s return in the international monetary system; Recessflation; Sarkozy, Cameron, Netanyahu and Medvedev; The BRICS maturing as a pro-active world player; Turkey’s exit from the Western camp; The Tobin Eurotax; Secular and pro-Western forces in the Muslim world; Growth; The usefulness of the G20; Lawsuits against those managing banks and hedge funds; The splitting of the world monetary system into three zones: Dollar, Euro, Yuan; The widespread downgrade of Western public debt; Peoples' anger; The Euro crisis; The EU as the principal incarnation of Europe; QE3 as the ultimate weapon for saving the US economy; The US’ capacity for military intervention; The West as a community of relevance and values; Scottish independence; Le détroit d'Ormuz et un nouveau contexte de crise au Moyen-Orient ; L'indépendance de l'Ecosse; The Straits of Hormuz and a new context of the Middle East crisis (page 19) (page 19)
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The GlobalEurometre - Results & Analyses
We are seeing a strengthening in the majority considering that common European solutions to the crisis are more effective than national ones (80% in January versus 77% in December)… (page 33)
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