Meredith Whitney Sees Bleak Second Half in Stock Market, Small Business Credit Crunch, Double Dip in Housing, Says European Banks in Worse Shape

Tuesday, May 18th, 2010

This article is a guest contribution from Mike “Mish” Shedlock, of Global Economic Trend Analysis.

Meredith Whitney is concerned about financial reform that will punish banks just for the sake of doing something. This she says, will hamper small business lending right at a time state and local cutbacks will cost 1-2 million jobs.

The Wall Street Journal covers this in The Small Business Credit Crunch

Over the next 12 months, disappearing state and local government jobs will prove to be a meaningful headwind to an already fragile economic recovery. This is simply how the math shakes out. Collectively, over 40 states face hundreds of billions of dollars in budget gaps over the next two years, and 49 states are constitutionally required to balance their accounts annually. States will raise taxes, but higher taxes alone will not be enough to make up for the vast shortfall in state budgets. Accordingly, 42 states and the District of Columbia have already articulated plans to cut government jobs.

So the burden on the private sector to create jobs becomes that much more crucial. Just to maintain a steady level of unemployment, the private sector will have to create one million to two million jobs to offset government job losses.

Herein lies the challenge: Small businesses continue to struggle to gain access to credit and cannot hire in this environment.

Unless real focus is afforded to re-engaging small businesses in this country, we will have a tragic and dangerous unemployment level for an extended period of time. Small businesses fund themselves exactly the way consumers do, with credit cards and home equity lines. Over the past two years, more than $1.5 trillion in credit-card lines have been cut, and those cuts are increasing by the day. Due to dramatic declines in home values, home-equity lines as a funding option are effectively off the table. Proposed regulatory reform—specifically interest-rate caps and interchange fees—will merely exacerbate the cycle of credit contraction plaguing small businesses.

If banks are not allowed to effectively price for risk, they will not take the risk. Right now we need banks, and particularly community banks, more than ever to step in and provide liquidity to small businesses. Interest-rate caps and interchange fees will more likely drive consumer credit out of the market and many community banks out of business.

It is important now to support any and all lending activities that would enable small businesses to begin hiring again. If the regulatory reform passes with rate-cap and interchange regulation amendments incorporated, small businesses will be hurt rather than helped.

Interview with Maria Bartiromo

In an interview with Maria Bartiromo, Meredith Whitney goes much further. She sees a double dip in housing, a bleak second half in the stock market and says European banks are in much worse shape than US banks.

Tags: Bill Gross, Business Lending, Credit Crunch, Double Dip, Dramatic Declines, Economic Trend, European Banks, Face Hundreds, Government Job, Headwind, Home Equity Lines, Home Values, Local Government Jobs, Meredith Whitney, Mish Shedlock, Small Business Credit, State And Local Government, State Budgets, Time State, Unemployment Level, Wall Street Journal
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Sprott: “So you think 2008 was bad?”

Sunday, February 8th, 2009

Eric Sprott, Chairman, CEO, and portfolio manager of Sprott Asset Management, has released his most recent newsletter, and presents the following facts and opinions:

• the shares of Citigroup, Bank of America, and the Royal Bank of Scotland fell 77%, 66%, and 92%, respectively, in 2008.
• So far this year (remember, this is only three weeks) the same stocks are already down 50%, 55%, and 74%, respectively.
• Last month, Sprott reported:
  • auto sales in the US were down almost 40%.
  • housing starts were down almost 50%.
  • industrial production is falling off a cliff, with each month worse than the last.
  • jobless claims are at multi-decade highs.
  • consumer confidence is at multi-decade lows.
  • company surveys we follow are showing dramatic declines across the board in economic activity.
• “We challenged the idea that this is a run-of-the-mill, minus-low-singledigit recession and we characterized this Depression (there is no other way to describe it) as “global, pervasive, and deep”.
• Since last month the numbers got worse:
  • US housing starts fell a further 15.5% in December to 550,000, the lowest on record.
  • US industrial production fell a further 2.2% in December, to a 7.8% year-over-year decline.
  • European industrial orders (a leading indicator of industrial production) are down 26% year-over-year, the largest decline on record.
  • Japanese exports plunged 35% in December.
  • US jobless claims are now running almost 600,000 per week.
  • Layoff announcements are coming at a fast and furious pace.
• We believe the announced job cuts thus far are only the beginning.
• Stimulus amounts are ineffective – even $10-trillion “just isn’t going to cut it.”
• Stocks have lost $30-trillion in value and globally housing values have dropped an estimated $30-trillion.

“Although there are those who would espouse that the ‘free markets’ have failed, we are of the belief that it is government involvement in the free markets that failed.”

“There’s been a paradigm shift – a permanent change. People will save rather than spend more than they make. The implications for the economy are enormous. Just envision a world where 25% of all shopping malls close down and try calling that a recession.

“governments the world over [are] taking an increasing role in the functioning of the economy and the financial markets. But are they trying to solve the main problem; namely, too much debt? Quite the contrary, every single solution they’ve adopted has been trying to get the good ol’ days back. Cutting interest rates to zero. Throwing money at the banking system so it can lend again. All these solutions have one goal: to bring back debt.”

Eric Sprott makes a compelling case for depression, the ensuing deflation, and the eventual (hyper) inflation that follows, and it should, and must, be taken seriously. In the meantime, the message here is that if you thought 2008 was bad, 2009 looks like and could very well, turn out to be a whole lot worse.

Sprott’s argument makes a compelling case for Real Return Bonds, Gold, and on a longer-term basis, commodities and commodities producers, especially the underlevered ones. 

To read the complete letter, click here.

Tags: Bank Of America, Bank Of Scotland, Chairman Ceo, Consumer Confidence, Dramatic Declines, Economic Activity, Eric Sprott, Facts And Opinions, Free Markets, Furious Pace, Government Involvement, Housing Starts, Japanese Exports, Jobless Claims, Layoff, Leading Indicator, Paradigm Shift, Permanent Change, Portfolio Manager, Royal Bank Of Scotland
Posted in Bonds, Commodities, Economy, Gold, Markets | 2 Comments »