Friday, December 22, 2006

Credit contraction is upon us

Note: I have moved from
You can go there to see previous posts.

It was only a matter of time before it happened, the massive expansion of credit reaching the stall point at the top of the stratosphere before gravity took hold and pulled it Earthword once more.

We are all borrowed out! We have no more room to fit additional payments into our over-stretched budgets, now that our personal ATMs (home values) are no longer rising in value.

I have maintained that mid February 07 will produce unpleasant economic numbers which will no boubt have a wet blanket effect on a now foundering housing market. The implications of that will be widespread.

Increasing volatility in economic and currency markets will surely be a precursor. Look no further than Thialand's actions to curb currency speculating last week. Volatility will spread to the stock markets and other areas as well and I expect sooner than later.

Mish Shedlock had some interesting things to say today.
Read the complete article at,

On Minyanville today Professor Bennet Sedacca citing Ned Davis research reported: Credit exposure relative to risk based capital by the top 5 banks rose to a record 433.5%.
Am I the only one that senses a future changing priority of banks away from ever increasing credit exposure?
What about consumers? You can already see a shift away from buying condos, second homes, furniture, appliances, remodeling, etc. Consumers are cutting back. Willingness to take on more debt and ability to take on more debt have changed. Those problems are highlighted in decreasing profits at Circuit City, cutbacks at Home Depot, and UPS. Where is the need to expand?

Bankruptcies and foreclosures are massively rising, in some states as much as 300%. That is forced credit contraction. And as priorities of consumers and businesses shift away from expansion and risk towards risk avoidance and debt paybacks, we are of course talking about a shift from inflation to deflation. We are right there right on the cusp and "changing priorities" will seal the fate.Note: Changing priorities will be one of the subject of tonight's podcast on Howe Street. Ironically enough, it was changing priorities that caused this delay from our normal Wednesday schedule. Tune in and find out.


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