Wednesday, September 5, 2007/
Remember this blog – by mid-September we will know if my mid-October warning is looming.
Grab your red pen and mark mid-September and mid-October as “watch this space” weeks. These red-letter days will shape the business environment before the federal election.
They will tell you whether to focus your attention on your existing customers and working out ways to over-service (and if necessary slash your prices) to maintain your cash flow, or whether to dramatically enhance your export efforts.
By September 20 you will know whether the US economy is about to move from a marked slowdown towards a potential election year recession.
I believe the upcoming report of US General Petraeus that there is no military solution to a problem like that in Iraq is likely to lead to a further cut in interest rates to cover up a military retreat.
Let me explain. Petraeus has already told a news conference that political negotiations are going to be crucial to forging any lasting peace, and a key challenge facing Iraq’s Government is how to identify “reconcilable” militant groups and bring them inside the political process.
We will no doubt be informed that the “surge” is working, but the diminishing coalition of the willing will need to continue to pump in billions of dollars and thousands of troops as only a handful of the conditions set by Congress have yet been achieved.
Watch out for a Federal Reserve announcement around that time.
And remember the name of the Countrywide Financial Corporation, the biggest home-loan company in America.
It may have to declare itself bankrupt before the middle of September despite a series of assurances offered to depositors to its funds and related regional banks affected by the sub-prime housing crisis. Federal regulators said they weren’t alarmed by the volume of withdrawals from the bank
Worried about the stability of the mortgage giant and the report of General Petraeus, depositors set off a run on the bank. A fortnight ago, Bill Ashmore drove his Porsche Cayenne to the bank’s office in Laguna, USA and waited half an hour to cash out $500,000. “It’s got my wife totally freaked out,” he said. Anxious customers jammed the phone lines and website of Countrywide Bank and crowded its branch offices to pull out their savings because of concerns about the financial problems of the mortgage lender that owns the bank.
Customers, most of whom said they were acting “just in case”, said they went to the lightly staffed branches because they couldn’t get through to the bank via its toll-free number or its slow-moving website. “I doubt it will go under, but I want to protect myself,” said Rogie Vachon, who was the Los Angeles Kings hockey team’s most valuable player for several years in the 1970s.
Vachon said he went to the West LA branch to withdraw some money because his account balance exceeded the limit on insurance provided by the Federal Deposit Insurance Corp.
Countrywide – which made one of every six home loans in the US in the first half of this year – now finds itself battling not just its own growing defaults but also a widening credit crunch stemming from the nationwide sub-prime mortgage meltdown.
Mortgage industry executives have said that although Countrywide Bank was the nation’s third-largest savings and loan, after Washington Mutual and Wachovia Bank’s World Savings unit, it was far too small to absorb the entire $20 billion a month in non-conforming loans Countrywide Financial produced.
“If enough financial pressure is placed on Countrywide or if the market loses confidence in its ability to function properly, then the model can break,” said Merrill Lynch analyst Kenneth Bruce, who warned investors to sell their Countrywide stock, saying the company could go bankrupt if the worsening liquidity crunch gets bad enough.
The Federal Reserve Board last month cut the discount rate in an effort to increase liquidity in the crumbling financial markets. This rate has no effect on mortgages, but it allows banks, including lending institutions, access to “borrowed” money.
Additionally, the Feds extended the borrowing period of these funds to 30 days in the hope that Countrywide can be rescued before the Fed meets again to decide on further interest rate cuts and whether to bail out hundreds of banks facing collapse.
By 20 October you will know the new leadership team of the only nation that can hold the American economy on any form of growth path: China.
As people rushed to get their funds out of Countrywide, two of China’s four main state-owned banks, Industrial & Commercial Bank of China and Bank of China, disclosed a combined $11 billion investment in US sub prime-mortgage debt. The odds favour other major Chinese banks incurring losses.
At the last (16th) National Congress of the Chinese Communist Party, Jiang Zemin said: “Reviewing the course of struggle and the basic experience over the past 80 years and looking ahead to the arduous tasks and bright future in the new century, our Party should continue to stand in the forefront of the times and lead the people in marching toward victory. In a word, the Party must always represent the requirements of the development of China’s advanced productive forces, the orientation of the development of China’s advanced culture, and the fundamental interests of the overwhelming majority of the people in China.”
The 17th Congress in mid-October will mark almost certain leadership changes. Observers are speculating that Wu Guanzheng will resign and Li Keqiang and Bo Xilai will be promoted, as Hu Jintao consolidates his power base.
The official status of Jiang Zemin’s Three Represents theory may be further confirmed at the Congress. The critical significance of this theory is two-fold. It legitimises the inclusion of capitalists and private entrepreneurs within the Communist Party. Second, it is an attempt to cement Jiang Zemin’s historical legacy as a Marxist theorist on the level of Mao Zedong for Mao thought and Deng Xiaoping for socialism with Chinese characteristics.
This could lead the new leadership to decide that it no longer has an interest in propping up George Bush’s ailing economy and refuses to heed the former Goldman Sachs Group chief executive officer and current US Treasury Secretary Hank Paulson’s demands to loosen its currency policy. If China transfers reserves into Euros in the interests of the majority of the Chinese people’s need for economic production, cultural development and political consensus following Jiang’s precepts, expect a dramatic shift in the balance of trade and the commodity boom.
As a Bloomberg report last week stated: “Communist Party officials can be excused for having trouble fathoming the American way. What should one think of a system where one day Countrywide Financial Corp CEO Angelo Mozilo gets saved from ruin by a $2 billion investment from Bank of America Corp, and the next day he says the US is spiralling toward recession?”
It wouldn’t be because of bulls in the proverbial china shop like Countrywide, would it?
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