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Credit Crisis: Nearing The End?
The bleak, nail-biting drama known as “The Tempest… In the U.S. Credit Market” has played out as one terrible scene after another: The once formidable Titans of Finance fell from an over-leveraged grace, triggering $300 billion in write downs, massive layoffs, losses, government bailouts, record-high foreclosures, and pretty much every variety of economic setback.
According to many front-row officials, however, the credit tragedy is finally approaching its final act; meaning, the Fat Lady is getting ready to sing. “The global credit crisis is drawing to an end,” begins one May 18 news source, “The danger of collapse is out of the question.” (Economic Times, India)
“The storm clouds have lifted,” “The worst is behind us,” AND “The credit market contraction is winding down,” adds a whole host of highly esteemed industry executives.
Forgive me if I’m not convinced. The fact is -- those same industry experts who now foresee a swan song in the credit drama’s future NEVER even showed up for opening night.
Case in point, this unforgettable remark by Citigroup Inc.’s former CEO back in July 2006: “As long as the music [in terms of liquidity] is playing, you’ve got to get up and dance. We’re still dancing.”(This came nearly one year AFTER the S&P 500 Homebuilding index peaked, marking the end of the great housing boom and subsequent subprime mortgage implosion.)
Equally memorable is the July 2007 London Conference, where the heads of Merrill Lynch, Lehman Brothers, Barclays, and Bank of America ALL envisioned the subprime fiasco to be a “contained,” “isolated,” and “temporary” event with little risk of wider fallout.
And lastly, the famous addendum to former Citigroup CEO’s earlier “still dancing” comment in October 2007: “We obviously cannot predict market movements or other unforeseeable events that may affect our business.”
Hence, the usual suspects arriving to the Credit Crisis long after the “It’s Showtime” lights had already dimmed. On the other side -- our analysts sat primed and ready for the coming reversal, as the following walk down memory lane makes plain:
- In the 2004 addendum to “Conquer The Crash,” Bob Prechter revealed five major conditions that “pose a danger” to many banks. Among them: “Low liquidity levels, dangerous exposure to leveraged derivatives, the inflated value of the property that borrowers have put up as collateral on loans, and the substantial size of the mortgages that their clients hold compared both to those property values and to the clients potential inability to pay under adverse circumstances.”
- Soon after, the September 2005 Elliott Wave Financial Forecast stepped in with this urgent message: “Banks seem to be blind to the danger of overpriced collateral as they continue to stuff their balance sheets with mortgage-backed assets… Lenders are still behind the curve, but once they see the writing on the wall, the rug will get pulled out from under the economy in a hurry.”
- And finally, the January 2007 Elliott Wave Financial Forecast revealed that the point of no return had been reached. “2007,” we wrote, will be “The Year of the Financial Flameout.”
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