財經觀察 2161 --- The Next Major Financial Crisis

The Next Major Financial Crisis by Marc Courtenay

Warren Buffett doesn't see the "green shoots" Ben Bernanke and other bullish investors have spoken of in recent months. In fact, the billionaire investor believes the economic picture will grow darker before things improve.

"Everything I see about the economy is that we have had no bounce," Buffett told CNBC anchor Becky Quick in a televised interview Wednesday. "There were a lot of excesses to be wrung out and that process is still under way, and it looks to me that it will be under way for quite awhile. In the annual report, I said that the economy would be in shambles this year and probably well beyond, and I think that is true."

From our vantage point, the nearly $1 trillion in outstanding U.S. credit-card debt could be the next major crisis to roil the economy... Losses on U.S. credit cards rose above 10% of the total loans outstanding in May – a new high in the 20-year history of the Moody's Credit Card Index, and the sixth-consecutive monthly record.

The mounting losses are forcing banks to bail out off-balance-sheet entities they use to package hundreds of billions of dollars of credit-card loans into securities. The total losses are very hard to estimate and most likely exceeds earlier estimates.

Citigroup (NYSE:C), Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), and American Express (NYSE:AXP) all pumped billions of dollars into these securitization pools... The firms aren't obligated to support these pools when big losses hit, but they want to ensure investors continue buying these securities.

The worst-case scenario is if credit-card losses rise to a point where banks are forced to repay bondholders early... There is no possible way the banks could afford this payout without massive government loans.

Credit-card defaults and unemployment are highly correlated. People have a difficult time paying bills without a job – which is why the government is focusing so much attention on creating jobs; that and the fact that the public loves job creation.

Thursday's surprise announcement from the Labor Department shows unemployment is still rising. The latest weekly statistics demonstrates that initial jobless claims for unemployment benefits rose 15,000 to 627,000 – a far cry from the expected 3,000 decline. Continuing claims – those drawn by workers for more than one week – rose 29,000 to 6,738,000, after dropping 126,000 the previous week. No wonder Mr. Buffett is so pessimistic.

Unemployment, said Buffett, will continue to drag the economy down. He told Bloomberg news that unemployment is "very likely to go above 10%."High unemployment will continue to depress consumer demand for everything from energy to cars and homes, Buffett said.

Buffett Has Seen Better Days

Mr. Buffett himself has not been unscathed by the economic downturn. His company, Berkshire Hathaway (BRK.A), reported its first loss this year since 2001.

Before things get better for investors, Buffett believes the government will need to continue to take steps to reduce unemployment."It looks like we're going to need more medicine, not less," he said in an interview with Bloomberg News, adding that the country may need a second stimulus package to pull out of the current spiral. "The recovery really hasn't gotten going."

Buffett cautioned that some of the "medicine," though crucial, may have adverse side effects down the road. Inflation, he believes, could become a big problem. But, it will also likely push investors to buy stocks since rising prices would erode the value of cash.

"We have done things that raise the probability of high rates of inflation at some point," he told CNBC. Although Mr. Buffett declined a chance to predict how this will play out in the stock market over the months ahead, his ominous appraisal of the immediate outlook for the economy spoke volumes.

With these facts setting the stage for the next chapter of today's economic version of "The Great Contraction" I hope we all have an appropriate amount of cash and cash equivalents ready for the the unexpected pullback in all the investment markets including precious metals, the stock market and other major commodities.

There's still too much "wishful thinking" about "green shoots" and other delusions. The fact of the matter is that Mr. Buffett is right, it will get worse before it gets better. With the credit-card debt debacle playing out before our very eyes we could see the "sh-t hit the fan" in the weeks ahead which could set the stage for the next best buying opportunity.

Disclosure: I am not long any of the stocks mentioned in this article.