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Banking Crisis 2008: The end of the financial powerhouse in the U.S.?

Posted July 12, 2008

Laura Cadden on TFN Smart Trading Bank of America is looking to reduce its workforce by 7,500 employees. Citigroup plans to lay off around 6,500. U.S. financial institutions are reporting billions in losses. These are just some of the most recent indications that we are in the midst of a severe banking crisis in the U.S. What should investors do? Martin Hutchinson of The Money Map Report gives his expert view – and tells investors where to turn.

by Laura Cadden

Baltimore — (TFN): With mortgage defaults causing an estimated $400 billion in losses to U.S. financial institutions, the situation looks dire for the industry. Executive recruiters have predicted that the world’s financial firms may lose as many as 175,000 jobs over the next 12 months. As the institutions crumble and our fund managers disappear, where should investors turn? Joining me today is Martin Hutchinson of the Money Map Report.

Welcome back to the show Martin. So will we continue to see major investment banks fail?

Martin Hutchinson: If they can’t raise capital, yes we will, unfortunately. And the question is whether they can raise capital. The big Sovereign Wealth Funds all invested at the beginning of the year, and they’ve lost about 20 percent on their money, so they’re not happy. The equity markets themselves, the public markets, have noticed this happening, so they’re not happy. It’s going to get quite difficult for the big investment banks and indeed the big commercial banks to raise new money. Once they can’t raise new money then they’re in trouble.

Banking Crisis 2008: The end of the financial powerhouse in the U.S.? Laura Cadden: In view of the bigger picture, do you agree with George Soros? Do you think this is the beginning of a real economic downturn in the U.S.?

Martin Hutchinson: I think it’s the beginning of a real financial downturn in the U.S. in the sense that the finance industry got well ahead of itself. It roughly doubled its share of the economy between the 1970s and 2006, and I think it’s going to go back much more towards where it was in the 70s, with a lot of the sort of funny securitizations and credit default swaps and so on disappearing or getting much smaller.

And so yes, I think the financial services industry’s in a big long adjustment process, which will look like a downturn for the unfortunate shareholders. But the U.S. economy as a whole, yes, I see a recession, but not necessarily all that severe a one.

****View the video here…

Laura Cadden: A lot of analysts think this is a correction of a bloated, bloated industry.

Martin Hutchinson: Yes, it got way ahead of itself. Part of the problem was that from 1995 we had too much money supply creation. If you look at the figures they created money about 4 percent faster than the GDP was growing every year for the last 13 years. And so that sent the financial markets mad. It caused speculative bubble after speculative bubble. And they haven’t changed that yet, which is why oil is at $143 a barrel. But eventually it’s going to have to change and they’re going to have to tighten the money supply, and that will finally kill off the speculation, but that shouldn’t damage the underlying economy, except you know with a few temporary hiccups.

Laura Cadden: Let’s talk about the financial institutions that are around right now. You can snatch them up at bargain basement prices. Do you think people should, or should they avoid them?

Martin Hutchinson: Not yet. The bargain basement prices won’t look so bargain basement I think. You’re buying at less than net asset value, but is the net asset value real? I think there some more nasties to come out. We’ve had 400 billion, as you say, on subprime mortgages, but of course with house prices dropping so rapidly, a lot of perfectly good mortgages are becoming more subprime and so therefore in danger of default. And you’ve also got the credit card loans, the auto loans, and so on, and indeed the business loans, all of which have to cause problems. So I think the financial sector’s one to avoid altogether in the United States. If you can’t live without owning a bank, I’d suggest something in market that’s completely unrelated, like for example Korea, where they’re biggest bank the Kookmin Bank managed to avoid the U.S. altogether. It hasn’t had a housing bubble and is currently on about 7 ½ times earnings, because people are being negative about both banking in Korea. I think that’s a bargain. The other thing is you should probably look at buying shares in companies that make stuff that you can drop on your foot. And so, for example John Deere, the agricultural equipment company, and one of their new products is a sugar cane harvester, the 3100. That’s, well, if you dropped it on your foot you’d smash every bone in it, because it’s about the size of a small office block. But of course that harvests sugar cane a thousand tons a day in Brazil, produces ethanol, which produces fuel for us all. And so you know they’re benefiting from both the agricultural boom and also the energy boom. And so that’s the kind of company you want to look at.

Laura Cadden: Great information, thank you so much, Martin. To learn more about Martin’s investment research service, the Money Map Report, just follow this link.

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