Karl Denninger of Market Ticker thinks there is a secondary banking crisis around the corner that will trigger a cascading collapse in the stock market, and another government bailout. TARP 3 anyone? We could reach 3,000 in the Dow and 300 in the S&P 500.
This is one of many controversial and incendiary opinions about the state of the global financial markets Karl voiced to me in a wide ranging interview on Hedge Fund Radio. Karl says the idea that we are going back to an S&P 500 earnings of $105-$110 a share in the face of the soaring cost input factors is totally laughable.
Bernanke is making the same mistake we saw in 1933. The nightmare scenario for him is a coincident dollar and stock market selloff. The risk of hyperinflation will force him to back off on easy money. If the market goes up by 30% and the dollar devalues by 30%, then you haven’t made any money. When cost push pressures show up, corporate earnings are going to disappear. Companies like Kimberly Clark are reporting the largest raw material cost increases in history. Even Apple is seeing cost push problems.
“Foreclosure Gate” will be much worse than expected. There is upwards of $200 billion worth of exposure just on the “put back side”. The large banks also have second line exposure on their own balance sheets that is at least as big, if not bigger. In dollar terms, interest income has been good, but their spreads have been collapsing.
Banks problems may become impossible to hide in 3-6 months. They are passing around the losses trying to hide the truth. Banks made their earnings in the recent quarter by taking down reserves. Not providing for these risks is absolute fancy.
The 900 pound gorilla in the room is the second line problem, which is mostly concentrated in the top banks, including (BAC), (C ), (JPM), (WFC). Industry wide, only $1 trillion of $3.5 trillion in real estate losses has been realized, and at some point, someone is going to have to swallow. Wells Fargo is the most leveraged, could be the first to go, with $1 trillion in off balance sheet exposure, including all of the garbage they took in from Wachovia.
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