We Haven’t Seen the Main Earthquake: Credit Squeeze Brings Tsunami of Defaults and Market Crash

By | May 6, 2023

Lack of credit means record-breaking tsunami of bankruptcies, writes Dohmen Capital

Dohmen Capital warns of a tsunami of bankruptcies that will send markets crashing from a sharp credit crunch.
More specifically, as the investment firm puts it, “the time has come for the free market, that is, the banks, to do now what the Fed has refused to do: credit crunch.”
All the Fed did was raise interest rates, which, in fact, it fuels inflation.
Most central banks make this mistake.
The credit crisis that has broken out will reduce inflation, but in a very painful way.
Lack of credit means a tsunami of bankruptcies, which will break records.
The economy and real estate are heavily dependent on smaller banks.

An article recently said:

“He banks with assets of less than $250 billion are responsible for:
to. 50% of US commercial and industrial loans;
b. 60% of home loans,
C. 80% of commercial real estate loans and
d. 45% of consumer credit”.
That means… serious addiction.

bloomberg said: “Loans from commercial banks fell nearly $105 billion in the past two weeks ending March 29, the biggest drop, according to Federal Reserve data, since 1973.
This is the largest drop in new commercial lending history and thus the largest credit tightening on record.
Read it again! We have the “largest drop in new business loans on record” and “the steepest drop in lending history.”
But this is an effect that is not produced by the Fed… but by the free market, that is, the banks, whose confidence was shaken overnight…
This makes it much more serious.
While central banks can handle deposit outflow problems, the big problem is CRE (commercial real estate) lending, especially in the next two years.

Is there salvation? According to a Morgan Stanley analyst, $1.35-1.46 trillion (30-32%) of securitized US credit – CRE debt matures by the end of 2025.
Banks own ~42-56% of maturing debt.”
And banks could refinance up to $650 billion of CRE debt, and temporarily.
The “Dohmen Theory of Credit and Liquidity”, which we developed in the 1970s, says that the main determinant of major stock markets and economic trends is the change in credit and liquidity, that is, from expansion to contraction and vice versa.
All the indicators used by most analysts are derived from the change in credit and liquidity and lag far behind.
The large deposit outflow resulted in the M2 money supply slumping this year, the steepest since 1958.
M2 decreased in December, January and February.
According to one analyst (Trevor Jennewine), the last time the M2 index fell was in December 1958, albeit a small drop of 0.16%.
The fall in February was 2.35% compared to the previous year.
Check out the chart below showing the big drop in M2 yoy change over the past few months.

During the Great DepressionM2 fell 2.35%, the same as now.
This is ominous, but it fits with what we’ve been saying for the last 18 months, which is that the next downturn/recession could be worse than the 1930s because the Fed’s bubble-blowing machine has allowed for the greatest supply of credit. in the history.
Bursting this huge bubble will be extremely painful.
Combine that with the massive tax increases planned in Washington and you have the recipe for the same thing that caused the 10-year depression in the 1930s.
The alternative is hyperinflation produced by panicked attempts by central banks to avoid recession.
It all depends on political options.
With the current leadership, the choice may be hyper-high inflation. We’ll see.

Two reasons

There is two reasons for the current credit crunchthat is, the reluctance of banks to grant loans:
to) or the banks want to reduce risk in the face of an uncertain economic situation
b) or don’t have stock to make new loans.
We think it’s both.
Much of the lack of new lending appears to be due to deposit outflows.
The chart below shows the massive outflow of deposits from domestic commercial banks, both large and small.
Deposits form the basis for obtaining loans, with a multiplier effect.
Banks are probably making almost zero new loans, waiting to see if the outflow of deposits has stopped.


credit crunch It is a vicious circle…
In the credit crunch of the 1980s, banks stopped lending, even to their best customers.
They would tell their best customers, “We know you have the best credit, but we don’t have the capacity to make new loans.”
This can happen again.
We recall in one of the previous critical episodes, many large well-known banks even canceled credit commitments to real estate developers, although this was a “breach of the terms of the contract.”
When the developer said he was going to sue, he was told “do it, but it will take you 5 years to get to court and by then you’ll be broke.”
Adverse effects should receive close attention from investors.
A credit crunch means a similar contraction in stock prices.
Furthermore, the record contraction, if it continues, could lead to a record contraction in the stock market, concludes Dohmen Capital.


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