After a while, large numbers lose their power to shock. So Bloomberg and the FT have performed a service this week by reminding us of the scale of losses in the financial sector. They calculate that so far, US and European banks have had to raise $216.9bn of new capital. And, of course, whilst this phase of the current credit crunch is now coming to an end, the IMF estimates the total bill will be close to $1000bn.
As Warren Buffett told his Annual Meeting this weekend, ‘the worst of the crisis in Wall Street is over. In terms of people with individual mortgages, there’s a lot of pain left to come’. This warning adds to my caution over the outlook for the chemical industry.
Most recessions, say 1973-5 or 1979-82, start in the real economy, on Main Street. The financial crisis on Wall Street usually comes later, when companies go bankrupt. This time around, however, the banks are already weakened, even before any downturn in the economy has really started. This is really not good news. For example, the decline in US car sales now seem to be accelerating, with April volumes ‘the lowest in more than 15 years’:
• GM sales fell 17%, and are down 13% YTD
• Ford fell 12%, and are down 10% YTD
• Chrysler fell 23%, and are down 18% YTD
• Even Toyota fell 5%
These figures are even worse than they appear, as April this year benefited from 2 extra selling days compared to 2007. As Bob Carter, Toyota’s head commented, ‘Its clear that the US economy continues to move through a period of weakness’.
With each new car containing $2241 worth of chemicals, according to the ACC, April’s dramatic drop in sales will have a big impact on the chemical industry. A particular issue for CFOs, as I noted last month, is that ‘concern is now mounting about the health of hundreds – if not thousands – of US auto component and service suppliers squeezed between falling orders from their carmaker customers, high raw material prices and tightening credit conditions’.
And as the chart shows, the cause of the problem has not gone away. US house prices are now down 13% versus February last year. “There is no sign of a bottom’ in the US housing market, according to S&P’s David M. Blitzer, who compiles the Case-Shiller Index. ‘Prices of single family homes continue to drop across the nation’.