Dan Denning says equity shareholders are being wiped out in the current financial crisis. And bondholders are next in line. If you are going to buy debt, make sure it is good debt. In today’s climate, that means it should be based on real assets with real demand… like energy stocks.

Calamity averted! At least for a day or so.

Markets did not self-immolate over night. But the S&P Banking sector had its worst day out in nineteen years.  It was led—or dragged—by a 34% decline in the shares of mortgage lender Washington Mutual, after an analyst said the company would have to raise capital to offset some US$28 billion in loan losses.

Now the wealth destruction is advancing on two fronts. Equity shareholders are wiped out as financial shares plummet. Meanwhile, assets are being revalued or in some cases, written off. Bondholders will be next.

Here in Australia the credit noose tightened on the economy last month. Gasp. The Australian Bureau of Statistics reported that total lending finance fell by a seasonally adjusted 13.3% in May.  It was the steepest fall in 16 years. “Total lending” includes all kinds of borrowing, personal, business, housing, and leasing.  The only bright news, perhaps, was that business borrowing grew by 3.2% after last month’s 15% drop.

Not all debt is bad. It just depends on what you do with it. If you buy an asset that produces income over time, we’d call it good debt. If you use borrowed money to buy financial assets that are falling in value, we’d call it bad debt.

Yesterday we mentioned how much exposure Chinese official investors have to mortgage debt issued by the GSEs. Today, we read that Chinese firm CITIC has upped its stake in Macarthur Coal (ASX:MCC) to 20.39%. It surpasses steel giant Arcelor Mittal (19.9% stake) as Macarthur’s largest shareholder.

Macarthur does not have a balance sheet full of mortgages, or a vault full of IOUs. It has a mine full of coal. Two mines actually. Between the Coppabella and Moorvale mines, the company supplies nearly a third of the world’s pulverized coal used to generate electric power, according to today’s Australian.

Is energy a better way to store your capital than financial assets? Well, shares in energy companies (and we consider coal and energy commodity, although it is also a steel-making commodity) are still just financial claims on a company’s earnings. But those earnings are derived from a real asset with real demand.

This is why—as bad as this grinding deflating of the financial asset bubble is—you need to keep your eyes open for quality resource assets. They are in demand more than ever, both economically (driven by Peak Oil and Urban China) and as investment alternatives to the slow-motion train wreck that is the American mortgage market.

Source: Equity Shareholders Are Wiped Out As Financial Shares Plummet