Usually, I'm not the type to dabble into economic speak but given that things have gone from bad to horrible in a short period of time, I thought it would be prudent to have my financial guru weigh in.
Economy in Peril
by Xen Mogul
Wake up people! We are on the verge of an unprecedented financial collapse. Oil prices have gone through the roof, consumers are over-leveraged (credit cards, mortgages, stippers...etc.) and the economy has now taken a turn for the worse. How in the world could this have happened? Well let me give you a little bit of history.
HOW
So it all started with the Nasdaq (tech) bubble of 2000. After busting early that year, it was followed the unforseen events on 9/11 which officially destroyed our economy. In response, Greenspan cut rates to 1%. This resulted in one of the biggest asset inflation cycles of recent history in real-estate and, more recently, in stocks and commodities. Through various creative financial instruments large investment banks around the world were able to add ridiculous fuel to the fire of rising asset prices (namely homes) driving prices up still further.
This huge influx of wealth generation via asset appreciation ("mortgage equity extraction") spurred massive consumer spending from the US, the global engine of growth. As the US continued to buy stuff the emerging markets (China, India...etc.) profited by making the products for us. This spurred significant growth and wealth generation in their respective economies which sparked a sudden domestic economic growth spurt. All of this further drove up asset valuation around the world as these countries were buying infinitely more of the basics than ever before (coal, iron ore, food...) driving global prices even higher.
NOW
Now the party is over. Home prices are falling and people are defaulting on their mortgages and more recently on their credit card bills. Because of the above mentioned financial instruments, the effect of these declines has a multiplier effect...a multiple so large few can really get their head around it (myself included). Think trillions, not billions. To put this number into perspective...US GDP is $14.5tr; China GDP is about $2.6tr; and Global GDP is about $45tr.
Leverage has been the name of the game for the last five years because the cost of borrowing money has been so cheap. The housing crisis and the resulting loss of unprecedented sums of money has resulted in the loan market to freeze up for some and get much more expensive for most (all this in spite of Fed rate cuts). This is simply because banks don't trust other banks enough in this environment to lend them money. All of this, among other factors, has spiraled us into what I believe will be one of the most difficult times in recent history. The risks are large enough and systemic enough to cause a economic crash.
The Future
Make no mistake about what the government is doing. I'm sure you've heard that they've proposed a "Stimulus Plan" to the tune of $145 billion. This is a sign of absolute desperation. They're trying to avoid a DEPRESSION not a recession. They're scum and judging by their past performance I'm willing to bet this won't work. It will only devalue the currency as they create this money out of thin air.
The next shoes to fall will be credit card and auto defaults and eventually private equity deals. The banks that loaned the money to these retards are going to take it up the booty over the next couple years. People are getting laid-off everywhere and unemployment figures will inevitably rise as lending standards and prices tighten and asset prices deflate. Some argue that the emerging markets have developed local economies strong enough to keep growth rates up in those regions but I disagree. I expect to see them slow appreciably albeit not come to a halt.
As they say, "when the US gets a cold, the world gets the flu."
The flip side of all this, what could make me wrong, is that by some miracle we're able to get the loan market working again and bring lending rates down so people and businesses can re-finance. If this happens we will be ok, but it will still take a long time to recover from the losses we've already incurred. It's all about the US consumer. That's the whole game. When we spend we fuel growth and, unfortunately, right now our wallets are getting tighter not bigger.
Remember that it's in nobody's interest to tell you that stocks are going lower...their jobs are at risk (the media included). So they'll tell you that everything will be fine and not even address the full scope of the risks.
The net of it all...stay out of stocks, hoard your cash and brace yourselves for what could be very difficult times in America. If everything turns around and the market doubles from here, I'm sorry. But if you have no chips you can't play poker. Good luck.
Technorati Tags: Economy Alan+Greenspan GDP Leverage Recession Stock+Market
