Who would have thought there would so much to track in the financial arena just five years ago. The 1960’s are looking like the golden years now for most of us who were around then. We have seen several recessions since the 1960’s. The current storm clouds indicate a severe downturn only second to the Great Depression. The U.S. Dollar is at risk. The America-centric world is at risk as well. With all that is happening, I thought we might want to look at the big picture.
Here are ten areas of the systemic financial meltdown associated with a projected severe economic recession…
1. We are now in the worst housing recession in US history and there is no sign it will bottom out any time soon. Expect US home prices to fall between 20% and 30% from their peak. This will would wipe out between $4 trillion and $6 trillion of household wealth. The subprime meltdown is likely to cause about 2.2 million foreclosures. A 30% fall in home values would translate to about 10 million households with negative equity in their homes. Many of these will default and walk away. Home builders will go bankrupt.
2. Losses for the financial system from the subprime debacle are rising daily. They were estimated at $250 to $300 billion. Who knows where they will end up.
3. The recession will lead to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans. There are millions of subprime credit cards and subprime auto loans in the US.
4. There is serious uncertainty about the losses that monoline insurers will sustain on their insurance of toxic financial instruments. Many are technically insolvent. This will lead to a downgrade of municipal bonds resulting in state, local, county funding issues. California has a $15 billion shortfall to fund.
5. The commercial real estate loan market meltdown cannot be far behind. Do you think lenders "got religion" when loaning to commercial real estate borrowers? They were as reckless as those in residential real estate.
6. Ninety banks are on the watch list at the FDIC. Indymac Bank was not on the list a month before they went under. The real watch list is probably about 700 banks. Don’t keep more than $100,000 in any one bank (defined by its charter). If a bank is offering notably higher interest rates, watch out!
7. As the severe recession continues, a massive wave of corporate defaults will take place. Will Steak & Ale ever reopen?
8. The “shadow banking system” or more precisely the “shadow financial system” (composed of non-bank financial institutions) are in serious trouble. This shadow financial system is composed of financial institutions that borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions. The Fed is now loaning some of these institutions money on 28 day loans which are renewed (rolled over) of course.
9. Stock markets in the US and abroad will soon price in a severe US recession. October always seems to be a favored month. However, the Plunge Protection Team will work overtime to prop the markets up until the end of the year. As financial losses mount, earnings will sharply drop and stock prices will follow. Highly leveraged hedge funds will be forced to sell off and help push stock prices down.
10. Energy prices may be the icing on the cake. Depletion curves of known oil reserves are outpacing new oil discoveries and development. At the same time consumers in China and India do not want to go back to bicycles. Commodities are in their 19 year bull cycle. Can a regional recession (U.S., Europe) offset the energy demand increases in Asia? I would not bet the house on it.