I try to be the optimist and welcome anyone's well reasoned argument for why I should still be optimistic but today's news on Bear Sterns is an indication that the nature of our economy is not a "slowdown" but it is becoming a "full blown catastrophe".
I encourage any of you to look up Prof. Nouriel Roubini's "The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster" He presented this scenario at Davos and has demonstrated frighteningly precise insights to how this has and will continue to unfold. I only hope he took this analysis to the next step and suggested some ways to manage through, but alas, he has not.
In a nutshell, the 12 steps are as follows:
1. A severe recession which he states started in December; more severe and longer than those in the past - housing prices likely to drop 20-30% from peak (STARTED)
2. Extend subprime mess to the broader mortgage mess - this will not only be the LIAR LOANS but all loans with less than 20% equity may find themselves in a negative position (STARTED - Spreads are widening at all quality grades)
3. Mortgage losses will then extend to credit card, auto loan, student loans - large banks and small banks take the hit (STARTED - 4Qbank earnings all pointed to deterioration in credit cards)
4. Monoline credit insurers losses will mount (FITCH, MBIA) driving down values of assets on bank balance sheets, increasing additional losses and hurting the overall stock market (STARTED - while ratings have been affirmed for some, it's only time before that's re-examined)
5. Commercial Real Estate lending gets hit (STARTED - let's see if those large tracts in Walton get sold and closed - even if its people with money who are bidding, you always want to use the bank's money to buy and hold real estate, let's see if it's in the deal)
6. Large regional or national lender goes belly-up (STARTED - look at the stock prices of Nat City or WaMu)
7. The banks start taking large losses on their leveraged loan portfolios that were used to generate many of those LBO transactions these past 3 years (STARTED - Carlyle Group is just the start)
8. Corporate loan defaults will explode in 2008 because of the recession; there are many good corporations out there, but the week ones will find it hard to refinance (STARTED - Spreads are approaching 1000 bps - unheard of rates)
9. The "shadow" financial system gets in trouble. (STARTED - this is the area Bear Sterns played in and one Warren Buffett warned us about - not sure how many of these the Fed will offer to bail out with Banks)
10. Stock market will reach levels that would indicate a severe recession (look for large drops this week after any preventive noise slows down)
11. Credit pricing will seize up and no government intervention will convince banks to start lending again
12. Writedowns, Margin calls, Losses will be a visious cycle - many firms will become insolvent
His final word - while opportunities exist, it appears that one should be prepared for a systemic financial crisis.
http://www.rgemonitor.com/index.php
Other than that, have an amazing Happy St. Patrick's Day!
