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Politics : Welcome to Slider's Dugout

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To: jim_p who wrote (6710)	10/19/2007 11:15:47 AM
From: jim_p	Read Replies (2) of 50730

The biggest problem we have going forward is the credit crunch and the stock markets have not priced in the fact that there is no short term solution to the problems. Somehow the markets seem to think that the FED will wave it's magic wand the all will be well. Nothing could be further from the truth. You have to understand where we have come from and how we got there to understand where we are today and where we are headed. This economy has been driven by cheep excessive credit and the longest building boom in history for most of the last decade. Today we have just the opposite. The credit pendulum is swing to the opposite position and it will stay there until the markets develop a completely new method for the credit markets to operate. This is no small task. The current system that was developed after the S&L crisis has been in place for only 25 years and the one prior to it was in place for centuries. The banks and mortgage companies shifted the risk in the current system to the individual investor and the foreign bag holders and the banks have not been risk takers for most of the last 25 years. Even if the current system were to shift back to the old system where the banks assumed the traditional role of risk takers, the banks would not be able create new credit anytime soon because they will soon be forced to place all of their off balance sheet investments (SIV’s) back on to their balance sheets which will result in the shutdown of new credit for years to come. In addition, the building boom is history. The markets seem to think all will be well in just two years and in two years we will be in the middle of the largest wave of foreclosures. Back in the S&L crisis of the 80's home prices started to fall in 1980 and they didn't bottom out until 1986, six years later. There are a lot of parallels between what took place in the SW region of the country during the 80's and what has taken place nationwide today. I believe we will continue to see home prices fall for the next 4-5 years and once they hit bottom they will stay there for a number of years before we see any recovery. For those who were around during this time period try to remember how you felt in 80, 81, 82, 83, 84, 85 and 86. Reality never even sunk in until around 1985 and the gloom and doom was at its peak around 1986. Well today we are back to 1982 and have about 4 years before we feel the full effect of the unwinding of the longest and strongest building/credit boom in history. Never forget the law of cycles. The longer the up cycle, the longer the down cycle and the severe the up cycle the more severe the down cycle. The problems we face today and not short term problems with short term solutions and once the markets realize this we will be in a sustained market downturn. Jim

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