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Politics : Welcome to Slider's Dugout

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To: jim_p who wrote (8785)	3/27/2008 3:31:13 PM
From: jim_p	Read Replies (6) of 50474

Here is my first draft: Pros and cons of being bearish or bullish in today’s market: Bullish case: 1. Real interest rates are now negative in the US 2. The Fed has been aggressive and very creative so far. The Fed has already utilized methods that have not been used since the great depression and we are still in the first or second inning of this down cycle (this really should scare the $hit out of you instead of being a bullish factor, but I’ll give you this one) 3. The lower USD will reduce imports and increase exports 4. Market has successfully tested the lows twice and held. 5. There is still excess liquidity in the system Bear case: 1. Every cycle of extreme over leverage has ended in a period of extreme under leverage without exception. The only other time in history that leverage has gotten this high was back in the 1930’s. 2. The average time period to go from extreme over leverage to extreme under leverage is about 9-10 years and we are just in year one of the deleverage process. 3. Record energy prices are starting to feed their way into higher inflation and are also reducing the consumer spending power 4. Consumer demand has been fueled by negative saving and excessive cheep credit over the last 10 years and we will have the opposite over the next 10 years. (BTW the last time negative spending was bad was back in the 1920’s) 5. Home equity loans were a primary source of credit in the past and that is not only coming to an end, but many of those lines of credit are being withdrawn or reduced. 6. The BOE and the ECB are both more interested in fighting inflation than saving the economy and the financial system. (1929 déjà vu) 7. The total losses are now being estimated by some to exceed a trillion dollars to the world’s financial systems and the US recession will only increase those estimated losses in addition to the losses around the corner from credit card receivables, home equity loans, other consumer credit and leveraged (LBO) buyouts done in record amounts at the very end of the last business cycle. 8. Bad debt is starting show up in home equity loans, credit card receivables, leverage buyouts done before the recession (just wait till the recession get in high gear) and other consumer lending. 9. Food inflation has become a serious problem due to both bad political decisions on ethanol and an increase in demand for better food from the developing countries such as China and India. 10. Grain inventories are at historic lows despite almost perfect weather in the mid west for close to a record time period. 11. We are years past due for a drought in the mid west (just wait till the locus wake up from seven years of sleep). 12. The feds ability to deal with today’s problems are limited by the impact it would have on the teetering USD if they are forced to use taxpayer money to bail out the system. All past extreme credit/real estate bubbles ended up costing the taxpayer in the end. So far the Fed has been creative without using taxpayer money, but the odds of them not having to use taxpayer money is about as close to zero as you can get. The 1991 credit bubble in Finland ended up with the government taking control of 31% of the banking sector and supporting 41 of the S&L’s with guaranties and loans costing the taxpayer 11.2% of GDP. The 1991-2002 Japan credit bubble ended up costing the taxpayers $500 billion in public funds for loan losses, seven banks nationalized, 61 financial institutions closed and 28 merged for a total cost of 24% of GDP. The 1987-1993 credit bubble in Norway ended up with the governments taking control of 85% of the banking system assets for a total cost of 8% of GDP. The Sweden credit bubble required the government to guaranty all of the banks losses for a total cost of 4% of GDP. The US S&L crisis ended up with 1,043 S&L’s closed at a total cost of only 3% of GDP. Today’s credit bubble is the largest bubble in history and we are in no position to use taxpayer money to bail out the system given our current deficits and on the going costs in Iraq? 13. The current system of using asset backed securities for the creation and distribution of credit is history and it will take years for a new system to be developed and accepted by the markets. 14. Despite record energy prices demand for energy is exceeding new supplies resulting in record prices. 15. There has never been a period of prosperity in history without abundant cheep energy. 16. The prosperity over the past ten years was driven primarily by cheep abundant credit and the banks do not have the balance sheet to expand credit. This will worsen as more losses are recognized and the recession progresses. The pendulum always swings too far in both directions and this will be no exception. 17. The average downturn in the economy following an extreme credit bubble bursting has been 8-9 years 18. The mono line bond insurers will either fail or get bailed out before very long. 19. Dramatic bear market rallies are very common and this is the first bear market when IRA’s are allowed to short the market through the use of ETF’s which will make the rallies even more dramatic. Can anyone think of any other pros or cons to add to the list? Jim

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