Reply #8: Thanks DemReadingDU! [View All]

[harry123]

And as for what's down the pike, I hesitate nto say because people do want to hear good news. The truth is that we are a society that is over-leveraged and is in the midst of a credit unwind and asset deflation. These events are highly deflationary and subject the financial system to lots of stress.

Witness what has happened to the regional financials like NCC, AmTrust, Fifth Third, and on. Basically, most pundits had thought/wanted the unwind to stop after the derivative (RMBS) markdowns, but the underlying loans were bad too. That's where the regionals are being hit.

Next are construction loans and commercial property. That will also hurt regionals as well as a number of money center banks. At some point during the CRE and construction loan unwind, I expect to see bank failures. The hope is major banks will not be affected as this could lead to problems regarding systemic risk, but it also means that regionals will be allowed to fail. Forewarning.

This next leg down will come when the real economy impact impinges on the banks in terms of auto and credit card loans as unemployment starts to have a negative affect on chargeoffs. All of these agents will be working against the financial sector for some time. What is the cure?

In my view, time is the cure. Savings rates will go up. We will have a few short business cycles with a bit of economic worry like the 1970s or like 1990s Japan. The scenario to dread is the 1930s. I am not so pessimistic as to see this as a likely outcome. All of this will take a good decade to work its way through. In the meantime, people's balance sheets will be better and there will always be asset classes and stocks that buck the trend. But, my major theme is extreme caution.

Let's see where we are in two months because we are in a period of some severe systemic risk. I invite you all to sign up for my RSS feed or email and feel very free to e-mail with topic suggestions or critiques. I look forward to the exchange.

Last word: two or three other good blogs are: Calculated Risk, The Big Picture, Naked Capitalism and Mish's Global Economic Analysis. They might give you all some good ideas.

Regards,

Edward