All Things Bubba

Because how can you not love a baseball player named "Bubba"?

Wednesday, October 08, 2008

Götterdämmerung


Financial maven Karl Denninger paints a bleak picture of the future:

I must caution everyone - if you are not prepared for six months to two years of unemployment, you need to be. If you are dependent on credit to survive (that is, if you couldn't make it without your credit cards) you need to fix that now.

Like today now.

Several times I have said "raise cash, get out of debt, be prepared."

I must reiterate this advice and emphasize it, as we may see a bond market dislocation and concurrent stock market crash at any time, without warning. It could be as early as today, in fact.

No, what happened the last three days isn't a crash, although it has now hit my full "bear market" target - 1070 - and in fact exceeded it.

Unfortunately what happened the last three days forces me to reset that target to the 2003 lows, and perhaps as low as four hundred on the S&P 500, 4000 on the DOW.

Needless to say if that happens it will be on the back of an economic catastrophe of a scale similar to the 1930s.

...Oil will collapse in price to $20/bbl. Unfortunately nobody will have any money to buy gasoline, or a car, so it won't matter. As in The Depression millions of automobiles will be scrapped after being abandoned by their owners for lack of insurance and registration fee money. Cheap scooters will become the dominant form of transportation for those with jobs, as they will be all most people can afford.

As credit collapses distribution of food and other essentials will break down. Unable to access credit, trucking companies will be unable to get goods to market. The current distribution system for food requires travel of over 500 miles from production to consumption; this is untenable in a market where stable credit is unavailable. Food distribution will be severely impacted and in some areas may break down below critical levels.

Unemployment will reach 25% within two years. Median income will fall by 30% nationally. Foreclosures will reach 20 million homes. The government will step in with HOLC-style remediation but it won't matter - the unemployed won't be able to pay irrespective of the price.

House prices will fall to well under $100,000 nationally on a median basis but with lending all but non-existent you'll need 50% down. A few people will make out like bandits near the bottom, being able to buy up homes for $10,000 each in blocks of 10 at a time - for cash. 60% of America will be renters; nearly half of all homeowners will ultimately lose their homes to foreclosure.

Civil unrest will break out in major cities when incomes fall but the cost of food and essential services fail to come down materially, leaving millions of Americans hungry, broke and homeless. Unlike in the 1930s America will not quietly stand in soup lines - instead they will riot, loot and burn. The National Guard will be called up but will find it impossible to exert meaningful control without shutting down all commerce in the affected areas. The decision will be made to cordon off the cities and deny entry to anyone who does not live in that specific neighborhood, essentially shutting down commercial activity. GDP will fall by 30%.

The S&P 500 will fall to 150 and flatline, a 90% loss. CNBC and Bloomberg will cease broadcasting. Volume will fall to 10% of former levels.

I hope he's wrong, but lately, his predictions have turned out to be a bit on the optimistic side.

There's a level of fear and uncertainty out there that even grandmothers and grandfathers say they've never seen before. Sophisticated investors who used to invest in complex hedges have draw their money out and buried it in the backyard. There are rumors that the banking system might be shut down for couple of weeks, and that the government might force people to convert their 401(k)s to government bonds. Seems unbelievable, but then, so did the ban on short-selling. Until it happened.

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posted by BubbaFan, 9:39 PM

1 Comments:


After a high school visit to Washington, DC, I chose a line from the FDR Memorial to be my high school yearbook quote.

"This generation of Americans has a rendez-vous with destiny."

Boy do we ever. I chose it in 1999. The next year, George Bush was elected. The year after that, we were attacked by terrorists. The year after that, we went to war. The year after that, we went to war again. As I graduated college and became an adult, the economy started tanking. Who knows what will happen, but it's not likely to be good. Destiny, indeed.

What I like is that the quote can be both uplifting or ominous. Each generation has its destiny. Now we're getting to meet ours. It reminds me of my all time favorite presidential quote, by Abraham Lincoln. "This, too, shall pass." The good times pass, but so too do the bad times. Life goes on.
commented by Anonymous Brendanukkah, October 09, 2008 5:49 PM  

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