Could this really be the beginning of Great Depression II?

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orient_IHB

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When I was browing Forbes, this paticular paragraph scares me:

<blockquote>If we put this in terms of the equity market, our structural bear market that began in 2000 was much more like the 1929 to 1942 event than it was the 1966 to 1982 structural bear market, which was characterized by rising rates and rising inflation. So we have aligned what's happened over the past five years to the 1932-1937 period and it has tracked to perfection. We are facing now the 1937 type decline, which was 47% and which the financials have already completed. That doesn't mean it's over, but they've already experienced that decline.</blockquote>
<a href="http://www.forbes.com/2008/07/17/yamada-excelon-pfizerl-pf-ii-in_wf_0717soapbox_inl.html?feed=rss_popstories">Forbes article</a>

Even though I was <em>secretly</em> thinking of GDII, it still makes me feel ill to the stomach. Granted that I was not in the US at the time (not even born yet), but the numerous depictings of it sure make me feel so good about that fact.

However, this is the first time I see someone give out a hint about GDII. The person spoke there was a technical analyst (not sure if these are the right words), but I think the indication is loud and clear.



My question is: Apart from the fact that we have Federal Reserve and FDIC now, what could be the picture for a full blown GDII? Where will the unemployment rate be? What would be the best way to protect yourself? And what are the moves you should consider now?



I am thinking that, given the estimation that 150~200 banks will fail, the unemployment can be really ugly, say 10~20%. And US is due for a long depression, given that we haven't got anything close to that in a long long time (from 70s?). And I am thinking about buying GLD when it is down a little bit. And last but also most important, get a job in health care or food industry before it is too late...
 
this is from nyu prof roubini's newsletters. he's generally the most bearish of the more prominent academics. sorry for the formatting...



RGE Monitor MEDIA ALERT: Nouriel Roubini predicts the worst financial crisis since the Great Depression and the worst U.S. Recession in the last few decades.



New York, July 15, 2008- In a series of recent writings on the RGE Monitor Nouriel Roubini ? Chairman of RGE Monitor and Professor of Economics at the NYU Stern School of Business - has argued that the U.S. is experiencing its worst financial crisis since the Great Depression and will undergo its worst recession in the last few decades. His analysis leads to the following conclusions:



This is by far the worst financial crisis since the Great Depression

Hundreds of small banks with massive exposure to real estate (the average small bank has 67% of its assets in real estate) will go bust

Dozens of large regional/national banks (a? la IndyMac) are also bankrupt given their extreme exposure to real estate and will also go bust

Some major money center banks are also semi-insolvent and while they are deemed too big to fail their rescue with FDIC money will be extremely costly.



In a few years time there will be no major independent broker dealers as their business model (securitization, slice & dice and transfer of toxic credit risk and piling fees upon fees rather than earning income from holding credit risk) is bust and the risk of a bank-like run on their very short term liquid liabilities is a fundamental flaw in their structure (i.e. the four remaining U.S. big brokers dealers will either go bust or will have to be merged with traditional commercial banks). Firms that borrow liquid and short, highly leverage themselves and lend in longer term and illiquid ways (i.e. most of the shadow banking system) cannot survive without formal deposit insurance and formal permanent lender of last resort support from the central bank.



The FDIC that has already depleted 10% of its funds in the rescue of IndyMac alone will run out of funds and will have to be recapitalized by Congress as its insurance premia were woefully insufficient to cover the hole from the biggest banking crisis since the Great Depression



Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.

This financial crisis will imply credit losses of at least $1 trillion and more likely $2 trillion.



This is not just a subprime mortgage crisis; this is the crisis of an entire subprime financial system: losses are spreading from subprime to near prime and prime mortgages; to commercial real estate; to unsecured consumer credit (credit cards, student loans, auto loans); to leveraged loans that financed reckless debt-laden LBOs; to muni bonds that will go bust as hundred of municipalities will go bust; to industrial and commercial loans; to corporate bonds whose default rate will jump from close to 0% to over 10%; to CDSs where $62 trillion of nominal protection sits on top an outstanding stock of only $6 trillion of bonds and where counterparty risk ? and the collapse of many counterparties ? will lead to a systemic collapse of this market.



This will be the most severe U.S. recession in decades with the U.S. consumer being on the ropes and faltering big time as soon as the temporary effect of the tax rebates will fade out by mid-summer (July). This U.S. consumer is shopped out, saving less, debt burdened and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation and rising oil and energy prices. This will be a long, ugly and nasty U-shaped recession lasting 12 to 18 months, not the mild 6 month V-shaped recession that the delusional consensus expects.



Equity prices in the US and abroad will go much deeper in bear territory. In a typical US recession equity prices fall by an average of 28% relative to the peak. But this is not a typical US recession; it is rather a severe one associated with a severe financial crisis. Thus, equity prices will fall by about 40% relative to their peak. So, we are only barely mid-way in the meltdown of stock markets.

The rest of the world will not decouple from the US recession and from the US financial meltdown; it will re-couple big time. Already 12 major economies are on the way to a recessionary hard landing; while the rest of the world will experience a severe growth slowdown only one step removed from a global recession. Given this sharp global economic slowdown oil, energy and commodity prices will fall 20 to 30% from their recent bubbly peaks.



The current U.S recession and sharp global economic slowdown is combining the worst of the oil shocks of the 1970s with the worst of the asset/credit bust shocks (and ensuing credit crunch and investment busts) of 1990-91 and 2001: like in 1973 and 1979 we are facing a stagflationary shock to oil, energy and other commodity prices that by itself may tip many oil importing countries into a sharp slowdown or an outright recession. Also, like 1990-91 and 2001 we are now facing another asset bubble and credit bubble gone bust big time: the housing and overall household credit boom of the last seven years has now gone bust in the same way as the 1980s housing bubble and 1990s tech bubble went bust in 1990 and in 2000 triggering recessions. And a similar housing/asset/credit bubble is going bust in other countries ? U.K., Spain, Ireland, Italy, Portugal, etc. ? leading to a risk of a hard landing in these economies.



But over time inflation will be the last problem that the Fed will have to face as a severe US recession and global slowdown will lead to a sharp reduction in inflationary pressures in the U.S.: slack in goods markets with demand falling below supply will reduce pricing power of firms; slack in labor markets with unemployment rising will reduce wage pressures and labor costs pressures; a fall in commodity prices of the order of 20-30% will further reduce inflationary pressure. The Fed will have to cut the Fed Funds rate much more ? as severe downside risks to growth and to financial stability will dominate any short-term upward inflationary pressures. Leaving aside the risk of a collapse of the US dollar given this easier monetary policy the Fed Funds rate may end up being closer to 0% than 1% by the end of this financial disaster and severe recession cycle.



The Bretton Woods 2 regime of fixed exchange rates to the US dollar and/or heavily managed exchange will unravel ? as the first Bretton Woods regimes did in the early 1970s ? as US twin deficits, recession, financial crisis and rising commodity and goods inflation in emerging market economies will destroy the basis for it existence.



Thus, the scenario of 12 steps to a financial disaster that I outlined in my February 2008 paper is unfolding as predicted. If anything financial conditions are now much worse than they were at the previous peak of this financial crisis, i.e. in mid-march of 2008.
 
Thanks for the Roubini story acpme. This is the bit that pisses me off....and is so true:



<em>It is the continuation of a corrupt system <strong>where profits are privatized and losses are socialized</strong>. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.</em>
 
I would mostly agree as I hate socialism. But I also think it is unavoidable because no one wants to go through the 1930s again. And that is precisely why FDIC and Fed Reserve are for. However, the protection has been extended way beyond what is reasonable, I think. From what I can gather, seems like all Fortune 500 companies are <em>too big to fail</em>. But how can you save GM or IBM when they are such international monsters that dwarf many countries of the world?

It really occurs to me that maybe we need to get something stronger than IMF to save the world and make multinationals pay for such kind of <u>insurance</u>.
 
While I would agree with the points in the article (and there are plenty of people who published things like this over 2 years ago, but no one would listen), I have to disagree that commodities are going to see a huge drop. There is an exponentially growing demand for commodities as China's population moves to a more urban lifestyle and supplies are limited, not infinite. If you want to find a safer haven for your money in these times, look to a diversified commodities portfolio.
 
while i generally agree with growing demand in china and india, i'm also cautious about that. china is hardly in great shape. below negative real rates, subsidized fuel, stock bubble, and overbuilding in the cities... not good signs.



if you look at beijing and shanghai, there's literally hundreds of beautiful, modern, skyscrapers that are completely empty. the skyline is half lit at night. cheap capital and optimistic growth forecasts fueled all the construction. large malls with luxury european retailers are always packed but there are very few people that shop there. even in shanghai there are few that can afford USD$6 haagen daz let alone $2000 handbags. one mall developer there explained that even though there are very few locals that can afford to shop in its smalls, a teeny-tiny % of the population each yr gains the means to do so. and that teeny-tiny % alone out of a massive population is enough to create growth that's unheard for their american peers. to me it sounds like the same logic we heard during the tech bubble, then more recently during the housing one.



couple that with slowing demand from the US and europe, and i don't think china is immune to the troubles felt here. not in a long shot.



<a href="http://www.bloomberg.com/apps/news?pid=20601093&refer=home&sid=aHdszWoQEitA">Bloomberg: World's Largest Mall is Empty</a>

<a href="http://online.wsj.com/article/SB121479507619315069.html">WSJ: Chinese Exports Hurt By Lower US Demand</a>
 
I agree that the ultra rich in China are very few and I don't think the demand for goods is going to be the type that come from a mall. Look at the sheer number of cars they are adding on a daily basis and you can see the demand for certain commodities rising exponentially. They are increasingly adding demand for electricity and as rural farmers move to urban areas, the people become dependent on others for their food rather than feeding themselves. We all need food and energy sources, that will not change.
 
[quote author="tmare" date=1216430841]I agree that the ultra rich in China are very few and I don't think the demand for goods is going to be the type that come from a mall. Look at the sheer number of cars they are adding on a daily basis and you can see the demand for certain commodities rising exponentially. They are increasingly adding demand for electricity and as rural farmers move to urban areas, the people become dependent on others for their food rather than feeding themselves. We all need food and energy sources, that will not change.</blockquote>
While the average Chinese may have more disposable income, their wealth creation isn't self-sustaining yet and that leaves them in a precarious position right now. Their economy is entirely dependent on exports, which means if that source of funding dries up they will be lacking in the ability to import commodities. In a global slowdown, that demand will drop, and prices will follow. If massive amounts of capital were moved from equities to commodities in an effort to protect capital and create profits, as I suspect was the case post-October '07, any sign of systemic decline in demand will be followed by a plunge in commodity prices as the really big money heads for the doors. As yet, I have yet to see anything that convinces me that the rise in corn, steel, oil, and other prices is purely the result of demand because it has happened over too short of a time frame. I think instead that cautious money-managers got out of the stocks and into the raw materials as a way to ride out any surprises from the Dow, yet remain liquid enough to move again as needed. I expect that when panic finally sets off a big downward run, you will see a sudden spike in TIPS sales as the institutional money decides to sit on the sidelines during the crash. It should be noted that my opinion is worth what you paid for it.
 
China has saved over $1 trillion of foreign currency that they can spend any way they want. That is one thousand billion or one million million. Their economy can slow to nothing and they can buy their way out of it.
 
actually china has close to 1.8T in foreign currency reserves and japan little over 1T. why couldn't japan do the same?
 
The jury is still out as to whether they are so export-led right now. China certainly seems to have a lot more options to get itself out of a rut.



Oh, and the Chinese government doesn't waste its time trying to prop up the stock market like the US government does...
 
Well, isn't this all just depressing?



I respect Roubini, but really dropping interest rates? I don't think so.



I see massive inflation rather than massive deflation. I suppose it is a

race between the printing presses to supply the FDIC and the disappearance

of all the debt and mtges are foreclosed, and other mtges do not appear

to take their place.
 
Looks like being priced out of a home in Irvine is the least of our worries now... Thanks everyone for your insights.
 
I guess the idea is to hold on to your money until just before most

of the banks fail and then buy the best bargain you can find, using

all your savings. Preferably something largish with rooms you can rent out.
 
I didn't think there were any rich people left in China? I thought they had all moved over here and bought houses in Irvine?
 
I think Japan was the China in the 70s, right? Also, US' economy was not a greater part of the world economy back in the 30s. When the crisis struck, confidence is the most important. And I believe China and India will not have any more confidence than here. Remember their foreign reserves are in FNM and FRE MBSs and Merrill Lynch.

I remember when one noticed the time that any average joe starts to talk about stocks, it is time for a crash. The analogy would be if any average joe can afford a big house, it is also time.



Compare diversified commodities to GLD, what would you think is a good rule to pick on? I guess inflation will be a gauge. If we got high inflation, then it is more like the 70s, otherwise, 30s. :-S
 
[quote author="orient" date=1216472752]I think Japan was the China in the 70s, right? Also, US' economy was not a greater part of the world economy back in the 30s. When the crisis struck, confidence is the most important. And I believe China and India will not have any more confidence than here. Remember their foreign reserves are in FNM and FRE MBSs and Merrill Lynch.

I remember when one noticed the time that any average joe starts to talk about stocks, it is time for a crash. The analogy would be if any average joe can afford a big house, it is also time.



Compare diversified commodities to GLD, what would you think is a good rule to pick on? I guess inflation will be a gauge. If we got high inflation, then it is more like the 70s, otherwise, 30s. :-S</blockquote>




I'm thinking both. I'm already in pretty far (for me at least) with diversified commodities, my next route is gold. I'd like an opinion on the best route to go, hold the real stuff or some other way? If all hell breaks loose, I'm guessing the real stuff is better. I should probably go back to the new Gold topic, but I'd welcome any other opinions.
 
[quote author="tmare" date=1216476751][quote author="orient" date=1216472752]I think Japan was the China in the 70s, right? Also, US' economy was not a greater part of the world economy back in the 30s. When the crisis struck, confidence is the most important. And I believe China and India will not have any more confidence than here. Remember their foreign reserves are in FNM and FRE MBSs and Merrill Lynch.

I remember when one noticed the time that any average joe starts to talk about stocks, it is time for a crash. The analogy would be if any average joe can afford a big house, it is also time.



Compare diversified commodities to GLD, what would you think is a good rule to pick on? I guess inflation will be a gauge. If we got high inflation, then it is more like the 70s, otherwise, 30s. :-S</blockquote>




I'm thinking both. I'm already in pretty far (for me at least) with diversified commodities, my next route is gold. I'd like an opinion on the best route to go, hold the real stuff or some other way? If all hell breaks loose, I'm guessing the real stuff is better. I should probably go back to the new Gold topic, but I'd welcome any other opinions.</blockquote>


The real stuff is better.
 
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