We are most likely headed for a recession! Watch out

StockTrader1 · Joined: 21 Aug 2007 Posts: 2

1. We are most likely headed for a recession, not only in the US, but worldwide. Fiat-money (paper) economies are cyclical and the cycle is headed lower.

2. There is plenty of evidence that the leaders of central banks and other high-level financial institutions are very concerned about the blow-back from the sub-prime mess. The US Fed and other central bankers pumped billions of $$ into the stock markets over the past two weeks, to little avail. Without going into long-winded explanations, the coming recession will most likely be long and deep.

3. The mainstream media - left or right - is notoriously ignorant when it comes to financial issues. During the housing boom, they were all rah-rah, ignoring the fact that many loans were being made to risky prospects and as ARMs which reprice from interest-only to interest plus principal in 2 years time. Most of those loans were made in 2005 and 2006, meaning that the bulk of them have yet to reprice - and the borrowers default (at a current run rate of over 27%) - so the worst is yet to come.

4. Besides the people losing their homes because they were either hoodwinked by lenders or just ignorant (or greedy), the recession will likely be a top-down event. Larger businesses with lots of overhead will be the first to feel the pain. Any number of banking interests will be forced into liquidation. A number with heavy mortgage exposure already have. Business expansion will be forestalled due to tighter credit and within months layoffs will begin at some of the largest employers.

Small businesses will not feel the pinch as acutely, as they are more nimble and able to make quick adjustments. It will, however, be important for small businesses to keep a solid cash balance. Anyone who is higly leveraged is exposed to lots of risk and potential collapse. That's why big business is going to hurt first - many are very leveraged and an inability to borrow will harm them.

5. While credit tightens, prices will come down for almost everything, by simple supply and demand. As more people lose their jobs and have less to spend, merchants will have no choice but to cut prices. (Wal-Mart is screwed. Their prices are already rock bottom.)

The bottom line is that the bulk of re-pricing ARMs is going to occur from October 2007 through May of 2008. The US should be in recession (defined as 2 consecutive quarters of negative GDP growth) by the 4th quarter of 2007 or the 1st quarter of 2008, though the general public won't know it until much later.

The prudent thing would be to minimize risk right now, cut back on any unnecessary expenses and build up a war chest of cash. Keep any expansion plans to reasonable levels. There will be bargains galore, but most will not be able to borrow to fund purchases. Besides, who would want to borrow at 15-18%? Cash in hand will enable you to scoop up distressed properties.

By long and deep, I mean we will not pull out of recession until mid-2009, so best to prepare for the worst. Seriously, did anyone believe that Americans could continue to borrow and spend forever. Payback is... well, you know the rest.

Finally, ignore my analysis at your own peril. Talk to me in six months if you don't believe me, or for that matter, many financial writers who are "under the radar" who are predicting pretty much the same, or worse.

Just my two cents...

info · Joined: 07 Feb 2005 Posts: 23

Thanks StockTrader1, that's an informative and frightening analysis you've given us.

I tend to agree with your analysis. The writing is on the wall.