Tuesday, April 8, 2008

Losses this Recession

Roubini, the IMF, Goldman Sachs, and a number of others are coming up with total credit losses due to the housing crisis similar my estimate in a previous post. Some of these estimates are rolling up losses on credit cards, auto loans, and commercial real estate along with residential housing losses. Others like Roubini are estimating a $1T loss just due to residential housing. Either way this level of losses will wipe out a good portion of Wall Street financial firm's market cap not to mention pension funds and insurance organizations.

A massive government bailout seems inevitable, probably at even larger scale than occurred with the RTC during the early 90's S&L crisis. This bailout is already under way, particularly in terms of inflating our way out of the problem. I do not anticipate a 15 year depression/recession such as occured in the US during the 1930's or Japan over the last 15 years, primarily because the Fed in the US has shown a strong bias towards an activist, inflationary strategy.

I do anticipate sharply higher commodity prices, a 20-40% decline in the dollar, multiple financial firm bankrupcies/rescues and house prices bottoming only after 25-50% declines.

With every decline comes a great shorting opportunity followed by a great buying opportunity. I just picked up "Anatomy of the Bear" a study of the last 4 bear market bottoms. This book looks at the actual historical record to refute popular mythologies on what characterizes bear market bottoms. Apparently both "buy and hold is your best strategy" and "Bottoms only occur when everyone thinks things will only get worse" are both false.

I'll post the Cliff Notes soon as I'm done.
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1 comment:

saurabhsareen said...

I agree with the given article " losses this recession", I was looking for the ways which are responsible for the looses of Wall Street financial firm and get important issues like the inevitable of the goverment bailout.

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