alstry (35.70)

Negative Feedback Loop

February 23, 2008 – Comments (1)

You may be hearing more of this term in the upcoming weeks and months.

Bascially, it means that one negative event can create another negative event forcing even more events down the line.  Sorta like dominos falling as they each hit the next.

In our world, it is like a worker getting fired, causing his house to get foreclosed, driving down the prices of houses in the neighborhood, creating more potential foreclosures, slowing sales at local businesses, causing tax revenues to decrease, drving more job losses and the negative feedback loop goes on.

What is amazing is how many people still seemingly have their head in the sand about the severity of the current problems facing our economy.

Access to credit was the driver of our economy for the past seven years, now that access is drying up and fast.  Without credit, little can be accomplished in an economy that is credit dependent.

In the past six months, credit is dryed up dramatically in the following areas:

Residential Mortgages, HELOCS, Commercial Mortgages, Private Equity Financing, and Municipal Auction Rate Securities.  Credit spreads have widened dramatically in corporate debt.

The tightening is really only about six months old and we are already seeing some very dramatic results, especially in the residential and commercial RE markets.  Sales down 50% in some markets. Private Equity financing has almost evaporated completely.

As are result of the above, in just six months,  we have also seen dramatic slowdowns in the following areas:

auto sales, retail sales, sales tax revenues, restaurant sales, financing revenues, rumblings of a January slowdown in technology, hotel forward bookings, and governments are now proposing dramatic cutbacks.....CA 10% accross the board.

The above cutbacks necessarily creates further slowing which can create even more cutbacks driving even more slowing.

We have witnessed the above slowing in just six months.  Just six months. Where will we be in the next six months?

At the current price declines in homes, Moody's estimates that 8 million Americans are already underwater on their mortgages.  Forclosure rates at the beginning of this year are already up 200-300% or more from last years high rates in many areas.  What if we have another 20% price decline as many are predicting, that number will likely skyrocket to 20-25 million underwater on  their mortgages. (In case you want to put a number on that, it is approximately $4 to $5 Trillion dollars worth of mortgages underwater at an average mtg of $200K)

The 10K parade will begin here shortly.  AIG's auditors threw the first granade.  Merideth Whitney gave us a fresh new warning.  It should be very very interesting over the next few weeks.

The real question now is are we closer to the beginning of this loop are are we towards the end?  I guess that is where monitoring the negative feedback will be important to see if it keeps looping.