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alstry (< 20)

The Mother of All Crashes



February 14, 2008 – Comments (0)

A couple of headlines from MarketWatch: 

8:44Greenspan says "long way to go" before credit issues bottom

8:41Greenspan warns U.S. economy on "on the edge" of recession

No kidding, what took you so long to tell us.  Alan says a long way to go.  Henry says it will take time and be painful just after he said the worst is just beginning?

We just completed the Mother of All Credit Booms.  Now the whole system is leveraged up to the gills.....and just to add a measure of real excitment, throw in some swaps for true insanity.  How do you insure hundreds of trillions of obligations when there aint hundreds of trillions of dollars worth of assets in the entire world?

Just wait unitl this one unwinds.

My friends, we had some party.  How many of your friends upgraded to granite countertops?  Higher property taxes, bigger fuel bills, you know the rest.

On the edge of recession, WRONG!!!! On the edge of Depression.  Never in the history of mankind have we had so much debt taken out by so many.  Credit bubbles don't contract, they implode.  There is counterparty defaults creating more defaults and so on and so on spiraling into a vortex that seemingly has no end.

Some reason our generation, and the last one for that matter thinks we are immune from market calamities.  Just when you thought it was safe to go in the water, you find out the pool is empty.

Let's just play out one string of scenarios.  Consumsers borrow lots of money and start upgrading their homes.  Not to disappoint them, HomeDepot opens nearby anchoring a shopping center.  The shopping center is financed predicated in the rental income from HD.  The shopping starts paying lots in sales taxes and property taxes bringing additional properity to the local government.  The local government starts banking on the additional taxes and borrows ten times more by issuing a muni bond supported by the revenues coming in from the new center.  With the money, a new library is built filled with brand new books and computers.  New jobs are created at the center, in the stores, at the library. HD stock price goes up because of the additional profits and revenues coming from its new prosperous store by 15X the stores earnings bringing additional wealth to millions.

Finally the consumer realized he borrowed too much and the bank won't lend him any more.  He can no longer afford his mortgage payments and gives his house back to the bank.  Others do the same and few are shopping at HD.  HomeDepot shutters the store and stops paying rent.  Some of the other tenants depending on HD's traffic are forced to shut down.  The shopping center defaults on its mortgage and stops paying property taxes.  Sales taxes are gone too.  The bond is too much of a burden too handle without the additional revenues.  The library closes and jobs are lost.  The city must fire additional workers simply to compensate for the revenue deficiency.  Their houses go into forclosure and so on and on.

The above is a hypo of the closing of one HD.  Imagine if Target and Walmart shut down as well.

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