(snip)"As I reported last night [New York Attorney General Andrew - sic] Cuomo is now gunning with his subpoenas at Fannie and Freddie. Not to nail them - but to prove that collusion and fraud was involved in the loans sold to them.
Did you catch Fannie and Freddie's response?
Paraphrased, it was this: "We can and will put back any loan that is found to contain fraud."
Remember my prediction from the spring with regards to loan putbacks?
If the fraud alleged is proved up virtually all of these banks and lenders who sold loans to Fannie and Freddie will be rendered instantly insolvent, as these loans will not only be put back they are also the very ones that are most likely to default!
I will reiterate the prediction I made back in the spring: You are going to see a huge number of banks, thrifts and others seized by the FDIC, and the common stock of those institutions will be worth zero.
As all this unwinds its going to be ugly, and there will be several million consumers who will literally go bust. A trillion a year worth of "consumer spending" is going to evaporate, which is a good 8-9% of GDP, and that's going to remain the case for a while as the adjustment proceeds.
I do not subscribe to either the "Crack up Boom" or "The End of the World as We Know It" theories, although the deflationary scenario looks assured. Simply put, you can't inflate out of this - it would destroy the banks, and that's not going to happen.
But let's not forget that the damage to the banks from the alternative is very real too - just not as bad. As this deflationary pressure builds investment and spending will both contract, and so will the Equity Indices. I am now expecting a thirty percent retrace on the broad indices, and it may get as bad as it did in 2003, with a full retracement of the move up since that time.
Both looks forward are actually far worse than they first appear due to monetary and price inflation - they represent real losses of value of 60-70%. But let's be straight here - there's only one reason to buy a stock in expectation of its price increasing, and that's earnings growth.
The "Global Will Save Us" crowd has their heads on backwards. So do those who are "running away" to Chindia with their money and assets. Those economies are dependant on consumption here and in Europe; they will NOT escape from what is coming and in fact may get hurt far worse than us!
In point of fact I would not want to be anywhere near Chindia when (not if) this comes apart. It is very likely to be extraordinarily violent over there, with those nations resorting to the usual when things get bad and money necessary to pay for critical imports (think food and energy here) scarce. Nations in this position almost always start wars!
My expectation is that India/Pakistan and China are the two worst places to try to "hide" in what is coming. China is very likely to find itself in a horrifyingly bad place with regards to resource needs and their consumer's inability to pay for them. This is how wars start, especially when a resource-rich nation sits just to your north!
Am I predicting major regional conflict? Yep. Sure am. And if you're invested over there, think about what happens if that conflict doesn't remain "conventional." All of the protagonists and antagonists in this game of "oh oh" have nuclear weapons.
Should Pakistan's government fall (and it is looking increasingly likely), with radical muslim interests getting their hands on Pakistan's nukes, Hell on Earth is likely to break loose, as much for economic reasons as geopolitical ones. Should China get squeezed as we see a deep recession in the United States and decide to try to solve its problems by "going North young Chinaman" the odds of that going nuclear are very real.
Consider what happens if Shanghi's stock exchange is vaporized in a ball of fire, then tell me again why you want to be invested over there when all the elements necessary to engender that sort of instability are present.
I think the Dollar is a major problem but my issue with foreign investment is that The United States is actually in a position to be able to pull manufacturing back here and survive. Most other nations are not, especially over in the far east!
Timing? Two to four years. By the middle of next year it will be obvious that we are in a deep, long, deflationary recession as the consumer balance sheet is defaulted or readjusted to account for deflation in home values. I believe we will see real GDP contraction of 6-7%, although you can bet the government will try to hide the truth through manipulation of the statistics.
By next summer the entire "emerging markets" area will be in freefall. I expect you will see a literal implosion in the emerging market stocks. China wants to try to keep all the balls in the air until after the Olympics - I wish them luck, because I don't think its going to happen, and when they come apart it is going to happen with ferocious intensity. Real civil unrest is a possibility, followed by the usual way out for a trapped government.
The US has options available to it that most other nations do not. Canada, for example, has an enormous resource base, and we're friendly. We have an enormous resource base, although we have to take the Greenies and string them up by their toenails first. We'll do it, once gasoline is $5/gallon - the Greenies will be thrown under the bus and then backed over repeatedly just to make sure that the last bit of life is squeezed out.
Then we will develop our oil and gas resources in the Gulf, we will drill off California and the East Coast, and we will recover shale. We will build nuclear plants. We will use the vast landmass out in the desert southwest to install aquaculture-based biomass production to eventually wean us off oil as a transport fuel, moving to biodiesel, using the nuclear plants we build next door to desalinate the water and provide artificial lighting so they can crank 24x7"(snip)



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