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ProShares UltraShort QQQ Message Board

  • gmyaz gmyaz Apr 22, 2008 9:58 AM Flag

    Debt Strains & Unraveling

    Dear Fellow QID Long's,

    Those who say the recession will be short and shallow, (indeed they question if we are in one now) have a remarkable blind spot about how the US economy actually works.

    To be clear, our economy is build on debt and credit. This point cannot be emphasized enough. The issuance of debt over the last ten years has been nothing short of breath-taking. As an example, take a look at the national deficit. Under Junior it went from 4.5 trillion to 9.3 trillion (and climbing).

    But this debt has to be approved by a lender. Whether it be a bank or a store.

    With the financials (banks and brokerages) losing 250 billion (and growing) their ability to lend is impaired. As they reduce the easy credit spigot (or shut it off entirely) the result for those that are highly leveraged is brutally clear: Bankruptcy.

    HELOC's (Home Equity Line's of Credit) are being reduced for home owners and that is spreading to retailers. Retailing is a HIGHLY leveraged business model as a whole of chain of vendors are involved. Banks are now closing down lines of credit for numerous retailers. (Bank of America withdrew the credit line for Sears yesterday.) While the Sear's news got headlines, hundreds of smaller retailers are now getting cut off. Result: Bankruptcy.

    These waves of credit reductions are going to ripple through our economy. Those companies that are highly leveraged are simply going to go "poof" as will those consumers with bankruptcies sky-rocketing.

    Due to these huge bank losses, their ability to lend has been severely impaired. And it is going to get worse and home values continue to drop and loans go bad. This is not going to be a short shallow recession. Our whole business model of debt creation is going to have to undergo a fundamental shift. And that will take years.



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    • The market seems to choose to ignore the facts or is so manipulated that facts no longer matter. Hundreds of thousands of "owners" are walking away from homes. Every foreclosure creates a 6-figure loss for the mortgage holder. Those are real losses, regardless of how they are accounted for. Foreclosures also reduce prices throughout the region, forcing banks to rein in HELOCs. And nobody seems to realize that banks being in the trouble they are in, can't make new loans. Those 4 million households who went from renting to owning thanks to ez credit, are not going to be able to consider buying again for a decade thanks to their foreclosure, possible bk, and the return to normal lending standards.

      • 2 Replies to shinchan21535
      • anecdote from las vegas, nv.

        two of my best friends bought a house here in vegas in late '05. their mortgage has just reset so they had to rent out a room. they still will not be able to make it when their loan resets again in 6 months. they have rented out a room, but every time i see them they seem closer to "walking away." the funny thing about "walking away" here in vegas is how long the process takes. i work with a person that stopped making payments 13 MONTHS ago and still has not been booted from the property. this person calls the lender regularly only to be told that they are "behind on the paperwork." i don't know who the lender is. things are falling apart faster than a chinese motorcycle around here...

      • In my original post I spoke about the highly leveraged retailing sector... The giddy bulls on CNBC just let slip that 6,500 stores will close this year... That "Linen N' Things" has to pay its vendors in cash... No "never, never" payments...

        As we know commercial real estate space also went through an enormous construction boom as well...

        I wonder what is going to happen to all that shopping mall space? Well, I agree, 6,500 isn't that many stores... But still. The giddy go-go days of yore are gone. This ain't Goldilocks folks.



    • Very cogent explanation.



      • 1 Reply to drdavidhuddleston
      • I should have mentioned one further key, crucial point...

        The world has a bad habit of following the US when going over a cliff...

        Many countries viewed the astonishing "growth" in GDP in the US with envy. In Europe, Ireland, England and most especially Spain decided that a housing boom would benefit their economies as well! Hence, they too went with the ARM plan finding hundreds of thousands of the home-buyers needed.

        Consider that in Spain, more homes were built in the past few years then in Germany and France combined.

        Now these countries that played the home-Ponzi game are having a housing bust hang-over. Today, the Bank of England just put up 100 billion in mortgage swaps to banks to rescue them. (Socializing the losses privatizing the gains. An ancient game.) Economists and analysts describe this action as a "good start." No doubt, there will be numerous rounds of swaps. (Note this is AFTER English tax-payers nationalized a bank to the tune of 25 billion pounds.)

        The problem for Spain is more severe. The Euro is a currency without a Treasury. The ECB is not going to go to Spain (without extending the same policy to all members) and do a similar swap. Watch for Spanish banks and for those with a great exposure to Spanish real estate to announce enormous losses.

        In short, it will NOT be a US recession only. Those nations who ran with our play book are now facing problems too.



    • Terrible. Just terrible housing numbers. Atrocious!

      The housing bubble continues to get ugly, meaning further losses for the financial sector, meaning less issuance of credit. Means more bankruptcies and a long recession.



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