The great thing about blogging is to watch "smoke and mirrors" and release all frustration by anonymously writing about it and thinking that someone is actually reading it.
Conventional wisdom says the next shoe to drop in this economic crisis will be commercial real estate and, in fact, it is already happening. That's nothing new to anyone reading the Wall Street Journal or any other financial or business-related news.
My sources, however, tell me a wave of banks--mainly community and mid-to-super regional banks--will be closing by the end of the third quarter as FDIC offices staff up in California and Florida. Bank United--taken over yesterday--is just the beginning.
I forecast a collapse in the stock market around mid-November. Why?
Well, let's see. First, mark-to-market rules now make banks look more solvent than they really are, which is insolvent. Geithner, himself, even said that the job right now is to increase confidence and the Treasury and Fed do this by using "smoke-and-mirrors" to make the picture better than it really is.
Basic economic indicators and human nature, however, do not lie--nor does common sense, which has been the one consistent indicator in this crisis.
Optimism is great, but polyannish behavior can cause even the most well-intentioned CFO to lose not only his or her job but put his or her business into bankruptcy.
Let's look at the facts:
1. Unemployment continues to increase and economists say it will continue to increase into 2010 if not further;
2. Credit remains tight--Despite the TED spread dropping, credit is tighter than ever. A business that needs the loan may not get it; one that does not need it may not want to go into debt for fear shareholders will consider it a weakness--as large, insolvent banks do.
(By the way, when do banks become solvent? When toxic assets turn non-toxic. Give it...oh...6-10 years. The Fed is optimistic saying we won't have a full recovery for six years. I don't believe home and/or commercial real estate values will return that quickly. I give it 10 years--like Japan's lost decade. It's easy to tell another country the right thing to do is let banks collapse. It's the right answer, and the U.S. said this to Japan before their decade-long recession. But try letting that happen to your own country. Wasn't so easy for the Paulson-Bernanke Bush team. The Geithner-Bernanke Obama team are keeping it up. Nobody wants large banks to fail when they're leader and certainly Congress doesn't want it. How else will they get paid?).
3. Strong regulation is coming for the financial markets which will--rightly so--keep the markets disciplined in the future. Let's hope long-term future. The U.S. needs a gradual recovery once it hits bottom--whenever that is. Which brings me to my next point.
4. Consumers are into not spending money. It's not just practical, it's the new fad sweeping the nation--Don't Spend...Save! Just as the past 30 years have been all about materialistic needs and increasing debt to make the middle-class feel as if they're upper class (because their wages never increased) the next 10 years or longer will be about savings and not letting the corporate executives be the ones with all the money. After 9/11, consumers were spending for their country and housing took this country right out of a brief, minor recession. Not this time. Businesses want consumer cash? They'll have to lower costs on those discretionary items. Lower costs is DEFLATION, not INFLATION (that might come later).
5. So now, with less items purchased, less manufacturing, less income for stores, less retail, less accountants and office services, less Wall Street, less office tenants, less real estate-related jobs, less housing boom, less income for REITs, less warehouse, less travel, less hotel jobs, less money to pay the commercial mortgages and commercial mortgage-backed securities on all of these loans made between 2005-2007 that mature in 2015-2017. Although many of them are going into default right now, refinancing them remains difficult in the long term. Keep your fingers crossed--we may have fully recovered from this "recession" in six years, according to the Fed. That would make it 2015. If not....commercial mortgages in default...like residential, it ties to derivatives and credit default swaps and bondholders losing money and everything that made the economy collapse in the past year. Can you say "double-dip recession?"
6. It will be at that time, when we discover the second shoe to drop, that the stock market investors sell off financials and all that goes with it because the dollar won't be worth the reams and reams of paper the Fed has used to print it on. Therefore, they won't be able to bail out banks and some large financial institutions will eventually meet their destiny--failure. Just like Bank United's failure only on a larger scale.
7. So then what happens? Just look at the history books, which Ben Bernanke has done so throughly. The Great Depression, 21st Century Style. 75 percent of people employed (depending on how you look at statistics, we're only about 10 percent unemployment away from that number and many people are still living on unemployment checks, not looking for work. Some still have jobs that may not very soon. Some may be starting their own consulting firms, which is a good thing to do right now). Soup lines? Well, there was unemployment insurance back then.
8. And then, when we've hit rock bottom and realize true value in this world does not come from monetary gain but in personal pride, investors with plenty of money on the sidelines--much of it foreign capital--step in to gobble up that real estate. Entrepreneurial minds create and manufacture for the future. Green manufacturers and/or technology leads the economic recovery--possibly forming a new wave of optimism and dare I say, another bubble that awakens the greed again in mankind. At that point, enjoy the rising market, the 401K income and its ensuing wealth. Hopefully, though, everyone will remember this economic event and gain some wisdom from it.
For me, I'm no investor, but I know that when that stock market hits anything near 11,000-14,000--if it does again in my lifetime--my money's going into the most conservative fund possible or maybe even under my mattress!
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