Monday, October 20, 2008
bouncing over bleakness
there's more as well -- both in the financial times' relaying of the most recent hayman advisors letter and john jansen linking to john mauldin's white paper (also referenced by henry blodgett at clusterstock).
i'll excerpt kyle bass of hayman, whose letter is titled "the darwinian flush" -- which puts into very grim perspective the issues facing the financial sector.
3-month LIBOR is off the charts - not as many believe, because banks don’t trust each other - but because THERE IS NO MONEY LEFT FOR THEM TO LEND TO EACH OTHER. ...
We realize that there are many moving targets, but we must attempt to put things into perspective for those of you at home. To date, some $550 Billion has been written down by the world’s financial institutions. ... Our expected default rates and severities imply that over $2.2 TRILLION of defaulted mortgage loans would result in AT LEAST $1.1 TRILLION of REAL LOSSES in mortgages IN THE U.S. ALONE. ...
There is approximately $7 TRILLION of total corporate debt in the United States. ... Standard and Poor’s recently penned a report that they expect up to 23% cumulative corporate defaults by 2010. ... This suggests that we will see at least $1 TRILLION of corporate debt default over just the next 2 years. ...
... [U]nderstand that book value isn’t worth the paper it’s printed on. How did Lehman, a firm with a STATED TANGIBLE BOOK VALUE of $15.1 billion, go from this number to ZERO overnight? ... There should probably be an asterisk next to the “tangible book value” entry on the balance sheet. It should state that, “this number is obtainable if all of our assets could be sold in a perfect world based upon our models, hopes, and dreams.” ...
... about the CDS market ... we could see at least ANOTHER $1 TRILLION of losses in CDS contracts alone.
World financial institutions just don’t have another SPARE TRILLION (on the low side) dollars lying around. ...
In the grand scheme of it all, there is really nothing that can be done. Both the US and the world economy are headed for a financial winter the likes of which we have never seen before (unless you happen to have been alive in 1929). We are not saying we will see bread lines - the enormity and severity of this crisis is somewhat balanced by the students of history like Bernanke and Paulson on the other side. However, the most frightening chart we have seen is one that compares total credit market debt to U.S. GDP. The average of this ratio over the last 100 years has been around 155%. This ratio peaked first heading into the Great Depression at 260% (after then falling back to 130%) but has now risen to an unprecedented 350%!
... We think we will see 10-12% unemployment, a 4-5% decline in GDP, and the equity markets could drop at least 70% from peak to trough. ... Remember, all of the loss estimates we have reviewed have really ignored the coming losses in credit card debt, commercial and industrial loans, commercial real estate loans, CDS contracts, auto loans, and unsecured personal loans. We are experiencing the global deflationary bust of all time. It will deflate the values of just about all assets. Anything and everything we own will decline precipitously in value. We are not perma-bears like some others, but we must be realistic about facing this terrible economic environment.
... This deflationary bust will take MANY YEARS and MANY BANKRUPTCIES to play out. We are but one year into the mother of all credit crunches and two years into a housing decline. Don’t be seduced by anyone telling you that “all will be fine” anytime soon.
------ ------- ------
v -- it's anyone's guess at this point.
i think housing is a mortal lock to decline for 6-7 years following its 2005-2006 peak -- 2012 or 2013 sounds right, probably at a significant discount to current pricing, though the speed of declines should abate.
banking too will be several years in recovery. there are still many, many bank failures in our future. finance will get small.
for the economy broadly, though -- there's a number of avenues to take, and which gets played out depends on things we don't know. i expect a couple years of recession/near-recession; it could be significantly better or worse than that, time-wise. but i think it will go down in the history books as a "depression", not a recession.
------ ------- ------
Post a Comment