Thursday, August 14, 2008

The New Global Recession

It seems over the past week or so the general consensus of the financial professionals is that we have now entered into a ''global recession.'' They say that the slowdown, stock losses, and inflation have now become a global problem that we will be dealing with for years to come.

What is never mentioned is that all the problems with foreign economies stem from the basic fact that they have lent the United States a lot of money that we cannot pay back. Yes, they made a mistake in doing it, and there are going to be significant losses in the short term and they are going to have to lick their wounds. But what I like to think about is, what is going to happen after that?

During the subprime mortgage era of 2002-2006 it was standard procedure for banks to lend money to customers they knew had no way of paying them back. Because of securitization they were able to offload the losses onto the final holders of the CDO's, and it was only a question of how many loans could be given out and thus how much "market share'' you were capturing. Fannie Mae recently admitted their lending restrictions had become far too low during the boom, but they felt it was something they had to do because if they didn't they would lose "market share" and their stock price would suffer in the short term. Their goal was to lend as much money as possible to homeowners that had no way of paying them back.

Looking back now it is so obvious how foolish the situation was. Now that we can look in the rearview mirror, the question is; when banks finally finish taking their losses and their stocks have been finished getting beat to death (we're still a long way away), do you think they will then go back and open up the credit lines to subprime customers?

The answer is no. So, it's important to understand that the economy that we live in now is the American subprime economy. The foreign countries have lent us a lot of money that we have no way of paying back, and they are now taking losses in the short term. But once the smoke clears, and they "write us off", they can continue their real economic growth and stop throwing away money that will not be paid back. It will become obvious to everyone at that point that we are what is holding their economy back and after their short term pain they can then continue their economic growth as we collapse without their life support.

Just as Goldman Sacs can go back to focusing more on investment banking, for example, New Century Financial's doors will not re-open. (The former largest subprime lender)

The dollar is going to get pummeled, and the American stock market is going to lose a tremoundous amount of real value. Where is the stock market going to end up? Here's where:

An ounce of gold is going to be worth the value of the Dow Jones. Where will that be? I don't know. It could be:

$5,000 gold, 5000 DOW
$7,500 gold, 7,500 DOW
$20,000 gold, 20,000 DOW

The numerical value of the stock market does not matter, but it's purchasing power is going to get absolutely destroyed. It's very, very difficult for people to see this because we live our day to day lives in this bubble; Subprime America. Just as it was impossible for real estate agents to see the magnitude of the implosion during the spring of 2005. When the bubble bursts, it's going to be the greatest transfer of wealth in history, and American assets are going to go on a fire sale. There will be a window of opportunity that will open and how you position yourself now for that moment will determine your financial future.

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