Sunday, August 3, 2008

Feeling Bullish ? Here is a dose of pessimism

If you feel that the bear market has come to an end, here is a point of view that suggests much worse is coming.
After providng a review of the forecast made in January 2008 ( came true on most counts), the author tells us:
"Looking ahead
As we go forward, I expect that there will be more and more individuals, businesses and governments that will be unable to repay their debt, because of indirect impacts of higher oil prices flowing through the economy. Eventually, the US government will have to make a decision as to what to do about all these defaults. The most obvious options would seem to be:
(1) Prop up as many as possible
(2) Let the chips fall where they may
Either of these would seem to have the potential to lead to serious disruption. If the "prop up as many as possible" approach is used, it theoretically could lead to a high inflation rate, high interest rates, and a severe drop in the dollar. I would expect imports of all kinds to drop, including petroleum imports. This could lead to parts of the country losing liquid fuels because the pipeline structure cannot easily distribute a much smaller fuel supply. The decline in imports other than oil could also be a major problem because we manufacture so little ourselves.
If a "let the chips fall where they may approach" is followed, it is possible that bankruptcies will cascade through the system. If there are inadequate funds in the FDIC, and banks are simply allowed to fail, this would have very negative consequences. One can think of a lot of other organizations that might need propping up--states with a lot of debt, like California; Fannie Mae and Freddie Mac; auto manufacturers; airlines; LNG terminals; independent oil refineries; and pension funds, to name a few. "
Wisely, the author says he cannot be sure of what will eventually happen:
"How much of this will happen in the next two quarters? I don't know. It is likely that Ben Bernanke and Henry Paulson have some ideas I haven't thought of, and there is a way out of this predicament. I don't have all of the answers. It is likely to be an interesting rest of 2008."

This is my third post for the weekend, two more are found below this one.

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