The Shadow Banking Deleverage & Dow 3600 to Come

MSN's Jon Markman explains many of our natterings in detailed fashion...

Governments are not really trying to save the system anymore. They now realize that's impossible. They are just trying to manage the decline.

its not hard to see the DJIA sinking to around 4,000 -- a level it last hit in 1995, before debt started to play such a large role in corporate and personal finance.

That would entail a decline of 70% from its 2007 peak, or about the same amount the Japanese stock market has fallen since 1990 in the wake of its own debt unwinding.

If that seems too harsh, well, the math is pretty easy to explain.

(Click on the link and read the rock solid math explaining how the deleverage will level this still grossly overvalued market.)

Unemployment, is expected to mushroom at least to 8.5% if not 9% or higher by the end of next year.

With stock and home prices in a tailspin, consumer net worth is already on track to decline 14.7% year over year this quarter, a record plunge.

corporate profits are on track to decline 10% in 2008, and that if U.S. gross domestic product stays flat next year,

corporate profits are likely to fall 13% more in 2009. That would be the first back-to-back decline in profits in the post-World War II period.

The shadow banking system worked so long as everyone at the base of the system paid their loans on time,

but economic stresses of the past year have tested that concept, and it has flunked.

There are as much as $3 trillion to $5 trillion in similar deals coming back onto bank balance sheets from CDOs, SIVs, currency swaps and the like...

so you can see that governments' effort to recapitalize banks experiencing a run of deleveraging is not trivial.

They will back up banks to the minimum required for solvency, but not anywhere close to their previous free-lending glory.

none of (the previous) blowups involved an equity, credit, commodity and currency crash all rolled up in one.

It will literally take a miracle to solve this mess. Cross your fingers, and hope that a rollback to 1995 is as bad as it gets.


The Nattering One muses... we have nattered many a time about shadow banking and off book chicanery...

the deleveraging to come, as reported yesterday...Credit default swaps totaling $33.6 trillion are outstanding.

$15.4 trillion are individual corporate, sovereign and asset-backed bonds. $14.8 trillion are tied to indexes.

Nattered before... Dow 3600 is not just possible, but more than likely... as stocks sink like worthless REO real estate in SW Florida -70% off from peak...

Markman has Nattering style... the fallout is upon us and those who died at ground zero were lucky...

because the government can cut to zero and bail all it wants, NOTHING will stop this trainwreck, its a fait accompli... and the worst is yet to come.

If your not out yet, you need to have your head examined.

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