One of my banker friends in London, who amazingly still has a job, emailed me this afternoon trying to get some perspective on what the fall out will be from the coming global recession. I wrote back outlining my worldview, and was shocked at how pessimistic I sound.
First, allow me to freely admit this is not going to be a well written diary, rather its a distillation of a fair amount of analysis into easily digestible bullet points. Second, my analysis presupposes Obama wins. If McCain wins, all bets are off the table. Third, none of the following should be construed as any sort of investment advice.
My US centric take on it:
- This is an unwinding of overleverage and credit creation that started in 1981.
- After the financials are finished getting creamed, the contagion will spread into sovereign nations without adequate reserves from either the long commodities boom or from the ability to cheaply export goods. This is what we are seeing with Iceland, Ukraine and in the next week or two, Pakistan. Interestingly, I believe India will be the biggest sacred cow that gets gored.
- Any large entity that has to have access to a deep and liquid credit market is going to get it next. To me, that means telecoms, cities, counties, states without a cushioning industry are going to get it terribly. If you look at the 3 big tech hubs in the US, Silicon Valley, Boston Rte. 128 and the DC suburbs, of the three, I think they are all in deep doo doo, to be perfectly technical, but DC probably less than the others. I know there is some rush to justify programmatic goals and to hire people who know how to do budgets with programs that have been defunded. This, of course, almost never happens here, but change is coming.I suspect the estimates in the 2-3 trillion range are a bit low, I would place it at 2.5 - 3.1 trillion in total wealth destruction.
- I have unemployment hitting 10% by Q1 10, bottom occurs around Q2.
- Corporate earnings are going to get smashed, financials and non financials alike. This ties into the above, but there is going to be a lot of writing down of derivatives that corporate treasuries are holding. Possibly some significant bankruptcies in very unexpected areas far away from finance.
- Energy, specifically oil, will trade around $60/bbl, which will help to sap the will to develop alternative energy alternatives, but it will also mean land that has not been drilled on will not be drilled on for at least 10 years, since the oil companies will not sink the money into E&P at that price level. I think Obama will be able to justify the alt energy programs as jobs programs for white collar tech people. Blue collar folks will get infrastructure investment to provide jobs.
- Along those lines, tax and trade policy will radically change. Offshoring will be heavily penalized, Buy American initiatives will replace the flat world silliness. Of course the domestic buy programs will be just as ridiculous, but as I understand it, economic issues will begin to blur into national security issues.
- Trading wise, emerging markets are going to get killed as the flight to quality play works in synergy with a new need for Americans and their government to save a much higher percentage of their incomes. I suspect accumulation time will begin this time next year, with a few little nibbles in some of the current account surplus commodities producing states.
- The global housing bubble is getting ready to collapse. Not just deflate slowly, but there a massive destruction of wealth in the real estate markets, with residential leading the commercial by about 6 months. London is going to be the poster child for this one.
- The Rebirth of Multilateralism. The G14 or 20 are going to have to coordinate efforts on this one. Under Obama, the US will be drained of the cowboy unilateralism that has drained our blood and treasure. Cooperation will be the antidote to the alternate Leviathan-esque behaviour that will rear its ugly head.
I could be very wrong on the whole thing, but like Whoopi said in Ghost: "Molly, you in danger girl".
Oh and Obama gets reelected in 2012.
UPDATE: It seems Iceland has named two women to clean up the mess the men left. That's one job I would not touch with (feel free to use your imagination to finish the sentence).
From the Financial Times:
http://www.ft.com/...