The horrible recession to come

The horrible recession/depression to come

::: Transcribed from personal myspace blog account:::

Welcome to another one of my economic blogs. But, this one is serious. Call it inside information, call it observances, call it what you will - Bottom line is that we're heading to a hard fall economically which will laeve us vulnerable on many fronts for economic subordinace.

It started today when I put in another equity application. This was the 4th equity that I put in this month like this. The customer had adequete equity in their home - about 100K. The value was stated by the customer about $550K, and the customer just refied with BAC for 420K - For those of you not in California, this is a normal thing... You still can't find a small condo for under 300K, at least not in the past... So, I submit the application. When I go to check out the details, the appraisal comes in at 450K. That leaves 30K of equity, and that leaves the customer not able to refinance their auto debt, their credit cards, etc, which they wanted to do. This is the 4 th loan like this. On average, the appraised value of the property came back about 70-100K Lower than the customer thought, or even Zillow.com said. Amazing.... BUT WAIT - So, I talk to Ricardo, the business specialist. He said that he is experiencing the same thing on the business end. Its harder to qualify customers.

Now, you have to understand, Wells Fargo is AAA rated by moody's and S&P both, and has the best credit rating. So, in light of the recent subprime debacle, I can understand them tightening credit - but this much? Apparently they are taking the low end of appraisals and being on the safe side of all credit lending.

Okay, so Wells Fargo is conservative. But, what is that to say about the future? Is Wells Fargo actually a leading indicator of what's to come? If so, the banks across the U.S. are going to tighten their lending practices - Which will decrease Consumption and Investment - Both contributing factors in the GDP, the benchmark to measure economic performance. This is not even taking into account of an economic downturn, or interest rates rising. This is merely the tightening of lending practices.

What does this mean? This will start filtering through the business community. As small businesses need to finance the inflating cost of goods, that is actually an affect of the increasing cost of capital that is passed on to the consumer/small business, that the small business won't be able to borrow like the could/should. This will start having the small businesses laying off people, which will start hurting the Consumption in GDP. Not only that, but the Consumption will also hurt because Consumer credit is getting harder to approve. So, for those that haven't taken out equity lines of credits on their home for emergency's, thinking it's there for a rainy day, it won't be, because they won't qualify when they get laid off. This will reduce consumption significantly that luxury goods will start decreasing. This will, in turn, put more people out of jobs and decline the economic activity even more.

The problem here is that we will be sliding into a recession and inflation will be rising, because the cost of capital is higher, and corporations will increase prices based on this. So, the government has already stated that inflation is more important than economic activity, so this will raise the probability of Fed Funds rate tightening. Once this begins to happen, we will see the real declines in real estate and the economy, and this is when the depression will hit.

Once this happens, it is inevitable that prices will come down, and deflation will take hold, and things will come back around. But, this is going to be a hard time for the United States. The biggest fear I have is that it will depress our economy so bad that we will be more vulnerable to take over, economically. However, if China and Japan quit financing our debt, then we will experience Germany during WW2 - Google it. With a lack of faith in the American economy, Government spending, another component in the GDP will also take a beating. This will set us into a deeper depression. Will this happen? I guess we'll see, but I doubt it'll get to that extent.

Bottom line is, things are a changin' - Stock are at all time highs, Real Estate is at all time highs, Bonds are at all time highs, commodities are near all time highs, and international stock markets are at all time highs... WHERE DO YOU PUT YOUR MONEY TO MAKE MONEY?!? ALl things correct after some time, and by correct I mean go down... It's the cycle of business and life. Unfortunately, I think that if we go into a depression, the whole world will as well, and we won't go into the deep depression I talk about, because we will work it out. So, hold onto your cash, be patient, and get ready for a downturn unlike anything we've seen in the past 25+ years... I'm thinking on the levels of the late 70s, early 1980s...