Thursday, March 13, 2008

Vicious Cycle'

``We're in a vicious cycle,'' Sharga said. ``We've got depreciating home values and loans resetting at an outstanding volume just as banks are retrenching. Even people who want to buy a home now are having trouble getting a mortgage.''

The one thing that all credit cycles have is a persistent and pervasive surprise to the downside; the simple reason is that there is a continued adjustment of overvalued assets, and those overvalued assets are still deflating, they are actually increasing to the downside, especially Real Estate, and now Real Estate deflation is now spreading around the world. This is extremely important since all Real Estate crises have caused distortion to the capital markets, add in global stock markets are unwinding; you have huge deflationary forces to the downside.

Most banks are levered 8:1 or higher, hedge fund ever more, so what are the risks as the great unwind continues. Mortgage resets are yet to peak, forecloses are heading higher, and the global banking system is tightening. I will not even address the advantage in derivatives, who really knows how much risk there is, this puts even more pressure to the downside.

Europe is slowing, the yen carry trade in unwinding, we can also add in record gas prices real and nominal for most countries, along with commodity price increases, which in itself could trigger a huge adjustment to the global economy.

So the supercycle of credit has burst, the stock market cycle is still unwinding (2000), the Global Real Estate cycle (Kuznets) is unwinding, add in the (Jugular) cycle, which I believe is centred in Asia, is to peak this year, China should also expect a slowdown after the Olympics. Add in the generational (crisis) cycle and Baby boom generation (spending wave) cycle, you have these long cycles putting downward forces on the global economy; these forces are a huge and extremely deflationary, counter to the concerns of stagflation.

A vicious cycle to the downside is just starting.

Global Investment cycles


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These are my own views, please enjoy these insights