Archive for December 17th, 2008

Rubbing the worry beads

Wednesday, December 17th, 2008

Looking forward to the holidays and the New Year. This has been a lousy year in terms of finance, but not for ShadowTraders. Happily, we at ShadowTraders have more going for us in life than just money. Here are the items weâ??re concerned about in the coming year. Some items were talked about previously, but have now intensified (in no particular order):

1. The hedge fund industry collapsing. The deleveraging alone was causing trouble, but now the Madoff affair will create a massive crisis of confidence for that entire niche.

2. The total cost of bailouts, failouts, handouts and pass-outs will exceed $10 trillion. I had only thought $5-7 trillion only a few months ago. The actual yearly deficit will be between $1-2 trillion next year.

3. Multiple bank failures that precipitate the bankruptcy of the FDIC. (If you want to be really depressed, the FDIC is right at the edge with guaranteeing funds. One more lemonade stand goes bust, and down they go).

4. Commercial real estate experiencing a greater percentage loss than residential housing’s decline.

5. Implosion of the $2.4 trillion consumer credit card industry, which is already underway with a threat to withdraw $981 billion of existing credit.

6. Implosion of one or more major state pension funds (So far I think California is in the lead with the Cal-PERS losses up to 33% of total assets for a minus $81 billion. Race to the bottom, indeed).

7. US automakers going into full liquidation. This would create some 1 million unemployed (from the Big 3 and allied suppliers). The additional 432,000 retirees from the Big 3 would be shunted to the Pension Benefits Guarantee Corp (PBGC) for pension payments. Of course PBGC has been struggling since around 2003. With so many more outstretched hands, they too would surely fall.

8. Inauguration Day surprise (or shortly thereafter). Think ‘bank holiday’ after which accounts over the FDIC limits (I believe $250K right now) will be gone. This may even include small commercial accounts. The workaround is to have multiple accounts under the FDIC limit at various insured banks.

9. Massive hyperinflation due to the already printing of $3 trillion dollars in the latter part of this year (without any corresponding value to back up that money). With the miracle of fractional reserve, that $3 trillion turns into $30 trillion of future leverage. Massive inflation from a run to redeem dollars from our foreign creditors before they devalue any further.

10. False flag activities designed to distract the populace from the financial issues. This could be war with Iran, Russia, Somalia, Pakistan, Burma, etc. Any other conveniently timed â??terrorist activitiesâ??, or domestic detonation of nukes.

11. Failure to transition to the newly elected president (or at least not the one you think should be there). Not as far-fetched with the Blagojevich scandal (half of Illinois is in on this one). We wouldn’t rule out assassination if harsh measures (as far as bankers are concerned) are implemented.

12. A forced conversion of 401(k) accounts to buy US Treasury bills.

13. Shortages stemming from halted goods imports from foreign creditors no longer willing to accept devalued dollars (or from pricing shooting skyward from devaluation).

14. A partial or complete bankruptcy of the US. By ‘partial’ I mean that for some holders of our debt (the ones with nukes who would use them) we would make good. The others would get to sit and spin.

15. A college “crash”. Financing for college tuitions drops down to seriously low levels. Correspondingly, attendance levels drop. The would-be students would probably head to community colleges, trade schools or attempt to find apprenticeships in lieu of spending $10K/year or more.

 We want to make clear, these are concerns, not predictions. Despite any cabals, plans or conspiracies, nothing is written in stone. If I saw a man coming at me with a clenched fist, I wouldn’t just stand there and say to myself “Well, I guess I’m going to get hit.” I’d figure out how to block or duck the punch and be able to defend myself. These items are food for thought, use them as such. Plan for the best, prepare for the worst.