Disappearing Equity

LOW QUALITY BUSH ERA GROWTH - HOUSE OF CARDS TUMBLING DOWN

We now have the three disappearing equities:

• Disappearing bank equity
  In three parts:
  
  1. 1. Sub-prime write-offs for bad credit
  2. 2. Return of credit-risk spreads to 'normal' levels
  3. 3. Temporary blow-out of credit-risk spreads to 'de-leverage' and 'recession' levels
     
• Disappearing home equity
  In three parts:
  
  1. 1. end of supply of junk credit
     
  2. 2. stress of foreclosures, especially on 'onerous terms' mortgages
  3. 3. pickup in unemployment / recessionary impact
     
• Disappearing stock market equity
  In three parts:
  
  1. 1. Rising inflation and slow growth, unfavorable for financial assets
  2. 2. Falling dollar and high energy/input costs squeeze profits
  3. 3. Rising prices of credit, declining lending capacity, and tapped out consumers
     

A bank sector weakened already by the "subprime mess" and an inflationary-recession economy are feeding off each other - in a bad way.

Markets aren't good at waiting to see what the cash flows will look like. They often discount the worst, which has a peculiar way of making the worst obtain, in some parts that cannot weather the storm.

The unwinding of the low-quality growth of the Bush era starts to look a lot like the unwinding of the cheap growth of the Reagan era. This is not going to look like the dot-com bubble pop.

artwork: michael costello

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