Thursday, September 18, 2008

The fat lady hasn't sung.

The worst is yet to come
'No market for old men,' TCW investment strategist warns in gloomy forecast
By Jonathan Burton, MarketWatch
Last update: 9:34 p.m. EDT Sept. 17, 2008

SAN FRANCISCO (MarketWatch) -- An influential investment strategist has a dire forecast for U.S. stocks, credit markets and the continued independence of some of the nation's top financial institutions.
Jeffrey Gundlach, chief investment officer at Los Angeles-based mutual-fund company TCW Group Inc., told clients on a conference call late Wednesday that the crisis in credit and housing may not abate for several years and is actually getting worse.

In the deteriorating climate he sees unfolding, Gundlach said, the Standard & Poor's 500 Index (SPX: S&P 500 Index SPX 1,158.30, +1.91, +0.2%) could fall another 30%, giant Citigroup (C: Citigroup, Inc. C 13.51, -0.52, -3.7%) could become an "AIG-sized debacle," Morgan Stanley (MS: morgan stanley MS 17.62, -4.13, -19.0%) would merge with a banking company, Wachovia (WB: Wachovia Corp 10.16, +1.05, +11.5%) won't be able to stand alone, default rates on even prime mortgages could soar, and European banks' woes are just beginning.

"This is no market for old men," said Gundlach, who also manages TCW's flagship Total Return Bond Fund (TGLMX). "This is no market for old-school thinking."
Gundlach based his assessment on a belief that housing prices still face several more years of decline, a protracted slump, he said, not seen since the Great Depression. Moreover, Gundlach said it's possible that home prices could be sluggish until 2022.

"If it's like the Depression experience -- and it sure is shaping up that way -- it could take several years. Maybe we won't see a bottom in home prices until 2014," he said...


Oh, lovely - just in time for the peak oil crunch.

...Expect loan default rates to rise, Gundlach said, not just in the subprime market, but among the top-drawer prime borrowers as well. The prime default rate could approach 10% from a current 2% before the carnage is over, he said.

... Accordingly, financial institutions may suffer write-offs that could surpass $1 trillion before conditions improve, he said. As of late August, credit losses and writedowns at the world's 100-largest banks and brokerages topped $506 billion, he noted.

Among the casualties, Gundlach said, is Citigroup. The company's balance sheet problems could be on a scale similar to that of insurer American International Group, which the U.S. bailed out this week.

"I would give a very meaningful probability to the biggest, next AIG-size debacle being Citigroup," the strategist said.

"I would definitely not be a buyer of Citigroup stock," Gundlach said...


Personally, I would make every effort to use whatever assets I had to get out of debt completely, right now, and use any remaining funds to position myself to be self-sufficient and not reliant upon automobiles in my community, and only then re-invest what I actually had as surplus, knowing full well that I may never see it again. That's the reality of the situation. It will be far more in your economic best interest to pay off your mortgage and credit cards and loans than it will be to try and hoard money for some far-off retirement - the money may vanish into the hole from which it sprang, leaving you still in debt but with no assets, either. Debt is bad, class, very bad. Get out of it now while you still can. Not paying interest or principal on loans is currently the best move you can make to increase your monthly budget.

And once you're out of debt - stay out!

UPDATE:

MoneyWeek Online
The economy will plunge, despite the AIG rescue
By Deputy Editor John Stepek Sep 17, 2008

...So what’s happened – and what does this mean for the wider economy?

The Fed’s decision to bail out AIG after apparently drawing a line under bail-outs with Lehman Brothers shows just how much more important it was to the financial system. The problem with letting AIG collapse is that the group’s tentacles reach everywhere...

...It just goes to show how rapidly the threat to one company can spread in these interconnected markets. So does the Fed bail-out – which involved AIG giving up a near-80% stake to the government, and cost the jobs of many senior managers, including chief executive Robert Willumstad – draw a line under the credit crunch?

It doesn’t seem likely to me. The markets will certainly be relieved that the Fed has stepped in to save AIG. As my colleague David Stevenson pointed out yesterday (Lehman won’t be the last domino to topple – is AIG next?) there was a lot more than the future design of Manchester United’s football shirts at stake.

Yet it makes it much harder for the US authorities to justify their tough stance on other industries. Although AIG’s woes were ultimately caused by its exposure to sub-prime mortgages, ordinary people aren’t going to see it that way. Particularly when John McCain, for example, is whipping up populist support by arguing that taxpayers are saving Wall Street, while blue-collar industries like car manufacturing are being left to go begging...


Like ANY manufacturing, for that matter. Now they're in the position of having to explain why when the big financial companies start going down, they're now suddenly concerned with manufacturing - AFTER millions of decent paying middle class jobs have already been eliminated and replaced with sub-living wage "service economy" jobs at wally-wort and lawn-service-emporium (translated: hoping-other-people-can-afford-to-have-us-do-their-lawns-is-r-our-only-plan).

...And this is why the idea that the fall-out from the financial economy won’t have such a big impact on the real economy, is so ridiculous. In Britain, the real economy pretty much IS the financial economy. Most of our spending power has been built on rising house prices, which have been facilitated by ever easier credit flowing from the global financial markets. That supply of credit has been brutally shut down, and regardless of what the Fed, the Bank of England and the European Central Bank do to interest rates, or special liquidity schemes, or whatever, it’s not going to open for business again any time soon.

The staff at Lehman Brothers have our sympathies – but they are far from being the last to suffer in this crisis...


And check this out - the MoneyWeek "recommended article" for yesterday was:

Why investing is not for the brave

Courage can be an admirable trait. But bravery has little place when making rational investment decisions, says Merryn Somerset Webb. Buying property isn't brave. Nor is buying bank stocks or junior miners. The word to describe those actions is 'stupid'...

There you have it, folks. Pay off your debts - don't gamble with your money. Dumping good money after bad is just "stupid."

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