Posted by: Matt | March 5, 2008


With Bernanke calling for banks to forgive portions of mortgages, the weakest dollar in 35 years and an indebted and over-spent consumer serving as the backbone of our economy, are we in for catastrophe or is this just a recession of words? It is hard to know, but the fundamentals of our economy are weak and will likely result in some sort of correction. Certainly some individuals and property speculators are feeling some real pain right now, but the long lines at the unemployment office are just not appearing.

What could drive us towards those long lines and government cheese? Here are four possibilities:

  1. Sovereign wealth funds and China quit investing in dollar-based assets and the bottom drops out of the dollar.
  2. The remaining home owners with ARMs default on their loans and “walk away” from their overpriced homes and unafforadable mortgages.
  3. Bond insurers default and declare bankruptcy, increasing costs to local governments and generating another round of steep write-downs at the big banks.
  4. The Fed and Congress over-stimulate the economy (see 1. – stagflation)

I’d say that any of these is somewhat likely. What can we glean from this? Probably nothing, but many of these scenarios result in a weaker dollar. I’d guess that exporters will continue to do well through the coming months.

Where do you see weakness? What are you doing to take advantage of it?


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