October 02, 2008

Blodget predicts US housing fall of 40%, stock market crash of 50%, massive bank failures, trillions in losses, bottom not until 2010 earliest

Can't say I disagree, even though I think there are many, many more surprises to come before we enter a New Great Depression. The Fed and the US government aren't going down without a fight, in an attempt to put off the day of reckoning.

Here's his post, in full. Read it and weep. Prepare for the worst, hope for the best.


Now that the government has been terrified into rubber-stamping the Wall Street bailout, what happens now?

I wish the news were better, but in opinion, here's the most likely scenario:


* Hank Paulson & Co. survey the banking industry and decide who will stay and who will go. JP Morgan, Citi, Wells Fargo, and Bank of America will stay. Goldman will probably stay. Morgan Stanley might stay. Everyone else in trouble could go. The government doesn't need to save all banks. It just needs to save some.

* Within a month or two, Paulson buys $250 billion of crap assets. He pays more than market value, but not an egregious amount more (because the public will be watching these early rounds). Over the next six months, he buys $700 billion of assets...and then he--or his successor--asks Congress for more money.

* Confidence improves modestly, but banks continue to hoard capital and credit markets stay tight. Loans stay expensive and hard to get. This keeps pressure on the economy.

* The credit crunch filters through to consumers: Credit cards, home equity loans, mortgages, car loans, etc., get more expensive, putting more pressure on consumers and forcing them to cut back further.

* The economic news continues to get worse: American consumers continue to pull back, housing continues to fall (as of July, the year over year declines were still accelerating), companies begin to cut back, which leads to layoffs--which puts more pressure on consumers.

* The global economy continues to weaken: Europe, Asia, and, eventually, emerging markets. This is already happen, and everyone else is later in the cycle than we are.

* The stock market continues to fall, as corporate earnings come under increasing pressure and hope for an early 2009 recovery fades. Analysts are still expecting huge growth in S&P 500 earnings for next year. These estimates will get cut by at least a third.

* The government enacts further measures to try to stop the fall in asset prices (stocks, houses)--including an expansion of the bailout plan--but these don't work. Governments always try to do this. They never succeed. All they do is delay the inevitable.

* A new round of white-collar prosecutions send a new posse of corporate villains to jail. Some will be guilty. Some won't. All will be hated.

* The government announces a new New Deal, finally investing in the country's infrastructure, in the hopes that this will stimulate the economy (which it will). Investments include broadband, green tech, wireless, physical infrastructure, et al.

* Eventually, asset prices will bottom: Housing down 40% in real terms, the stock market down at least 50%. With luck, this will happen by early 2010, so the recovery can begin. Warren Buffett loads the boat with stocks, but by that time, most people are too depressed (and poor) to follow him.

* Unlike Japan, we finally force our banks to write down assets as far as they need to be written down...and then recapitalize them. This is what we should have done in the current bailout, but we'll get it right next time (we hope).

* We gradually begin a long-term economic recovery, one in which consumers save a greater percentage of income, thrift and saving again become admirable qualities, we gradually begins to wean itself off international oil, and the bacchanalian decades of the 1990s and 2000s become an embarrassing memory.

* The stock market finally begins a new, long-term bull market, in which stocks once again return 10%+ per year. Unfortunately, most Americans will be so sickened by the stock losses they've sustained since 2000 that they'll miss many years of it.

55 comments:

Anonymous said...

A year and a half to clean everything.

Sure, whatever.

vanilla ice said...

If HP'ers don't make a killing off this mess then there's something really wrong. This is why HP needs to keep going. I want to hear about all the people that bought houses 1/2 off and bought oil companies at 1/4 off.

vanilla ice said...

Blodget says the bill is a done deal, but it's not.

Roses and rainbows after 2010. We'll be able to do everything we're doing right now in a couple years, except it will get slightly more expensive. Yeah right.

I think the markets will break and be fundamentally changed after this panic. We won't be going back to the ways things were before.

And don't forget about peak oil after this.

mickeyc said...

Wow Keith - you've been thinking. Congrats.
This seems a very reasonable outcome.
I'm sure by now you'll never answer this question but I would still love to know: have you sold your GE and Apple shares yet?

Anonymous said...

I believe that we are in the such pit hole that even Blodget cannot look down and say when is the bottom.
Here some other people who try to forcast like Barton Biggs who has some offbeat advice for the rich: Insure yourself against
war and disaster by buying a remote farm or ranch and stocking it with
"seed, fertilizer, canned food, wine, medicine, clothes, etc.'' The "etc.''
must mean guns. "A few rounds over the approaching brigands' heads
would probably be a compelling persuader that there are easier farms to
pillage,'' he writes in his new book, "Wealth, War and Wisdom.'

The bottom line is the financial media may still be firehosing the peasants with kool-aid but the financial elite are earnestly manning their lifeboats while the more intelligent members of the management classes are scrambling to at least secure life-vests for themselves and their families.

source: http://www.bloomberg.com/apps/news?pid=20601088&sid=aImBVle3OMyo&refer=home

See you on barricades!!!!!

keith said...

mickeyc - bought more aapl. but i'm buying and holding. aapl will be fine.. in 2012!

Anonymous said...

word up, Apple's the stuff!!!

Afterthought said...

Prescience continues.

HP Uber Alles.

Anonymous said...

* We gradually begin a long-term economic recovery, one in which consumers save a greater percentage of income, thrift and saving again become admirable qualities, we gradually begins to wean itself off international oil, and the bacchanalian decades of the 1990s and 2000s become an embarrassing memory.
I love this bit about decoupling the US economy from oil, which for a modern industrial society that exists because of cheap readily available oil, is a bit like saying we can skin ourselves alive and well still remain so!

The US will wean itself of oil, not through the emergence of some magical alternative, but through the direct effects of long-term poverty brought on by the very depression this article is describing.

* The stock market finally begins a new, long-term bull market, in which stocks once again return 10%+ per year.
Until it hits declining/stagnant oil production again.

NONE OF THE ABOVE said...

What is the chance of a third party getting some serious amount of votes? Imagine of 10% of congress is not part of the duopoly.

Or vote for president, a third party.

Anonymous said...

He (and you Keith) are missing a key ingredient here. The government will renegotiate everyone's mortgages. So the dumb ass who has a $2000 payment he can't afford will now have a $1200 payment and will not foreclose.

Then he has an extra $800 a month to go out and spend on whatever else and keep the game going for another few years.

Anonymous said...

What? How will aapl be fine in 2012 and at the same time we are entering into a New Great Depression? Unless somehow you think sales of iPhones will continue to soar during this depression you're so convinced is coming.

You're making no sense Qweefer.

keith said...

I'm not predicting a 2nd great depression, I see recession. I think this massive government intervention puts off that day of reckoning, maybe for years and years, until the entitlements bomb goes off.

Second, I think in tough times like these the strong survive, the weak go away. With banks, you'll see super-banks, like you have major-oil today. BAC, WFC, JPM, GS and a few more who survive will get massive while most regional banks will fail.

With apple, take a look at the innovation, products and balance sheet, and tell me they're in trouble. they're not. They're still the same great company putting out the same great products, with a great balance sheet. The consumer is f*cked for now, which will hurt aapl's growth curve short term, but long term, they'll be fine. They're just getting started. Same for google - they're still just getting started. Pick your entry points, and good luck.

The right play for 99% of you is to be in all cash, especially if you need the cash. But I will continue to believe that there are some smart pick-ups right now if you have too much cash, that may likely get cheaper if you're patient, but still good pick-ups right now.

Two more - COP and Lukoil - I hold both.

Don't be so stubborn that you miss opportunities that now present themselves. Cash is king but when everyone else is selling in a desperate attempt to raise cash, that panic selling creates opportunity.

Anyone with me on this or am I on my own? Anyone read Manias, Panics and Crashes? And no, I don't need hourly updates on Apple's price. If you want day-trading advice, go to cramer.

Miss Goldbug said...

That pretty much sums up the business cycle, including great depression II.

I disagree with only one thing - house prices will fall 70-85% not 40%.

Everything else looks about right.

Miss Goldbug said...

Keith:"With apple, take a look at the innovation, products and balance sheet, and tell me they're in trouble. they're not. They're still the same great company putting out the same great products, with a great balance sheet."


Keith, I know you love APPL stock, but be careful. You're starting to sound like a housing zombie.

When people don't have money, they stop spending. This bill that's passing helps corporations as a priority, taxpayer is last in this deal.

My thoughts are this - government has over estimated the power of the people who will retailiate. It's going to be a BLACK Christmas... all year long, with electronic toys at the bottom.

I'm concerned stocks will crash later this month because forward earnings won't happen - ever, it was all just pure speculation. Everyone will stampede out of stocks in a panic.

Think about all these folks buying forclosures right now who are thinking they're getting great deals...

Miss Goldbug said...

Who one last thing....isnt stock PE's same concept as the 2-3x income vs prices ratio for houses?

This is the problem I have with stocks right now, is the PE's are too high.

Maybe I'm wrong, we'll see.

DavidInLA said...

Check out this idiot on the Today show who clearly has no clue on the cause of the housing crisis.

http://tinyurl.com/3sublc

She is a supporter of Obama, which tells you a lot about the thinking of people voting for him. It also indicates that Obama will probably try to re-inflate the bubble.

You're in such good company, Keith. You let your hatred of a man because of his age and veteran status cause you to support an idiot who is 180 degrees in opposition to you.

i've had it said...

i hate henry blodgett...we all remember him from the dotcom era. but i have to say he is right on the mark here.

Anonymous said...

Isn't Mr. Blodgett the same guy who recommended internet dot com stocks? I think the coming recession will be much worse and God only knows when the bottom has arrived. But we will know the bottom is somewhere here when there is wide spread pessimism, public opinion is overwhelmingly negative, the mood is very pessimistic, etc... So far, we are not even there yet.

keith said...

No argument on AAPL - if you can't afford to lose don't buy. Period. Stay in cash. It could just as easily go to $50 as pop to $150. It is not a daytrade. Or a yeartrade.

Look at what Buffet is doing today. Picking up assets at firesale prices with his cash, negotiating sick terms.

Not that you can get those terms, but look for panic and look for firesales.

They're out there, and there are more to come.

Plenty, plenty more to come

Cash is king. Use it wisely. Or just go to the beach and wait a year or two.

keith said...

Yup, this is the same henry blodgett who pumped .com stocks while selling 'em.

Either he's trying to make good, or he's talking up a crash while he's buying low

Take expert advice with a grain of salt

Meanwhile, a $700 billion bailout goes through and the market goes down. That says something

Get ready for more fireworks. Rate cut? Bank bailout? Allstate failure? Something big is around the corner yet - maybe even this week

Redd Candles said...

"Goldman will probably stay."?

Blodgett doesn't even know who Hank Paulson is (was).

keith said...

Question for HP'ers - what banks do you have your money in today? What are the top 3 banks in the US you trust?

(If there are 3)

Anonymous said...

Of course the stock market is going to crash. Once this bailout bill passes, Ben's swap is going to make money with the dollar crash. The foreigners will trade in their crap debt and cash out of this country as quick as possible.

Anonymous said...

I hope the house torpedoes this sucker of a bill.

Anonymous said...

* The government announces a new New Deal, finally investing in the country's infrastructure, in the hopes that this will stimulate the economy (which it will). Investments include broadband, green tech, wireless, physical infrastructure, et al.

By my calculations, $700 billion would buy 14000 nuclear plants, which would solve the energy problem and put everyone back to work and drastically reduce greenhouse gasses. Just an example, we don't need that many nuke plants, but it shows what that money could buy.

Or we can use that $700 bil. to save country club types from becoming commoners.

GT Charlie

investorinpa said...

I trust the following publicly traded banks...Commerce Bank (Now part of TD Bank) as they have a HUGE deposit base and have always been reluctant to give out commercial or residential loans. National Penn Bank a really good regional mid size bank. We've put some family money into Bank of America and PNC Bank. I'm good with some very small community banks as well.

Miss Goldbug said...
This comment has been removed by the author.
Anonymous said...

Just got this. Sounds like people are taking money out and they want to reassure

Again, thank you for choosing FNBO Direct, an all-American bank with over 150 years of banking excellence and innovation to assist you in your savings success. As always, you can be confident that your FNBO Direct Accounts are managed by a bank that values trust, integrity and security. Rest assured that your money is always within reach and earning more than traditional savings and checking accounts.

Anonymous said...

some offbeat advice for the rich: Insure yourself against
war and disaster by buying a remote farm or ranch and stocking it with "seed, fertilizer, canned food, wine, medicine, clothes, etc.''


ROTFL... The "rich" couldn't stick their finger up their a$$, let alone come close to knowing what to do with seeds. They might be able figure out the wine though...

Anonymous said...

Hey GT Charlie what dream land are you living in? A nuclear power plant only costs 50 million? Try billions.

Did you really think they could build a nuclear power plant for 50 million while new sports stadiums cost a billion? Which do you think has more engineering and safety concerns?

You might get 140 plants.

Reminds me of the people saying if they gave the 700 billion to taxpayers every person would get a million dollars. Try $2300.

Miss Goldbug said...

The banks I'm comfortable with right now (opinion could change at any time)

BTW-dont believe bankers when they say they dont have ANY subprime loans. All banks have them, some more than others.

Here's my pics of banks...

US Bank
Wachovia
Wells Fargo
Pacific National-First Bank of Oak Park (revised)
For sure, not many banks to choose from these days.


I'm waiting for a brand new bank to emerge from the ashes like a phoenix that has ZERO bad loans on its books. This will happen once the economy really starts consolidating.

I wonder why the bailout bill has increased FDIC Insurance only through Dec. 2009...new banks?


We'll have to see...

Anonymous said...

'* Hank Paulson & Co. survey the banking industry and decide who will stay and who will go. JP Morgan, Citi, Wells Fargo, and Bank of America will stay. Goldman will probably stay.'

Goldman should probably change their name, though.

Allied Investment Distortion Specialists?

Anonymous said...

Keith:

Re: aapl

You can't have it both ways. Either we are heading to a depression/recession or we're not. Good companies or not, they need to sell in order to be profitable. Google and AAPL won't sell shit in the next 2-3 years. Especially not aapl a company that is totally dependent on disposable income.

People have to buy toilet paper and toothpaste. So companies like P&G will be OK depression or no depression. But at the slightest downturn in the economy, the 1st expense that goes away is toys like an ipod or iphone. If even a semi-severe recession is on the way, you'd be a fool to hold a company like aapple.

Frank@Scottsdale-Sucks.com said...

Second, I think in tough times like these the strong survive, the weak go away.

Also, those with work ethic survive and the lazy go away. The past decade has seen Americans turn lazy and want everything for nothing. Total entitlement mentality.

That's also why Obama is up - he promises the most free sh*t.

Add to this a huge conservative/libertarian victory in the 2010 elections after two years of the Obama nightmare. Even bigger than 1994.

LibVet said...

Really liked the Bloget article.

This is going to be a deep, dark, long recession. Worse than I have seen and I am old too.

Seems like this is the first time this has happened that I wasn't out looking for a job or something. Usually, they've caught me with my pants down. Shouldn't have spent so much of my life with my pants down, I guess. ;)

Anonymous said...

Keith,

the one thing you left out is a war somewhere in that outline/timeframe.

All this stability might cause rise to some "hitler-like" despot.

Anonymous said...

Reminds me of the people saying if they gave the 700 billion to taxpayers every person would get a million dollars. Try $2300

=====================================

yea, I received a chain email about the AIG 85 Billion bailout. The mental midgets forwarding it around getting excited about the idea of taking the 85 billion and just giving to tax payers. Problem was, their math was off, slightly. they had calculated a $430,000.00 payout to each tax payer! The real amount would be $430.

Anonymous said...

heard a funny name for the bailout bill:

No Banker Left Behind

Anonymous said...

Commerce Bank is a regional bank on the East Coast. I have put money into it recently from my Citibank account, which is almost down to zero now...I don't see how Citi can survive now that they have Wachovia (not that they had a chance before). I am friendly with my Commerce Bank branch manager...had a good conversation with him recently and he seems to have his head on his shoulders. Although their brochure says they make no doc loans, he told me they aren't writing any of these and didn't write that many in the past. At least from this branch. I've gone through their
10k and it would appear they do not have huge amounts of bad commercial or residential loans, although they do have them...as most banks do. One thing I couldn't tell though is how much was lent out under the CRA...they are a bit cryptic about that. Anyway, I feel alot better having my money there than in Citi...and besides, they are being bought out by TD Bank of Canada and I don't think they have a lot of the problems American banks do.

I am looking at Wells Fargo as another bank to put some money. Was thinking about PNC but they don't have a branch where I live so I'm reluctant to do that.

JAWS said...

I sold all my R/E from '05 to summer '06, and stuck it into a CD at FARMERS AND MERCHANTS Bank of Long Beach, CA. Google it, "thestreet it", do whatever you can to research it - it's A+ rated on www.thestreet.com, 4-stars on Bankrate.com Star Rating, and a 2 on the Safe & Sound CAEL Rating. I asked what they would do if George Bush came in and wanted to know about me and my accounts and they said they'd tell him, sorry, no.

Anonymous said...

Keith, Sounds good but as always the hardest thing is not predicting all this but having a job and cash in 2010 to buy bargains. Also the bottom will be very L shaped, ie things will flatline so take time in picking your assets. I do believe there is a killing to be made buying items on the cheap, but likely will take 2+ years. I personally have 85% of assets in cash. Waiting......

Lady Di said...

jaws said; I sold all my R/E from '05 to summer '06, and stuck it into a CD FARMERS AND MERCHANTS Bank of Long Beach.

-----------------------------------
Farmers and Merchants is a great bank - very conservative, traditional lending. If I didn't have access to my credit union, which pays a decent rate, I would switch to F&M.

hp fan said...

Question for HP'ers - what banks do you have your money in today?

Wells Fargo is the only bank I trust and have all my money there, better to have 1 million in a good bank than 1 dollar in Citi etc. Wells Fargo and Stumpf are the only people in banking who have a clue and he's the one who burst this bubble by jacking up rates on jumbos.

90%+ of large cap companies are grossly mismanaged and will be bankrupt or zombified in the coming years. I'd dump AAPL, COP, Lukoil and pretty much everything. When the future does brighten, it will be with better managed small caps and foreign companies.

During the Carter years small caps went up something like 20%/year. The same thing could happen under Obama. On the other hand everything went through the floor with Hoover which is what will happen if McCain wins so stay all cash in case you need it to survive the next 4 years.

Stuck In So Pa said...

I also like PNC bank. I was talking to an investment counselor there a few years ago and brought up my fears for a housing crash. I learned that PNC has an 80-90% rejection rate on home loans, and only loans in-house, to customers with long standing accounts!

Mike Hunt said...

Banks I like and bank with:

Commerce Bank- now called TD Commerce after buyout by Toronto Dominion bank.

ING Direct- little exposure to bad mortgages, very conservative lending practices.

-Mike

Anonymous said...

"By my calculations, $700 billion would buy 14000 nuclear plants"

It would buy about 140.

Which would more than double U.S. nuclear capacity.

Which already is orders of magnitude greater than solar and wind.

Anonymous said...

if you bought bac about a month and a half back and held it till today aside from the 13 percent dividend you doubled your money............me i bought one of the merged into bac years ago and am about40 percent down..........over 10 years.

Anonymous said...

I think you really nailed it with these thoughts!

Anonymous said...

"He (and you Keith) are missing a key ingredient here. The government will renegotiate everyone's mortgages. So the dumb ass who has a $2000 payment he can't afford will now have a $1200 payment and will not foreclose."

People with the adjustable rate ARMS have already left their houses. I know. I am surrounded by them here in SW Florida.

A customer came into my shop last month and we were talking about the terrible economy in our town. He said, "I paid $240,000 for my house and so did my neighbor. Now, my neighbor is in foreclosure and the bank is offering that house - which is just like mine - for $120,000. Why should I continue to pay my mortgage?"

Good question.

He continued, "What I should do is buy my neighbor's house and let mine go back to the bank."

Now, how many people are going to think like this guy? This is not a case of being unable to afford his mortgage. This is an economic decision.

Same house - less money. More money in my pocket.

If there are no consequences - then, why not?

Anonymous said...

Frank said:

Add to this a huge conservative/libertarian victory in the 2010 elections after two years of the Obama nightmare. Even bigger than 1994.

October 02, 2008 7:24 PM

==============

I wouldn't bet on that. The Democrats got elected over and over in the 1930s even as their socialist policies made the economy worse and worse.

In 2010 Dems will have a huge majority. The media will blame everything on Bush still. The story will be if only we elect more democrats we can fix the economy. And the drones of America will follow those orders.

My prediction for 2010:

Senate: 75 Democrats
House: 395 Democrats
WH: Barry

2011 unemployment rate: 18%

Which is why I have already secured my passport to another country and will be getting out of dodge early next year.

mickeyc said...

Hi Keith,
Thanks for the Apple update. If you have a 2012 framework I'm not going to argue your position!
I trade more in 6-8 week time frames so my perspective is different (yup, I'm one of those evil traders).
To answer your question I now have close to zero in US banks. Bill paying money only.

hp fan said...

AAPL Friday high: 106.50 low: 94.65 closes at 97.07 down over 3% from yesterday...

Hedge funds attack any stock mentioned on these blogs and see weather it holds up or not. This extreme volatility is unprecedented, stay on the sidelines unless you want to get eaten by the sharks.

Anonymous said...

* Eventually, asset prices will bottom: Housing down 40% in real terms, the stock market down at least 50%. With luck, this will happen by early 2010, so the recovery can begin.
No. 2011 earliest.

mickeyc said...

hp fan said...

" AAPL Friday high: 106.50 low: 94.65 closes at 97.07 down over 3% from yesterday...

Hedge funds attack any stock mentioned on these blogs and see weather it holds up or not"

Hedge funds are down 12% on average for September. Can we drop the nonsense that hedge funds are evil geniuses?
Prices are plummeting due to an absence of BUYERS.
AAPL would also have to be one of the most obvious short positions of the last year. It doesn't need HP to discuss it to pop up on anyone's radar.