What will catalyze the "meltdown"?

Let's face it. fuBarrio has wasted a lot of time musing about potential melt-downs and scary outcomes for the financial markets in this blog. The executive summary of this entry in case you don't want to dig through the details of my still muddled mind is that I'm predicting a bankin crisis in the US -- beyond what we've already seen in the subprime lenders.

Uruguay and Argentina had a pretty brutal crisis here about 5 years ago that they are just shaking off. However, there are no shortage of people here with some pretty scary stories. While it's true that the people who were bein paid in dollars made out like bandits, those unfortunate souls would were being paid in pesos and borrowing in dollars made out like "bagholders"

The title of this blog entry "may" be overstating the case for a meltdown, but I believe a meltdown is imminent. So what does "imminent" mean? Well...this is a developin thesis so I'm still looking for feedback to help develop this theory from the two readers of this blog...but, as I start to lay out my arguments in a somewhat incoherent fashion (especially at first) maybe you can get an idea of what i mean by "imminent".

Here's the crux.

The US econ transforming into a service economy. While this sounds well and good, I believe it has gotten ahead of itself. Pushing bits has become the only way to make money in the US it seems. At first it was the technologists....and after that crashed the "bits" financial credits and debits represented by "bits" on a computer.....the new fangled version of pushing paper.

Why?

Lots of reasons, I guess....and i'm sure i don't know them all....but i think numero uno is costs of doing anything else in the North America. I had the opprotunity to look at the costs associated with opening up a new semiconductor fabrication facility in the valley in 2003/2004

Even with a desperate landlord and a built out fab selling for pennies on the dollar in the wake of the tech-wreck, all the "other" costs couldn't be reconciled against just boxing up the entire thing and sending it overseas. Now, don't get me wrong, moving, reinstalling and requalifying used semi fab equipment overseas ...even for a small fab, is a 7 or 8 figure expense....but the "hidden costs" of doing mfg business in the states is crushing.

Healthcare/insurance/pensions/unions
Regulatory hurdles to new facilities/beauracratic red tape
Attorney costs -- any long term relationship/contract with any vendor/partner/distributor/supplier becomes something for attorneys to pine over for weeks at 450/hr.
Taxes -- these come in a 101 flavors for the small business
Compliance -- this is a big bugaboo...Sarbanes Oxley hits not just big companies, but little companies with hopes of being big, or hopin to be bought by someone big.

So, it was hard to open a plant making refrigerators in America's heartland the last 10 years. So, rather than just sit around and starve we got creative about ways to feed our families.

Those with "education" and didn't want to pull down big bucks fixing toilets or swinging hammers often found themselves in some part of either the "Real Estate Industrial Complex" (REIC) or something broadly defined as "Financial Services"

The result of this (coupled with criminally loose monetary policy) has been an explosion in the REIC and financial services industry....to include in my definition for the REIC

builders & construction
specuvestors
appraisers
title companies
mortgage brokers
IB's repackagin mortgage products
RE Agents
inspectors
etc, etc, etc, etc.

And for the "financial services industry"

Managing
commodity trading
hedging
borrowing/lending
advising
mergers
hedge funcs
lbo's
PE funds
derivatives traders
etc, etc, etc, etc.

Now that the REIC is contracting massively, it is putting additional pressure on a financial services industry that is already leveraged to the hilt (in my opinion).

What we are seeing now is banks (and other assorted bagholders) who still have yet to "come clean" on the depth of the mess. In one of the most disturbin revelations to come out of this, I read a few months ago (have yet to independently confirm) that many banks are booking negative amortization loans' unpaid balance increases as income in the current period. This is eerily reminescent of almost every other "accident waiting to happen" in recent memory of my adult life.

In summary...."income" being booked that had nothin whatsoever to do with "cash flow".

Those banks and financial institutions unfortunate enough to be holding a large amount of residential real estate returned to them by borrowers unable to pay will eventually be forced to unload their holdings at "any cost" to remain liquid.

So again, in summary....I need to study this issue more thoroughly, but I'm predicting a banking crisis of sufficient magnitude to hit the mainstream press....and not just in the subprime lenders as previously born out.

you'll see them first (probably) in smaller, less capitalized, regional banks in areas hit by heavy fraud...and then if it gets big enough this whole mess could people to look under the rocks at fannie mae.....and that's where you wind up with "too big to fail" issues. when something is "too big to fail" typically, the US taxpayer ends up footing the bill while a host of clowns sail into the sunset already set for life. This is a key covenant of "privatizing benefits" while "socializing risks".

The exact reactions of the Fed, the US govt, and our trading partners are a little difficult to gauge right now....We could see something like the old Real Estate Trust Co. (RTC) reformed and that is why i really don't have any "new" plays to try in this market other than *possibly* shorting the banking index with long term puts (this b.s. could carry on for years before it's brought to the light of day) and an inflation hedge offsetting your puts in case the printing presses try to paper over this mess.

for now, in the housing fund, i'll sit in depreciating dollars and txm.v

ciao for now,
fuBarrio