Ten Things That Could Still Go Wrong with the Economy

Fresh off the Presses from Yahoo! Finance. Enjoy.

Yahoo!

The recent buoyancy of the financial markets has created a sense of calm about the economy. The overall sense of panic has gone.

But there's still a wariness in the air, a feeling that the fragile "green shoots" of the recovery might be stomped out by some new crisis. People are waiting for the next shoe to drop.

Here we suggest 10 things that might stymie our recovery. Some are purely financial events. Others are geopolitical. And one involves these little piggies.

Did your favorite nightmare scenario make the cut?

1. Swine Flu Second Wave: Typically, influenza outbreaks come in waves, getting worse with each one. The very ease with which we seem to have survived the first wave of swine flu may make us vulnerable to a horrific second wave.

2. Commercial Real Estate Collapse: Various commercial real estate deals face trillions in refinancing obligations over the coming years. But the market is practically closed, ensuring massive bankruptcies and restructuring.

Why are lenders so freaked out? Because existing loans are going sour at a pace unlike anything we've seen in history. Because of that, even commercial real estate properties with strong cash flows are finding financing extremely difficult to come by.

3. The Option Adjustable Rate Mortgage Explosion: Anyone referring to the "subprime crisis" has got to get with the program. The subprime wave of defaults is basically over. Now the question is, what about all the other types of mortgages? You know, Option ARM, Alt-As and of course, good old fashioned prime mortgage.

The big wave of Option ARM resets has yet to come, and given the drop in home prices, refinancing won't be realistic. Let's hope the homeowners can afford their new monthly payments.

4. Global Food Crisis: As we saw last year, the global food supply teeters on the edge of adequacy. Any serious shock--floods in the Midwest, a war in Asia, social unrest in China, political upheaval in Thailand or Egypt--could result in shortages in countries that import large amounts of their food.

5. Israel Bombs Iran: The Obama administration's openness to the Iranian regime may have the perverse effect of emboldening its nuclear ambitions. Very likely, the fears of the nuclear Iran are over-stated. It would probably behave like most members of the global nuke club, cowed by its own destructive power into behaving responsibly.

But Iran isn't the only country to worry about in the region. Israel may not be willing to tolerate a nuclear armed Iran, and may choose to strike out to destroy Iran's nascent nuclear capabilities. This would obvious raise tensions throughout the Middle East. At the very least, oil prices will likely spike and remain elevated following any military action against Iran. This, in turn, will slow the global economy.

6. A Wave of Municipal Defaults: Historically, cities and states don't default on their loans very much. But as Warren Buffett pointed out, historical results don't mean jack because muni insurance wasn't around. Unless it gets a bailout, California may go bankrupt, causing the muni market to seize up, bringing public works and spending to a halt, kneecapping GDP.

At that point, with no ability to borrow, the other states will rush to default themselves, sparing their taxpayers any more pain.

7. Another Bank Run: It seems unlikely, given the government's implicit guarantee of the banking sector, but it's always possible that investors or lenders could lose confidence in one of the banks again, prompting a financing run a la Bear Stearns.

If this happened, we'd be back to square one with all the confidence and bailouts since Lehman's collapse -- only, the government would have fewer bullets left in the gun.

8. Runaway Inflation: The Federal Reserve seems confident that it can "land the recovery." Is it right?

There's good reason to be skeptical that the Fed will be able to reduce the monetary base before it floods out into the economy, driving up prices and destroying savings. For one thing, the Fed has never really been very good at doing this. By the time the Fed realizes that inflation is taking off, it may be too late.

9. North Korean Missile Launch: Wee dictator Kim Jong II has lulled the world to sleep, performing missile tests on a seemingly daily basis. What was once a cause for alarm now barely merits a bulletin on CNBC. In fact, the dollar has rallied on the nervousness.

But his neighbors in China, South Korea and Japan are freaked out and an actual war, or genuine provocation, could wreak havoc on far eastern trade. This might cause investors to flee towards the dollar, but it would be terrible for markets and economic activity.

10. Chinese Financial Crisis: Most economic discussion of China these days is about how dependent the US government has become on China buying Treasury bonds. But China has lately learned that its own economy is dangerously leveraged on foreign demand for Chinese manufactured goods. The global downturn has helped expose the fragility of the Chinese economic miracle, and worse might be coming.

A collapse of profits in China could very well spark a banking crisis, much like the collapse of real estate prices did to US financial institutions. Very little attention has been paid to the fragility of the Chinese financial system, which is dominated by large, slow, non-transparent, often corrupt state-run banks and centralized decision making. Slowing exports could be the tide that goes out and reveals which Chinese banks have been swimming naked. And the Chinese financial system, which has almost no effective securitization and therefore high concentrations of financial risk, is much less prepared to deal bank failures than the US was.

Of course, this will be bad news for the US. Any financial crisis in China will hurt the demand for our debt, both public and private, driving up interest rates and slowing down the US economy. This, in turn, would reduce demand for Chinese exports, exposing shaky banks to risk of collapse all over again.


My favorite is number all of them. We will see one of these happen. Count on it.

[edit on 6/13/2009 by Tentickles]

reply to post by Tentickles


Yeah, that #3 (The Option Adjustable Rate Mortgage Explosion .. probably Implosion is more accurate) is a scary thing. I know there are a lot of people out there that bought a home with ARM financing, making only interest payments for a while, thinking that when the time came to start paying down the principle they would refinance. Many were also thinking that when that time came, their home would have appreciated in value too, and thus refinancing could net them some pocket money too. Some were probably sold on this ARM idea by their bank too back when they made such a risky decision. UNFORTUNATELY HOWEVER, as we all know how, most people have seen the value of their home go down .. way down .. which means they are upside down, and as a result they aren't going to be able to refinance .. OR sell!

The subprime implosion was NOTHING compared to this ARM issue. There are going to be a lot of people up and walking away from their homes when they see their payments suddenly going up 50% or more and they can't (or don't want to) afford THAT, and can't refinance either! Of course, on the flip side, this will be a boom for rental properties, because when they walk they aren't going to be able to buy another home unless they have cash to do so.

Man, that whole ARM thing is going to be a major fiasco that nobody is going to be able to fix.

Starred and flagged, this is an excellent thread and more people need to see this! The worst ain't over yet, despite what much of the media is reporting!

reply to post by Divinorumus


All too true my friend. The things to come are even worse than we've seen.

As always Tent...you are the voice of reason in the middle of insanity!

I agree that at least one event WILL occur and that unfortunately,the worst isn't over yet.

School is out: traffic is a mess,everyplace is PACKED with people at all hours of the day on any given day...I keep saying "Doesn't anyone WORK???"


My dermatologist was full of pretty young things getting VERY procey "procedures" during their "off-time" from school and the mall yesterday as packed with young shoppers as well....all had purchases.

I think there is still a large segment of the populace NOT affected by the current situations but this may well change?

Yet another "potential nightmare": These "kids" aren't getting Summer jobs(not available and/or too many applying for too few positions) and I'm SURE that has to be a burden on their working- parents??? HAS to be!!!

Kids are damn expensive to provide for and entertain for a few months.

I'm wondering if this will result in fewer being able to even GO to college or to return in the Fall?
Will thing change the face of the "workforce"in terms of skill-sets or will it just put some families even deeper in debt?
It's a whole new worlod out there: these kids are VERY used to having and going and doing.

How the hell do people keep up with it all?








[edit on 13-6-2009 by irishchic]

i think commercial real estaste downturn is happening,,, in nj,,, they're building tons of strip malls,,, while the finished ones are losing stores left and right,,,,

many times the supermarket or big store,,,,, that is the major draw and helps support the smaller stores, leaves/closes and thenthe little ones follow shortly after

struggling stores and mom'pops won't be able to get extended loans to cover downturn losses and make it to the other side


i've seen many building sites shutdown or stopped as well

Originally posted by irishchic
I think there is still a large segment of the populace NOT affected by the current situations but this may well change?

There's a whole big segment of the populace that doesn't even know what is going on. There are still segments of the economy that haven't been affected much by all this, yet.

That ARM thing will have a devastating cascading effect too. When people loose their home, they will no longer be buying those things you have to buy when you own a home. That will result in more retailers laying off or closing down. And then there is the loss of property tax revenue too. That will effect everybody, whether you have been affect by any of this (yet) or not. We could find ourselves snowed in next winter when our municipalities can't afford to plow the snow from the streets.

Of course, there are some good things that could come about because of this. When half the homes in your community have been foreclosed upon, and the banks/lenders that now own them can't pay the property taxes on them or keep them insured, there will be a lot of homes going on the auction block selling cheap. For those out there that wish they could buy a home but can't afford one now, SAVE up some cash, you may be able to pick up that $250,000 dream home simply by paying off the back taxes owed on it. (talk about wealth redistribution, huh! ha) Heck, you might be able to pick up half a dozen homes for less than what one of them would have cost a couple years ago and rent out the extra ones. Somebodies loss is always someone else's gain.

You know, there are also people out there that are upside down on their homes yet are still working and able to pay their mortgage ... but when this ARM implosion eventually gains momentum, how many people are going to want to stay in their $100,000 home that has a $150,000 mortgage on it .. when they could walk across the street and pick up a comparable home for $20,000 CASH, and simply allowing the bank to foreclose on their pervious home. I know I would! One of the best things you can do for yourself is to trash your credit, ha .. doing so can keep you out of a lot of trouble and prevent you from ever getting in debt again! One of the side effects of all these foreclosures is that with each one that happen, you've got another person that won't be borrowing money and thus living beyond their means for some years to come, and that too wil further affect retail businesses.

Who would have thought one tiny little pebble rolling down the side of a hill could cause such a cascading side effect. It's like a house of cards, you pull one out and the whole thing caves in.

Oddly enough, the one most people will dismiss as the least concern is the biggest potential bombshell - an imploding China.

With all the attention on what a n economic powerhouse China has become, few realize how weak the foundation actually is.

Beijing just barely holds the country together with nearly a billion living at subsistence level, by using it's proceeds of manufacturing to subsidize projects in the impoverished Southern ad Western provinces. Bank loans are handed out with the knowledge they will never be repaid, just to keep people working.

China has rashly over-extended itself with infrastructure upgrades, militarization and foreign adventurism it can ill afford. The thinking was the money from manufacturing consumer goods for the US would just keep growing.

Now demand and revenues are about half what they were a year ago. The people who worked for pennies an hour in sweatshops are rebelling and leaving.

Billions in bank loans from start up companies will never be repaid. Worse the two trillion in saving for a rainy day with US Treasuries turned out to be another bad investment.

China could implode economically at any time. Who is there left to bail them out?

This story will continue to be under reported. Keep an eye on it.


Mike

Originally posted by Divinorumus
It's like a house of cards, you pull one out and the whole thing caves in.

It's a house of cards made out of houses and retail stores.

That mental image is frightening.

reply to post by mmiichael


I do keep a very close eye on this. So close in fact my eye is glued to the map of China.

If you think about the US and China as business and investor respectively...
When the largest investor pulls out of the business called the US, the US is left in shambles.

Be it whatever reason for China to pull out, it is a dangerous scenario for the entire world.

You know, Iran could bomb Israel. A major Hurricane (Houston, NYC) or major Quake (L.A., S.F., or Missouri) could strike the U.S., or even a super volcano (Mt. St. Helens or Yellow Stone). There are many unpredictible things that could hit which are disasters themselves, but would also impact the economy.

reply to post by Tentickles

I'd like to add one other thing that I think has the potential to be
worse than any of the ten you listed.

100's of Trillions in derivatives set to collapse

Few ppl understand what was done here.

They used the unregulated penny stock market called the OTC market
or over the counter market which is trade in little paper slips.

With no over sight the thieves ran amok.

It was all planned, and they robbed the country and all the ppl
with creative accounting.

This is why Iceland went in the toilet.

Mad(e)off and Stafford were the tip of the Iceberg.

1,000 Trillion in derivatives scam

The grand total is now running somewhere near the ridiculous figure
of 1,000 Trillion, and yes that is Trillion with a T.

And you would be correct in saying that there is not that much money
in the entire world.

These financial masters of the universe were nothing more than
thieves who used computers and pens to rob us instead of holding
us up at gun point.

The ppl howled when AIG was to get million dollar bonuses, and now
they decide to quadruple that amount.

AIG failures to get quadruple bonuses now

This has the capacity to destroy what little is left of this country,
and perhaps most of the financial markets of the whole world
and it was all done on purpose.

Some of these look like separate issues, but they all have the common
denominator of being tied back to this giant ponzi scheme that some
say is going to break out into Ponzimonium.

Ponzimonium about to run amok

If you do not have some way to grow your own food, filter your own
water, defend yourself from riots, or have a safe place to ride out
a total collapse you might consider investing in these basics.

Gold and Silver will not feed you if no one is willing to sell,
or the shelves are empty.

Good Luck to you all !

[edit on 14-6-2009 by Ex_MislTech]