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US Economy: Prime Down, Private Equity Short: It’s Here: Prepare For The Bear

The US economy has run on cheap oil and cheap foreign money for many years. With the current levels of Dollar dominated indebtedness at all time highs the strain in the system is starting to show. The dollar, standing at $2.05 to the british pound, has continued the steady decline I commented on in October 2004. Since that date that drop has been around 6% against the Euro. Now we are seeing a potential implosion in the US sub-prime mortgage market which will have inevitable knock on effects on the US domestic economy as mortgages are pulled and lives turned upside down.

The overspill into the business sector of the potential funding shortage that may now arise has also begun I believe. Private equity buy outs are facing a shortage of funds as the underwriting banks are still carrying on their books much of the stock they issued for transactions earlier this year. Since Bush was re-elected for the second time, delay of an economic bear market in the US has only been managed by spending lots of dollars on very unpopular wars. The Republicans do not believe theirs will be the next president so the current situation suits them fine.

The Democrats will be handed a Basket economy on the point of implosion and two wars they can neither win, withdraw from or pay for. When I was at Las vegas airport earlier this year a Trucker from New Jersey gave me a light. We chatted as we smoked outside the terminal. “You watch”, he said, “The Democrats are down to a black and a woman for President. The Republicans aren’t gonna let a black or a woman run the show. There will be another major terrorist attack”. I do not believe he is right there. Another terrorist attack would only ensure the Democrats are in for ten years, whomever they chose. Without it they will be in for five, crisis managing through the bear to the beginning of the upside, before a shiny young besuited whiter than white Republican can take over to ride the good times.

Prepare for the bear because it is coming. Luckily we will be protected from the wash to some extent by the trading block of Europe and the trade we have with China and India who are of course leading world growth. But any major remolding of the shape of the US economy will not be without knock on effects. In the UK we can expect inflation up 1 -1.5% over the next two years and interest up 2 – 3 points. At the same time many people are coming off low fixed rate mortgages set five or ten years ago. The effects on consumer spending will be quite significant, slowing growth to near zero for a short sharp spell.

The worst affected will be the same borrowers as in the US: those who are mortgaged at higher rates because they have less resources and lower credit ranks. Oh, and those who own businesses.

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