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Friday, December 26, 2008

Rich Man's Recession

Christmas is done. The party is over. The numbers are in. The recession is "official", though I still don't understand how they declared it retroactive by one year. Were they asleep at the switch or just like to revise history?

In any case, Americans bought 5% less this Christmas than we did last year. That certainly qualifies as a down-turn, but what's even MORE interesting is that luxury goods were down 37%! That indicates that at least initially, this recession is highly disproportionate as to who will take the greatest hit. It's a rich man's recession.

This selective slam makes sense, considering the majority of bad paper on Wall street was in the form of credit default swaps or other bundled debt managed by so-call "hedge funds". These hedge funds seem to have accomplished just the opposite of a "hedge" in their trading of this bubble paper.

The point is, this bubble was more of a credit bubble. The houses were the rationalization. They were just the part we could see and touch. Why else would Ohio lead the nation in forclosures when their house prices hardly rose at all? It was about more borrowing even if the house DIDN'T increase in value. And all this bad credit ended up, not only at local banks, but on Wall street in hedge funds. So first impact will be felt by those who used hedge funds, directly or indirectly. And this tends to be the wealthy in this country.

What does it mean for MAIN street? It's true, over-leveraged first-time home buyers and junior speculators who bought too many houses will obviously be hit, but most of the rest of the damage will be limited to trickle-down and side effect from Wall street to main street. That doesn't mean it will be pain-free for most, but it will certainly be far worse for the super-wealthy.

And like the internet bubble, much of this bubble's loss will be from bubble gain. And much of what's missing when all those CDSs are sorted out will be assets which were largely illusion to begin with.

It's like that gain you thought you'd made on that house you never sold - it came out of nowhere in only a few years, and now has even more quickly disappeared into the same place - nowhere. For the internet bubble, this loss was about $4 trillion. This time it will be about $10 trillion in contracted value, most of which didn't exist five years ago. And that's the point. These ARE real dollars, but they mostly exist on the balance sheets of large Wall street firms, not in printed form.

No one can predict the future, and this down-turn will certainly not be like ones we've seen in the past, but it will probably affect Wall street far more dramatically than it will Main street.

Time will tell.