We think we will see 10-12% unemployment, a 4-5% decline in GDP, and the equity markets could drop
at least 70% from peak to trough. Remember, the capital structures of most of America's companies have
taken on more and more senior debt, subordinated debt, preferred, convertible preferred, trust preferred,
and God only knows what else in front of equity. This means the "equity" piece of the cap structure is
enormously positively or negatively leveraged to changes in funding costs and enterprise values. A drop
of 70% for the S+P is absolutely possible. Remember, all of the loss estimates we have reviewed have
really ignored the coming losses in credit card debt, commercial and industrial loans, commercial real
estate loans, CDS contracts, auto loans, and unsecured personal loans. We are experiencing the global
deflationary bust of all time. It will deflate the values of just about all assets. Anything and everything we
own will decline precipitously in value. We are not perma-bears like some others, but we must be realistic
about facing this terrible economic environment.
BTW: Lehman CDS Payout is on Tuesday as well as I think 200 companies reporting earnings this week, Get ready for fireworks...
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