The Perfect Storm

Wikipedia - The phrase perfect storm refers to the simultaneous occurrence of events which, taken individually, would be far less powerful than the result of their chance combination. Such occurrences are rare by their very nature, so that even a slight change in any one event contributing to the perfect storm would lessen its overall impact.

The US housing market has been in decline over the past couple of years...certainly off it's highs of recent memory.

Cheap products comming primarily from China helps to keep our economy chugging along in that we spend less for goods we can buy more.

One can argue that it has been our housing market that has kept our economy going in recent memory considering the vast expenses of the wars in Iraq and Afghanistan and the debt that goes along with it. People in general were tapping into the equity of their current homes to finance everything from second homes to new cars and the lifestyles that go with it. This was fine as long as there was ultimately someone willing to buy your home.

In many regions of the US there was a boom in housing. Builders could not build houses fast enough and the size of the average new home was at all time highs (say 2700 sq ft +). I think everyone could agree that this scenario was not one to go on indefinately. Indeed, a study just this year showed a downturn in the size of the average new home by about 250+ sq ft or so. Not a big drop by any means just one observation that shows that we as Americans were stepping back from the "bigger is better" in our homes even if those steps were baby steps.

We find out now that part of the housing boom was financed to people who were at higher risk of defaulting. They gave loans to people who had little documentation of income and gave them loans at low initial variable rates. When the loack on that variable was removed and the prime interest rates went up these risky borrowers were left to either pay substantially more monthly payments or to refinance.

What happens when you buy a large house at very low variable rate with very little or no money down and then housing sales fall off and your interest rate rises causing your payment to rise like the floodwaters from Katrina?

You often find that your house is not worth what it was when you bought it and with little or no equity or tightning of loan qualifications you find you cannot refinance. We now are finding out that those loans were bought up by a number of hedge funds who have lost 100's of millions if not billions and of which several have closed. The extent of the damage to the banking and funding insdustry will take some time to discover but there are people in financial circles who are very antsy lately

Now in the past year or so it is hard to open up a newspaper or browser to not notice a story about one recall or another. Sure we have our own problems (peanut butter, mad cow, e coli contaminated food from California, etc) but these recalls are comming more and more from our largest trading partner - China.

Today Mattel will announce yet another recall

http://news.yahoo.com/s/nm/20070814/bs_nm/mattel_recall_dc_5;_ylt=AqmZ7RY43Sei.cyx7CZTT10E1vAI

The recalled products include about 7.3 million Polly Pocket, Batman Magna, Doggie Daycare and Shonen Jump's One Piece play sets with the small magnets. According to a statement from the U.S. Consumer Product Safety Commission and Mattel, about 2.4 million of the play sets were recalled on November 21.

About 683,000 Barbie doll Tanner play sets were also recalled due to a magnet hazard and about 253,000 Pixar Sarge die-cast toy cars with lead paint were recalled.

Inevitably there are two scenarios here. One is that these Chinese companies producing tainted products whether those be food or manufactured products will be forced into correction which will lead to higher prices or we will come to a collective decision that all chinese products = BAD! and avoid them like the plague.

Look at Walmart

http://news.yahoo.com/s/nm/20070814/bs_nm/walmart_results_dc_6;_ylt=AizlXRNnm7pbrW2du4ZfzaME1vAI

With more than 127 million customers visiting a U.S. Wal-Mart store or a Sam's Club warehouse location in America every week, the company is considered a barometer of the health of the nation's retail sector.

NEW YORK (Reuters) - Wal-Mart Stores Inc. (WMT.N) reported a lower-than-expected quarterly profit and cut its full-year earnings forecast on Tuesday, saying its customers remain under economic pressure.

One has to wonder how these recalls from China effect WalMart's bottom line. God knows WalMart is ruthless when it comes to margins and pressures on suppliers to keep prices low......it's not too much of a stretch to understand how a chinese supplier would cut corners to get an egde over another chinese competitor.

If WalMart wants a widget for 5 cents and my competitor can make a lead free widget at 4.9 cents well what the heck if I use this lead based paint and sell that widget at 4.75? It's not all that far fetched.

So those are two completely different sectors of our economy where individual problems could occure and our economy would be resilient. Taken together though it is comepletely something different.

Perhaps add to that an energy crisis. Maybe Iran or Al Quieda does something to block vital oil shipping lanes in the Strait of Hormuz or perhaps Hugo Chavez does something to disrupt the supply of oil to the US.

The result would be a perfect storm comprising of financial, energy, retail/housing crisis.

Or

It could be a good movie