Morgan Stanley: 2-1/2 Year Downturn in the Financials?

The market is deteriorating rapidly this morning as the bad news is coming from all directions. Oil is soaring to $130/barrel. Boone Pickens now says oil is heading to $150/barrel. If oil goes to $150/barrel we are looking at $5 gas people! Thats a consumer killer!

The PPI came in hot hot hot:

"May 20 (Bloomberg) -- Prices paid to U.S. producers, excluding food and fuel, rose more than forecast in April, reflecting increases in automobile and furniture costs.

The 0.4 percent gain in so-called core prices was twice as big as anticipated and followed a 0.2 percent increase in March, the Labor Department said today in Washington. A drop in energy costs and unchanged food expenses held the total price measure to a 0.2 percent gain.

Soaring raw-material costs are likely to hurt profits as a slowing economy prevents companies from raising prices enough to cover expenses. A report last week showed prices paid by consumers rose less than forecast in April"

Quick Take:

Remember this number does not include food and energy. Imagine what it would have looked like if it did? Expect this trend to continue until we finally decide to protect the dollar. You can guarantee that interest rates are going higher very soon if inflation gets out of control.

Every other central bank is raising rates in the world, and we eventually will be forced to do the same. You can kiss those low rate mortgages goodbye when this starts. Housing prices will then move lower to make up for higher rates. Whoa! Its a bad spiral we are stuck in ladies and gentleman.


So how bad is this financial crisis versus the ones we have seen in the past 20+ years?

Look at the chart below. Morgan Stanley is predicting a 2-1/2 year downturn in the financials. This is another must read from The Economist. There are too many things to highlight so take a look. You will understand why this is going to be such a rough period economically.

Bottom Line:

Pretty scary stuff eh? We are basically looking at a downturn that's going to last almost twice as long as the Dotcom bubble that burst. If you recall we had a 50% decline in the S&P 500 during the last downturn.

This is far from being over. Don't forget, after the acute phase of this is over, we still have the hangover to recover from. The severe part of this downturn is going to last right into 2010. Housing and the rest of the economy will not recover for years after that.