I think we can all agree the run-up in asset prices these past few years has been partially, if not significantly, due to the effects of loose credit, leverage and financial engineering. As the business cycle turns and we head into a period of economic contraction and credit tightening, the impact on stock market capitalization, among other things, will be decidedly negative.
Personally, I’m anticipating further declines in overall asset values. Given the magnitude of the run-up, a 25% decline in stock market capitalization from this point and another 25% drop in property values isn’t outside the scope of reason. I expect the decline to be expressed through a combination of currency devaluation and outright nominal deflation. Wealth is actively being wiped off the books as we speak.
Overall, I am very concerned about multiplier effects and the collateral damage of de-leveraging on the ‘real economy’ (productive and profitable economic activities). I expect the impacts of the unwinding to be severe, with market failures in certain areas such as construction and credit. I think some regions will be hit harder than others, and I put San Diego in the ‘at-risk’ category due to state, county and municipal financials as well as general over-exposure of its economy to FIRE markets.
