I came across a video on the Financial Times website. The video is a report by investment editor John Authers on the financial crisis that has hurt the world’s economies, developed and developing alike. A financial crisis that was rooted in the US subprime mortgage sector.
As Mr. Authers said, it may start from a US subprime mortgage, but the implication is far and wide. Financial companies are collapsing, bringing with them others in different industries. As streams of layoffs hit purchasing power, profits across the board are tumbling down. In an interconnected economy, the effects are felt globally and rapidly.
As Americans spend more than they earned, fueled by ever-increasing debt, the momentum has carried them deep in debt. So deep that it would take years to unlever it. Historically, housing prices have constantly increased, but in drying demand caused by mortgage defaults, the price no longer holds. Since the price is declining, would that increase further defaults as people have mortgages higher than the actual price of their homes?
James Melcher of Balestra Capital called the subprime mortgage meltdown a year ahead, profiting tremendously from the crisis. Mr. Melcher believes that the worst may have yet to come. People are desperate to believe the market has bottomed, that it can only go up from now on. Opportunities to profit?