Financial stress on the system

I posted this last week on Google+ at https://plus.google.com/u/0/114613808538621741268/posts/13tBzre1nRa. Given market drops since then, I'm reposting it in a more public forum.

How could our next financial crisis start? I was in an interesting discussion about this last night. I'd give better than even odds that it will be ugly before Christmas. Here are some of the possibilities to watch.

- General economic slowdown. The economy seems to be slowing. Plus there are all of the other stresses I'll discuss, all of which are likely to make it slow more. But it seems implausible that a general slowdown will happen suddenly enough to precipitate a full-blown crisis. Though it sure provides stress that could cause something else to happen.

- European sovereign debt issues. We all have heard about Greece. Italy is in the news. But the really scary quantities of debt are in Spain. And Europe has proven to have no political appetite for having meaningful bailouts of one country by another. Either the prospect of the EMU (European Monetary Union) dissolving, or a liquidity crisis caused by a large default (even if it doesn't get called a default) is a likely bet.

- US sovereign debt issue. We dodged the debt ceiling debate. 2 of the 3 rating agencies have left the USA at AAA, but on a negative watch. (Meaning better than even odds of a downgrade within a year.) The third, S&P, based on past guidance is likely to downgrade the USA this month. Though they could do what the other two did. The next test is what the super committee comes up with for the second half of the cuts that are in the debt ceiling deal. That's expected around Thanksgiving. Whether that triggers a crisis depends on what is cut. But a crisis is unlikely. The bigger problem is that people have been backed into a political corner where the US government will be unable to intervene if something else goes south.

- Residential mortgages. The current expectation in the industry is a 3-6% drop next year, with 15% as a worst case scenario. However if the mortgage tax deduction were to be yanked (for instance as part of deficit reduction), much worse changes are possible. (And, of course, another financial crisis would take all bets off of the table.)

- Commercial mortgages. Everyone is aware that commercial mortgages are in a world of pain. However servicers have been very forgiving. They really don't want to force bankruptcies which are in nobody's best interest, so they restructure deals, collect as much blood as they can, then limp along. (A clear case of, "If you owe $100,000, you have a problem. If you owe $100,000,000 the bank has a problem.") However the sector is still under stress. And last month the delinquency rate spiked to the highest rate on record. There could still be trouble there. Particularly if a slowing economy reduces how much money is available to pay back debt.

- Private equity. There is a world of pain coming here as deals struck in 2006 and 2007 (2007 had a lot more) see principal payments come due this year and next. Based on the experience with commercial mortgages, I would expect the banks to be unusually forgiving. But the question is whether they have sufficient liquidity to be forgiving enough. (As much as the banks may want to make deals, they have a real problem if nobody pays them back.) Borders just went bankrupt, how many more companies will follow in the next year?

- Municipal debt. Meredith Whitney has been crying wolf on this for some time, but she has a real point. There are trillions of dollars of debt issued by municipal governments who are under stress. In the first half of this year they got unexpected revenue increases. However a slowing economy could cause them to get back in trouble. And their budget cuts to deal with financial pain could slow the economy. To add salt to the wound, most have large investments in pension plans that is budgeted to get 8% annual growth. Those rates are hard to reach in today's economy, so a lot of that money is in risky asset classes like investments in private equity. It is very likely that those assets will under perform, adding to budget holes. Central Falls, Rhode Island just filed for bankruptcy. How many more will follow in the next year?

- Chinese asset bubble pops. I know little about what is going on there. They do have a big asset bubble. History says that it will pop eventually. Nobody knows when, or what the fallout will be. However my impression is that when it happens, the pain will be mostly felt in China.

- External shocks. You name it. Successful terrorist attack. (The 10'th anniversary of 9/11 is coming up...) Unrest in the Middle East triggers oil spike. An unexpected major earthquake. (For instance the Cascadia fault slips, leaving over 100K dead in Seattle, Vancouver and Victoria.) These are all unlikely, but possible.

Literature not popular in the USA

I grew up in Canada, but now live in the USA. In the grand scheme of things, Canada and the USA are very, very similar. Yet even so there are odd differences. One of them being that there are books which are popular around most of the English-speaking world (and often farther) that are popular in Canada which nobody in the USA has heard of.

In some cases it is obvious why. For instance consider Yes, Minister which is one of the most brilliant descriptions ever of how bureaucracies work. However it assumes you understand the British parliamentary system. This political system is used in most places that were part of the British empire, including Great Britain, England, India and Australia. Therefore there is little surprise that while I've met plenty of fans of the series from all of those countries, virtually nobody in the USA has even heard of it.

In other cases it is less obvious to me why it is so. Consider, for instance, the comic series Asterix and Obelix. Originally written in French, the series has been translated into many, many different languages and is loved by children around the world. I've talked with fans from France who didn't know it was translated, fans from Spain who didn't realize it was in English, fans from India who didn't know it wasn't originally written in English, and so on. Yet I think I've talked with a grand total of one person from the USA who had heard of it - and I believe he learned about it while traveling through Europe!

Why would this be so? I suspect that some marketer looked at the series and said, "A comic series set in ancient France shortly after the Roman invasion? No American kid will ever go for that!" And so it was never marketed here.

I think this was just a bad decision. Certainly no American that I've lent it to (including several children) had trouble with the material. They all loved it. Besides, the books are meant to be appreciated on many levels. I can read it to my 4 year old son and he laughs at how Obelix accidentally breaks doors when he knocks at them. I loved it at 9 even though I missed most of the jokes embedded in the names. And my kids' babysitter wants me to buy more so she can read them. It really is a series that grows with you as you learn enough to understand more of the jokes.

In short you'd think that any series that is popular around the world in multiple languages is worth trying in the USA as well. But apparently publishers don't think that way. And so American audiences miss out on some really great works.

But this makes me wonder. I'm aware of these works because I grew up in Canada. But the USA and Canada are very similar. What popular works would I love that I don't know because they were never marketed in either country?