Core economic activity was driven by credit expansion that reached its terminal peak around 18-24 months ago. We are now starting to see the first order effects of reduced consumption. The first segments effected have been employment and earnings in lower value added sectors, the impact of which can be measured by sub-prime mortgage delinquencies & defaults.
Next up are option ARMs and other marginal loans provided over the last 3-4 years that enabled unqualified people to purchase homes. Concurrently, we're seeing the inevitable vacancies and occupancies emerge in CRE from dramatically reduced non-essential spending.
These loans, which are are all held in various tranches of different CDO securities, are poised to begin experiencing negative servicing levels which will greatly impact current cash flows. MTM models will have to reflect prices paid for comparable L3 asset bundles held by non-banks that are suffering large redemption rates.
Without a demand driver, asset values will continue to decline, putting even more mortgages at risk of non-performance. The market is way beyond looking past assets, CDS notional values, etc. They are looking at the same cash flow numbers you are but are coming to entirely different conclusions. Until an income/debt/asset equalibrium is reached, your cash flow assumptions are subject to continued downward adjustments.
But by all means, go long.
Credit cards will experience higher loan losses, oh terror! The funding cost is 2.8% and the interest rates charged at 13-18%. The loan losses at spike levels are around 5-6%.