Archive for June, 2009

The economy is contracting. get used to smaller and having less

Thursday, June 25th, 2009

The U S gross domestic production contracted by 5.7% in the first quarter of 09

The World economy is forecast to contract by 3% for all of 09.

In a world of steady population increases, and a standard of living which has been improving worldwide for the better part of 20 years, a contracting economy is dramatic and dangerous.

In the U S , real estate values have been the savings account, which gave people the freedom to borrow and spend. Home equity was alway an easy loan in a market that increased steadily .

Retirement funds have been traditionally  augmented by the cushion that our home equity provided.

The crashing real estate market has been a severe blow to our psyche.When the steep decline in Wall Street wiped out our retirement savings, we could no longer look to our home equity as an alternative  hidden cushion.

Defaulting loans and home foreclosures has left many parts of the country looking like ghost towns, and the ripple effect has affected all aspects of our economy.

Every reported slight increase in pending home sales is examined  with wishful optimism, but the sad truth is , any glimmer of optimism is fueled by short sales and foreclosures sold by the mortgage companies; most  at a loss.

The economic recovery can not begin until home prices stabilize and begin to recover.

With the inventory glut of available homes equal to almost a full years supply, values are still falling.

Property values can’t begin to recover with the economy stuck in a cycle of higher savings and lower spending.

The stagflation which we have talked about many times, is getting a stranglehold on any recovery.

World wide, factories have a glut of excess capacity, built for the bubble economy, which is now deceased.

With the Democrats agenda of big spending and massive stimulation, the Treasury Department is running the printing presses on a 24/7 basis.

This excessive growth in the money supply has only just begun to trickle into the general economy.

This trickle will soon become a torrent, as the Fed hopes to pay back the   $ trillions  in borrowed funds with inflated dollars. The potential for this unprecedented money expansion to trigger a hyper inflation recalls visions of modern day Zimbabwe, and post WW I Germany. Both resulted in scenarios of wheel barrow loads of paper currency to purchase a loaf of bread.

If you depend upon a fixed income to survive, be very cautious.

More later

Bigger is no longer better.Let the Jones’ keep up with themselves

Thursday, June 25th, 2009

World wide production is expected to shrink by almost 3% in 2009.

While house prices are falling, the houses themselves are no more affordable than last year.

Income and employment are also falling, and mortgage rates are inching up.

The institutions with mortgage money to lend, have increased the level of scrutiny and the criteria necessary to grant loans. 

They have learned to be much more careful to whom they lend money, thus trapping potential buyers between  falling incomes and a more stringent lending policy.

Consumers are cutting back. They are no longer exhibiting the  ” keep up with the Joanes’ ” mentality, which has ruled our society for the better part of 40 years.

Smaller houses are in : more affordable, easier to maintain.

Less utility and energy consumption is in.

Smaller more energy efficient automobiles are in.

More modest vacations, including stay at home planning is in.

More modest retirement plans are in.

Public colleges are in.

Two year community colleges are in.

Moving back home by children and grandparents is in.

Saving is up from 0% to almost 7%, while spending has steadily declined.

The vast amounts of liquidity being pumped into the system by the government has created an illusion of new economic growth, but without a return to consumer consumption, there can be no lasting recovery .

Anything else is just that, an illusion and false reflection engendered by government printing presses and the shuffling of funds between the Feds and  the States.

The “green shoots” they talk about implying the beginning of a recovery, is a marketing gimmick. A way to create a false sense of economic recovery, to encourage consumer spending.True growth can only begin to germinate when that which we have broken gets repaired and renewed. A long and painful process, destined to drag on for many years.

THE DANGER IN OUR FUTURE

More Later

My puppy needs dinner and a walk

How the Recession is Rebuilding the American Family

Thursday, June 18th, 2009

The American household, and the reconstruction of the family living unit is a phenomenon directly attributed to the worsening recession.

Beginning in the mid 1980’s easy credit, a booming real estate market, and a highly resilient stock market, had the effect of creating separation among families.

It became economically affordable for families to split. Walking rather than talking created a psychology conducive to going on their own.

Money and easy credit  encouraged a rift to become a canyon of misunderstanding, and generated a quest for independence.

Adult children could afford their own places, and grandparents could afford to live in senior communities to be with their own age group.

Divorce was easy and affordable, and single parents became a common option when husbands and wives had  a dispute.

The houses were getting bigger while the number of residents shrank.

The bad economy has changed all of that.

Many children are moving back home to save money while they look for jobs.

Grandparents, having lost much of their retirement nest egg are moving back to live with their adult children.

Spouses are attempting to work out differences and to remain together . Separation and divorce are expensive, and must be a last resort rather than a quick fix.

Multi generational households are becoming a common and indeed desirable , as each generation supplies help ,advice, and security to the family unit.

American society is undergoing a fundamental change in action and perception.

Less bad is the new good!

Smaller  is now  becoming fashionable!

Less is more!

Luxury is out!

Practicality is in!

Buy what you need, not what you want!

Make do with what you have!

Charm counts more than splash!

What is out.

Big houses

Fancy vacations

Expensive restaurants.

Big tips.

Putting on a big front.

Frills are out, practicality is in.

The credit card mentality is out, downsizing is in.

Canning, gardens, wood burning stoves ,bicycles, and walking for exercise are all in.

Downsizing is in.

The landscape of America is beginning to resemble the 1950’s rather than the 21st century go go world of just 2 short years ago.

Consumer Spending Used to be 70% of our Economy

Monday, June 15th, 2009

We have all heard the financial pundits anxiously awaiting the results of  a consumer confidence survey” because consumer spending represents 70% of the Nations economy”.

Consumer confidence has been bouncing off all time lows for the past few months. “Just plain terrible is better than scared to death”, but not enough better  to get those credit cards swiping again.

The Wall Street and Government “yes men” have attempted  to  fool us into thinking that the stimulus and government spending frenzy are beginning to gain some traction in anticipation of an upward spring in economic activity.

I don’t think so!!

The “laws of physics”, apply to debt in the following manner.

Debt is either expanding or contracting. When it gets too high it  stalls under its cumulative weight, then tends to contract because it can no longer expand.

The credit implosion of the past year has guaranteed that consumer debt can’t increase.

The bad economy and mass unemployment ensures that consumer income is not increasing.

Consumer saving is over 6% this year compared to 0% for the same time last year.

Consequently there is no way that consumer spending can increase. If it can’t expand, then it has a tendency to contract in response to worsening economic conditions.

You can’t have the rebirth of a boom in a consumer driven economy. when consumer credit, income , and spending are all contracting.

Consumer spending does represent almost 70% of our economy.

Not a good number.

A View of the Stimulated Economy from the Perspective of Small Business

Friday, June 12th, 2009

I happen to be CEO of a small import export business, in the construction supply industry.

My business is down almost 40 % year to year. Several of my largest credit worthy customers have filed Chapter 11. My bad debt is growing, and the phones barely ring during the height of the construction season.

I have been forced to lay off 5 workers, and reduce the hours of my other 10 employees.

If this is economic stimulation I must be missing something. With state and federal taxes increasing in a dozen direct and indirect ways, I feel squeezed,

People have become mean spirited and very antagonistic.

Every day I speak to customers and suppliers  around the country, Almost every one of them tells me that they are laying people off, cutting back hours, and cutting expenses at every turn.

Small business is struggling to survive.

Despite the Stock Markets being 40 % above their March lows, I don’t believe this recovery is real. This economy is still dropping, The glimmers of rebound that “they” keep telling us about, represent the optimism born of Spring and warm weather.

The Federal Stimulus spending bill has made a bad situation worse because:

1. Investors and the public are mislead into thinking that all the money being thrown at the problem economy will make the problem go away.

The spending psychology has seen the markets go up almost 35% off their March lows. The public sees this performance, and accepts that things must be getting better. They are tempted to put money back into stocks. They chase the market after the bounce has almost run its course, in a vain attempt to recoup their losses and replenish their retirement savings.

Chasing a running market bouncing off a deep dive is a futile strategy destined to fail.We are not at the beginning of the next boom, and the bottom of our depression has not been seen yet.

2. The stimulus money delays a real recovery by keeping bad businesses afloat. Instead of letting the incompetents die off they are keeping alive dead wood for political agenda.

If General Motors and Chrysler had been allowed to fail on their own without bail outs, new American entrepreneurs would rush in to fill the void with viable new lean companies, and the American spirit of investment.

What should have been a 2-3 year shakeout and restructuring in a free market is destined to become a prolonged 10 year, slow recovery,(If it ever recovers from all of the interventions)

3 Basic laws of economics have been ignored. When a corporation goes broke due to a  faulty business plan, stock holders, bond holders, and labor unions should all suffer a proportionate loss.

In the case of the auto bailouts and subsequent bankruptcy, the labor unions have come out as the big winners, while the bond holders have been left holding a bag of pain. Rewarding the unions as political allies at the expense of the rule of law and free enterprise , sends a very stilted message of  distrust and legal disregard.

Politicians should not decide the outcome of free market movements for partisan reasons.

4 The current upward trend in stock prices is ultimately a fools gold fake out. The recession is a depression, and we appear to be doing everything possible to duplicate the errors of our predecessors in the early 1930’s.

Those who do not study history are doomed to repeat it.

The era of bubble economics is over. We have broken the engine which drove our economy. The banking system has been bailed out and regulated but not fixed.

The final bubble, which the government is attempting to inflate, to pull us out of this disaster is the US Treasury.

When this bubble pops from too much hot air too fast, who will bail out the treasury?

The Economic Stimulus is Great for Stimulating the Growth of Big Government, Not the Economy

Friday, June 12th, 2009

As the sub prime Adjustable Rate Mortgages (ARM’s) began to reset higher. in 06- 08, defaults began.

The steady climb in home prices slowed , then stalled as the economy floundered.

Sub prime ARM borrowers no longer had the automatic option of selling at a profit, or refinancing and pulling out equity for living expenses and new real estate purchases.

As real estate continued to decline, more and more people found themselves “under water”( their mortgage balance was higher than the value of their house) Many of these people chose to default, simply turning in their key and walking away from their obligation, amid their home.

The value of the derivative insurance instruments  declined, exposing the dubious value of  this form of collateral.

By the end of 08, most of the sub prime ARM’s had reset, dragging the markets into a precipitous crash, and leaving the banking system on the verge of collapse.

The unprecedented infusion of $ hundreds of billions, in TARP funds, put a temporary halt to the free fall, and helped to stem the panic in the banking system.

There is a second ARM problem, which is not considered sub prime, but appears to be a much bigger disaster because of the timing.

ARM’s for non sub prime purchasers has been a mortgage tool utilized by home buyers and lenders for many years. It is a method for giving  first time buyers or recent graduates and newlyweds a means of purchasing a home while they establish their career and earnings levels.

When home prices began their steep rise in 2002 and 2003, lenders utilized the ARM  with a wrinkle to help credit worthy buyers purchase homes that were   larger  and expensive.

The new wrinkle in the prime ARM’s is designated AltARM’s.

An Alt ARM is a mortgage loan where the borrower chooses what payments he will make for the first 5 or 6 years.

Interest only loans, or even less than interest, delaying all additional payments until after the mortgage adjusts.

This enabled credit worthy people with careers that appeared to be on the upswing, to purchase larger more expensive homes, to live the life style of their contemporaries, to purchase above their means.

The recession and job market shrinkage along with the massive losses on Wall Street have put these Alt ARM’s at great risk, and the derivatives insuring them in a very precarious position.

These Alt ARM’s are scheduled to begin adjusting in the Fall of 09, with the heavy resetting beginning in the Spring of 2010, and turning into a tidal wave through the end of 2011.

These are former Yuppies, and middle to upper middle class  successful people who lost jobs or a career due to the recession/depression.

That is a disaster in waiting, and the disaster is being ignored by our instant gratification politicians.

Perhaps they should see an eye doctor.

What a mess!!!! (more…)

The Economic Stimulus is turning the Economy into a Swamp. Add more water and you just get swamped.

Wednesday, June 10th, 2009

This is really great news.

The Stock market which hit its peak in October 07, then fell by 55% to its low in March of 09, and now has rallied by over 30% ,is back.

The recovery is under way.

 The worst is behind us.

We have survived “the worst economic recession of  the last 80 years”, and now confidence is returning to the market place.

What a relief.

 Back to normal.

It only took us 17 or 18 months to go to the gates of hell, and now we come back reborn.

It must be a miracle!

A fiscal program of  obscene deficit spending, social engineering, and socioeconomic bludgeoning must be the nectar  of the gods of economics.

 Get out the credit cards, and lets start keeping up with the Jonses once again.

Or NOT!!!

The ” perfect storm” series of events,which have attacked the foundations of our economy, have created a serious void, necessitating  dramatic long term actions as part of the  healing process.

Sadly we haven’t even begun the first small step towards a recovery.

How did this happen?

The market high point in October 07, was fueled by the real estate bubble and low interest rates, pegged at 1% by the Fed, in an attempt to keep the bubble inflated.

The mortgage industry found itself in a situation, where the average home was more expensive than the average person could afford.

To keep the ponzi scheme going, the bankers had to utilize an alternate method of making a mortgage affordable, even when it was more than a buyer could afford.

In order to comply with government dictates, the mortgage lenders began offering sub prime borrowers, the Adjustable Rate Mortgage ( Sub-prime ARM) as an option.

The ARM offered the purchaser a low introductory rate for the first 5 or 6 years of the mortgage. Usually based upon interest only, it offered the buyer an opportunity to purchase a home that was more that he could afford, with the expectation that when the rate adjusted upwards after the 5 year introductory period, the home owner could  sell the home at a large profit, or refinance at a new lower rate.

These sub prime ARM’s are what have been defaulting since 07, dragging down the banking system. Home prices began to stop going up, and instead of selling at a profit, many home owners found themselves “under water”, and chose to default.

Fanny & Freddie had been “encouraged” to make these sub prime loans in the late 90’s, and many people rode the new wealth and pride of home ownership up and then crashed as home prices reached a peak and stalled.

The bankers who made these sub prime, loans began to worry about the exposure if the loans defaulted, so they packaged their sub prime loans and took out mortgage insurance called Credit Default Swaps( CDS)

These mortgages were sold and resold with ever increasing leverage, based upon the steady increasing prices of homes during the early and middle 2000’s. These highly leveraged CDS’s became more and more shaky.

More Later

I don’t want to overload your  attention span.

The Economic Stimulus Package is like fertilizing weeds. They were going to grow anyway,you just made it happen faster.

Monday, June 8th, 2009

This is not a regular run of the mill recession.

We can not ride this out like the dot com bubble, or the S & L scandal, or the various  “boom bust” cycles of the past 30+ years. 

In fact, our economic “ship of state” is sailing in uncharted waters, and it feels like the boat is taking on water and listing to the left.

Recent popped bubbles, and their resultant recessions, have been  rescued by lowered interest , easy money, and a consumer shopping  frenzy fueled by credit cards and home equity loans.

This rescue spending , which translates into 70% of our economy, is gone. It has disappeared, along with 50% + value in our 401K’s, and the precipitous fall in the equity of our homes.

The American public has been frightened into  sobriety.

The ongoing loss of jobs( real unemployment approaching 14%)  and the  near collapse of our banking system has changed our spending and saving habits.

The staggering liberal economic spending agenda aimed at an attempted fix, has left most sober minded Americans, unnerved by the $ trillions being spent as a cure.

Our leaders have reportedly told us that this is the worst economic downturn  since the Great Depression.

As I explained to you several times in the past, the  Depression did not begin with the stock market crash in October 1929.

In November of 1929, unemployment was approximately 7 1/2 %, extended to 8 1/2 – 9% by  January 1930. but was settled back to 6 % by June 1930.

The attempt at stimulating the economy in the Summer of 1930. followed by passage of the Smoot Hawley Act and the resultant protectionism, resulted in increased unemployment, ultimately settling above 20% for much of the next 3-4 years.

Some comparative numbers parallelling  1930 and today.

In 1930                                                         Today

World output  – 15%                             World output  -15%

Stocks                – 15 %                               Stocks             -30%

 World Trade     – 14%                             World Trade   -22%

The protectionism of the 1930’s set off a world wide ripple of protectionist laws, intended to protect local populations. The resulting shrinkage of trade fueled the Depression.

Today, protectionism is being fueled by consumer choices, and international trade is one again shrinking . Third world manufacturere are being forced to adjust to new spending patterns by Western consumers.

The operative word is “purchase by need not by greed”.

The Next Problem, Later

We Have planted the seeds of our destruction. Now our leaders are supplying the fertilizer

Friday, June 5th, 2009

Our cheap money policy helped to fuel the boom in real estate.

People were able to buy more expensive houses than they could really afford , due to the low interest rates. This helped to stimulate demand, and pushed the price of  houses even higher.

The system began to stall, when the average house became more expensive than the average person could afford.

When rising mortgage rates in 2007 and 08 caused buyers to turn away, prices stalled, and began to slide.

The inventory of unsold houses on the market was inflated, as the sub prime mortgages ,many being Sub Prime ARM’s (SPARM’S),began to reset at much higher rates.

The subprime defaults which resulted, further depressed prices. The resulting halt to new construction and speculative renovations took down builders, suppliers, and financial institutions.

As the deflating bubble accelerated, bad debt and faulty derivatives caused banks to pull back on lending in fear of seas of red ink. This helped to create a worsening credit crunch.

The slump in construction and lending had a ripple effect on the economy.

As the Stock Market inploded, businesses cut payroll.

Banks stopped lending, and began to tighten up on customer credit. Consumer loans and credit limits on credit cards  became tighter.

Consumers stopped shopping and stayed at home to save on expensive gasoline costs.

Automobile manufacturers found themselves buried in unwanted inventory.

The world wide economy began to follow suit.  Demand for exports shrank,  and commodity prices fell along with oil and real estate values world wide.

By the end of February 09, the value of most stock markets around the globe had fallen by better than 50%.

The crash had turned into a torrent of red ink, wiping out $ trillions in assets.

In early March of 09, the percieved turn around began.

From their bottoms, stocks world wide rebounded by around 30%, and oil had once again become a speculative darling, showing increases over 50%.

The worst is over!!!

On to the next adventure.

We are all saved!!

Or Not

Part 2 later

Are Things Really Getting Better? I Don’t Think So!The Disappearance of another Industry

Thursday, June 4th, 2009

This recession/ Depression has caused major disruptions and disasters for the banks, the automobile manufacturers, the insurance industry, as well as energy producers, but very little attention has been paid to arguably the largest industry in the United States.

I am talking about construction.

Every business begins with some attention to real estate, location and construction either past, current or future.

Commercial real estate including industrial, office, hotels, restaurants, and even parking facilities,  are necessary considerations involving economic expansion.

When the economy is healthy, construction is expanding, and hundreds of thousands of new  jobs  are created.

When the economy is stagnant or falling, construction becomes stagnant. The depth of the recession helps to define the degree of stagnation.

Despite the optimistic mutterings of the ” experts and pundits” this is a deepening neo- depression.

Besides commercial construction, there is also infrastructure and residential .

Much of the funding for roads and bridges was supposed to come from the “stimulus” package, but the pragmatic observations are much of the money is being diverted to other applications by desperately insolvent governments, with many projects being delayed by governmental red tape, and laborious allocation bottlenecks.

The sub prime fiasco has resulted in the cessation of much new residential construction.

Defaults and foreclosures are far more prevalent than renovations or new construction in the residential market.

There is a national network of independent businesses, ranging from a Home Depot, to the small local tile installer, who account for millions of jobs.They supply, install, build and maintain the flow of residential and commercial constrction.

The sad reality is that most of these businesses are in dire financial peril as a result of this widening depression. Many of them are in real danger of going out of business, with a resulting tidal wave of new job losses.

Most being independent entrepreneurial business people , their cry of impending disaster is barely heard by the national scene, but these people are the backbone of our economy and provide the true  job creations in good times and job loss in bad.

Now is bad, Very bad, and the impending crash is totally unanticipated by the National pundits.

As they are forced to close in ever increasing numbers, the unemployment figures will expand exponentially.

Look out below!!!