Major Economic Dislocation

[chequita guevara]

/me is now taking applications for the Communist Party of Apolyton.

[DanS]

Originally posted by Colonâ„¢
BTW glad it took a mere decade to come around my view Americans weren't saving enough

To be fair, the savings rate has declined since then. You were only marginally correct a decade ago.

About government misallocation of capital, I agree. That's what worries me too. The government doesn't allocate capital well -- if it were good at it, we would leave it to the government in the first place.

It's important to include the scale of misallocation in your analysis, however. We probably have some productive infrastructure spending that we can do, unlike the Japanese. A couple hundred billion in infrastructure spending isn't all that much in the grand scheme of things. See Adam Smith's post in my high speed rail thread. He knows this stuff exceedingly well.

[Colonâ„¢]

I think messing around with the housing market even more than has been the case could be a pretty ****ing big misallocation. However, I guess we'll have to wait for what the Obama administration has in store. I'm somewhat optimistic considering he's been gravitating towards experience in his cabinet picks so far. Maybe a Sweden rather than Japan.

[DanS]

Yes, I agree with regard to housing. That misallocation has been going on forever.

[The Mad Monk]

Originally posted by notyoueither
At bottom, I disagree with the characterisation that these are the dog days of the recession. What we've seen so far is a gerbil. The cat is eyeing it. The dog hasn't been let in the house yet.

I am/was hoping to be learn something and perhaps entertain some doubts about my misgivings, but I need more than reassuring words.

Glenn Beck has been talking about the upcoming credit crash for two years now; now that it is happening, he says we're in the first five minutes of a five hour ride.

[DanS]

How does he figure?

[KrazyHorse]

Glenn Beck is almost as insightful as Lou Dobbs.

[DanS]

One step at a time, Kitty.

[notyoueither]

Originally posted by DanS

So far, you haven't named anything that would cause a major blowup beyond what we're experiencing already (and there's a lot of crap baked into the cake already). It's a little hard to argue against a vague notion of impending doom.

What I'm not seeing from any of the optimists is how the North American consumer economy is going to overcome the collapse of real estate and other asset values as well as denial/refusal of other forms of credit. I've stated a case, in broad terms. All you can say is 'don't worry too much about it.'

However, I understand not taking the word of some internet crank. Don't. But surely you've heard opinions similar to mine in the OP. Try this one...

Warning: The following contains that dreaded D word

http://www.financialpost.com/most_popular/story.html?id=911549

Dr. Doom forecasts depression

Janet Whitman, Financial Post
Published: Monday, October 27, 2008

NEW YORK – Peter D. Schiff, an extreme bear who correctly foresaw the U.S. stock-market slide, the home mortgage meltdown and the credit crunch, still sees plenty of doom and gloom ahead. As president of Euro-Pacific Capital, a Connecticut-based brokerage, the 43-year old financial advisor has long been urging his clients to get their money out of U.S. stock and bond markets and look for safer investments outside of America or put their nest eggs into silver and gold.

Mr. Schiff, a frequent pundit on U.S. business channels whose gloomy views have earned him the nickname "Dr. Doom," sees no need to alter that strategy. He expects a lot more downside, despite the already precipitous drop in U.S. stocks, which has seen the Dow Jones Industrial Average tumble 40% from its October 2007 record of 14,164 to 8,379 points as of Friday's close.

Far from fixing the problem, the US$700-billion Wall Street bailout and other government interventions are only going to prolong the pain, predicts Mr. Schiff, who was economic advisor for libertarian Republican Ron Paul's 2008 presidential campaign.

The economy, he says, appears headed for its first depression since the Dirty Thirties. Mr. Schiff spoke with the Financial Post's Janet Whitman.


FP: How did the U.S. get into this mess?

Peter Schiff: It was the result of reckless monetary policies. Of course, the rest of the world is not blameless. They're the ones who loaned us all the money that we spent. We couldn't have dug ourselves into this gigantic hole without them. We've printed and spent and borrowed our way into a financial disaster. What we are witnessing is the consequences of the excesses of our economy, especially over the past eight years since the bursting of the tech bubble. We basically ended up with false economic growth. Ultimately, if an economy lives by credit, it dies by credit. When we can't borrow any more, it implodes. A lot of companies were built around this phony economy. Americans are now too broke to buy those products. We never could afford to pay for them. We were paying for them with debt.


FP: Are government bailouts helping?

PS: Everything that the government is doing right now is designed to prevent the market from administering its tough medicine. All of the bailouts are a bad idea. The government is trying to put more cash out there so Americans can keep spending. We don't need more loans for consumers. We need less. Consumers should not be borrowing. They should be doing the opposite. We're trying to encourage more of the behavior that's behind the problem.


FP: What is the solution then?

PS: What we need is real change. We need to rein in the government and let lose the free market, unfettered by government. It was government intervention that created this crisis in the first place. The Federal Reserve brought interest rates down and provided all this cheap money for everyone to speculate with. A lot of Americans refinanced and took out much bigger mortgages in the last few years. The idea was, You don't want to leave all of that equity in your house. You're rich now, you live in half million-dollar house. You need a media room and a Mercedes. You can't be driving that Ford. Everybody was spending all that money like they were entitled to it. Now all the debt is still there and we can't pay it back. We can't fix the problem. We can't stop housing prices from falling because they are too high. Most people still think that the government can fix it and put it back together the way it was. But we need housing prices to fall to a point where Americans can afford them – where you can put 20% down and have a mortgage payment that's only 25% of your income. I think real estate in America is going to be the cheapest it's ever been in real terms. Pendulums don't stop in the center. They swing in the other direction and over shift.


FP: How bad is the economic downturn going to get?

PS: As of right now, we are headed for a depression, meaning a protracted period of economic contraction with elevated levels of bankruptcies and unemployment. It's not going to be a recession the way we've come to know them. Whatever we call it, we're still going to be in it at the end of [U.S. presidential contender Barack] Obama's term. He's going to be known as a depression-era president. Unfortunately, [things he's proposing to do] could make it worse and drag it out. The economy will be the issue when he goes for reelection...We have to restructure the economy in a different way. That's going to involve a lot of pain. We haven't seen the full extent of the doom and gloom in real economy. It's showing up on Wall Street first because they funded all of the extravagance...But the bigger picture is the party is over. We're going to have to get used to a different lifestyle. We're going to have to start saving money again.


FP: When might the U.S. stock market bottom out?

PS: The U.S. stock market is still fairly expensive, especially if you factor in what future earnings are going to be. I think [the Dow] still has a long way to go down. Is it 7,500, 6,000, 5,000? I don't know, but I don't think we're there yet. Adjusted for inflation, I think in five years the Dow is going to be below where it is today.

jwhitman@nationalpost.com

[DanS]

Originally posted by notyoueither
What I'm not seeing from any of the optimists is how the North American consumer economy is going to overcome the collapse of real estate and other asset values as well as denial/refusal of other forms of credit. I've stated a case, in broad terms. All you can say is 'don't worry too much about it.'

I can't play whackamole all day, but if this is the most specific fear to be presented, then I'll address it as best I can.

Loans are very available at this moment at quite attractive rates to those with average-to-good credit, who are not underwater on their mortgage, and who have jobs. This represents a majority of consumers.

Among the reasons why credit is available is that the Fed has been lowering interest rates to absurd lows and is pumping money into the financial system like mad. If you remember a couple of weeks ago, the Fed announced a purchase of $800 billion in mortgage-backed securities, allowing the lenders to turn around and issue another $800 billion in mortgages to consumers. Mostly, this is going to consumers to refinance their mortgages to lower monthly payments, thereby increasing their disposable income. I have no reason to expect that this is a one-time deal for the Fed.

Last week, the Fed announced a 0% to 0.25% interest rate. As the interest rates go down, those with adjustable-rate mortgages will find it easier to pay their mortgages, even if they are underwater and can't get into 30-year fixed mortgages. Those with credit cards will find it easier to pay their credit card bills. This will help increase disposable income.

Gasoline is almost being given away nowadays. Food is becoming cheaper. This is helping increase disposable income.

Now, it's true that even though credit is available, consumers aren't borrowing (well, except the mortgage refinancing, which is perking up nicely). Part of this is a rational belt-tightening that is not likely to be too drastic. Part of it is that we just had a stock market and credit market crash and it takes a few months to process all that on an individual level.

[notyoueither]

OK.

Now combine that downturn in consumer spending with the reliance of our corporate citizens on the easy credit economy to fuel ever growing consumer spending on crap that no one needs.

The Fed may well be pouring gas on a fire that has gone out.

That's why we are still at the beginning. Our employers are going to be challenged to adjust to a new reality, and some of them simply will not survive without being able to push crap to overjacked consumers.

The U.S. stock market is still fairly expensive, especially if you factor in what future earnings are going to be. I think [the Dow] still has a long way to go down. Is it 7,500, 6,000, 5,000? I don't know, but I don't think we're there yet. Adjusted for inflation, I think in five years the Dow is going to be below where it is today.

The point is the shortage of currency, be that in consumers able or willing to borrow to buy more 'stuff.'

[DarkCloud]

NYE- Look at the P/E earnings ratios of the companies on the DJIA. Lots of them are trading far under what they are worth.

There's a lot of wealth on this market. I'm personally moving some funds into the market since finally the company wealth evaluations have gotten to a point that's acceptable as long as credit doesn't dry up from the banks... Which I don't think the US economy is going to let happen.

Was the Dow reasonably valued at 10K, yes... but was it reasonably valued at 12K- I think people were beginning to realize things were overvalued when they started purchasing highly leveraged companies that had over 1:14 ratios.

That being said, I agree with you, the US is due to see some bankruptcies. But after the big Jan-March flushout, the majority of the junk should be out of the financial system. Just putting a random number on things, I don't see the Dow going below 6800 in 2009. I do agree however, that it will plunge again from its current level.

---
Oh, and, I would never bet against the propensity of the American Consumer to spend money they clearly do not possess. Americans simply are not thrifty. It's the American Dream to borrow on Credit (!)

[notyoueither]

Let me get this straight. You think the market is about to plunge, but you are investing in it. Do I have that right?

I would venture to say that American consumers have nothing on you. You go, girl!

[DanS]

Originally posted by notyoueither
OK.

Now combine that downturn in consumer spending with the reliance of our corporate citizens on the easy credit economy to fuel ever growing consumer spending on crap that no one needs.

The Fed may well be pouring gas on a fire that has gone out.

What does that mean, specifically? Lower interest payments on the debt that is already taken out will no doubt lower the burden on consumers who are jacked and unjacked. This is just a matter of mathematics. People will probably save a little bit more with the reduced debt servicing burden.

That's why we are still at the beginning. Our employers are going to be challenged to adjust to a new reality, and some of them simply will not survive without being able to push crap to overjacked consumers.

Yes, employers will have to adjust to a new reality where people are saving more. Why is that particularly scary?

[One_more_turn]

Dow 5000 is very likely next year, but Peter Schiff is still an a-hole. Anyone who wants a depression now is a f*cking sadist.