Seven Uncomfortable Predictions for the Economy

Feverish speculators were ripped in half. Intoxicated investors are still nursing healthy scars. It’s like the movie Jaws. As you slowly start dipping your toe in after the last brutal market attack and you get ready for the spring swimming season here are seven clear and present dangers you need to watch out for:

ONE: Commercial Real Estate

It won’t be long now until major REITS (real estate investment trusts) come unglued adding further shock waves to American banks. Wells Fargo (WFC) is one of many that have commercial real estate loan exposure. The SRS (an ETF based on the Dow Jones real estate index) fell back down on Friday to $52.90 not far from its 52 week low of $48. Although this ETF does NOT deliver as promised and it is packed with some of the strongest REITS it is the easiest way to short commercial real estate. Simon Properties (SPG), one of its largest holdings, is on the trouble list. As the sector gets hit, the cards will fall. Don’t be lured by REITs' juicy yields. Get out before the masses head for the exits.

TWO: Insurance Companies

Guess what large insurance companies invested in? That’s right, commercial real estate. Now, if you lost your job and your house is getting foreclosed on, chances are you’ll look to either borrow from your IRA or cash in early on any life insurance benefits. Expect these unprecedented withdrawals to cause swift changes to your policy and the amount and ease you can access your cash. Just as the commercial real estate assets on these insurance companies' balance sheets are being hit, people will start pulling their money out en masse. I expect a run on insurance companies next. If you are a shareholder or bondholder of a weak insurance company cut your losses as the market rallies.

THREE: A wave of Corporate Bankruptcies

Despite recent credit improvements and bear market rallies, the carnage of big business is not over. What can we expect this year? A lot more banks, clothing companies, factories, homebuilders and smaller companies unable to secure financing will be forced to close their doors. General Electric (GE) is all that remains of the original 12 Dow Jones companies. Everyone else merged or went under. These bankruptcies will send millions more to the unemployment lines and leave banks reeling again as they take the brunt of the corporate loans gone bad. What happens when the bailout band-aid factory itself runs out of money? If you answered “it will just print more”, you are today’s winner. What if the projected and expected bank failures eat up the FDIC insurance money? No problem, Benjamin has an unlimited supply of fiat brothers and sisters.

FOUR: The Almighty Dollar

The dollar is a moving target. On one hand it strengthens as other economies' problems prove worse than America’s and the world scrambles to buy our currency to pay off dollar denominated debts. On the other hand, the reckless debasement of the US dollar as the fed buys billions in treasuries and Freddie and Fannie backed securities puts our status as the world’s reserve currency in jeopardy. Already Russia and China are asking that a new global currency be part of the G20 discussions. Countries including Iran and Venezuela have refused to accept dollars for their oil. Since 1973 when Henry Kissinger persuaded OPEC nations to accept only US dollars in payment for oil, the greenback has had major strategic advantages as the reserve currency. If this tradition ceases we not only lose a tremendous strategic advantage, but a sudden dive in the dollar would cause financial panic, crashing stock markets and oil (priced in US$) would fly above $100/barrel and gold and silver would go into the stratosphere. If this trend continues the dollar could suffer the same fate as Zimbabwe.

FIVE: Thrift

One creative newsletter writer referred to it as a frugalista fiesta. I’m talking about heaven forbid, millions of fashion divas bred to consume, wearing last year’s designer wardrobes again today. As horrified consumers watch hard-earned money disappear they will shop less, save more and in an attempt to lure them back prices will continue to fall. Christmas sales were the worst in four decades. With 70% of Americans living paycheck to paycheck and 72% of GDP making up consumer spending, that rainy day is here. As the unemployed use up the years of contributions made to unemployment insurance, the clouds are about to deliver with gale force winds a torrential downpour. For the growing middle class forced to take jobs way beneath them to feed their family, just about everything except food, clothing and shelter will now be considered an unnecessary luxury. The first tier of casualties will be ski holidays and high-end vacations. Private schools are already noticing attrition in applications. On the flip side as things deteriorate, those with cash will be able to negotiate once in a lifetime deals on houses, boats, jewelry, furniture and other luxury items. 2009 will be the year of the dramatic reduction in value in two to ten million dollar homes.

SIX: Crime

States and counties with looming tax deficits will be forced to further cut funds for fire, police and other community services. Good citizens, having followed the rules, now out of work for an extended period are required to go to extraordinary lengths to feed their families. Should this trend continue, muggings, household thefts, kidnappings, bank holdups and identity theft will sky rocket. Gun and ammunition sales have already increased dramatically. This will make it easier for folks to get food on the table when the cupboards run dry. Watch for an escalation of crime not only in the cities but also in quiet, safe suburbia. Hold on tight to your sense of humor and your “don’t worry, be happy” spiritual attitude. These will be useful tools to navigate the next decade.

SEVEN: Baby Boomerang

Years of conspicuous consumption, excessive waste and depleting natural resources will come home to roost along with their kids and grandchildren who’ve lost jobs and need a roof over their heads. So, dust off the guest room. As boomers retire en masse over the next several decades they will be net sellers, not buyers to fund their retirement and to afford the new extended family back underfoot. Just as the administration puts a floor under real estate, the baby boomers will be down sizing. Only a great re-inflation of our currency will send housing prices higher.

As the beaches open for the upcoming swimming season, be vigilant as you step into the water.

Stock position: None.

Comments

[JOE TODD]

I hope you are wrong but that is about the way I see things to..

2009 Mar 30 08:11 AM

[Steve Owen]

Joe said what I was thinking.

2009 Mar 30 08:33 AM

[Urbane Gorilla!]

Yup! Aside from increasing social unrest in other countries (expect the Mexican Drug problem to spill over our border for example) I think you've summed it up very well. Thanks!

2009 Mar 30 08:33 AM

[MichaelJ007]

OMG! the sky is falling.... still.

2009 Mar 30 08:36 AM

[capital pains]

My God, talk about gloom and doom - I needed to call a suicide prevention hotline after this article !
However, unfortunately this entire article is spot on .
The bear market rally was a selling opportunity..Only, suckers bought in ..Fools like Cramer and his "nation of sheep" audience.
The G-20 summit will be a huge flop. The USA is hated because we exported toxic scuritizations all over the world.
The commercial real estate collapse is a train wreck waiting to happen, and it will !
Look out below !!

2009 Mar 30 08:37 AM

[Ferdinand E. Banks]

I like this paper. I like the way the author writes, even if I do not believe in a large part of it. I also like the inclusion of crime in the discussion, although if she were a little more thorough she would have mentioned dope and porn as the big long run factor where that activity is concerned..

As for what I didn't like in particular, it was the expression "bailout boogie", or something on that order. BETTER TO BAIL OUT U.S. BANKS AND BUSINESSES THAN IRAQ AND AFGHANISTAN.

2009 Mar 30 08:48 AM

[epeon]

Buy your guns, run for the hills, plant a garden, start hunting deer. Damn, the appocalypse is at hand!!!

2009 Mar 30 08:53 AM

[Joe Adamaitis]

Well done and if I might add, as I usually do, let's not forget those pesky "pay option arms"! One trillion strong and soon to adjust. I would also mention those commercial loans and even equipment leases which as many know carry some heavy paybacks. As small business suffers, so do these firms.

Keep in mind that many commerical loans were made by brokers and lenders who when the first sign of a decling residential real estate market began to crack, they jumped into the commercial loan arena. Ironically and sadly many of the same predatory prgrams (by originators) were being introduced to "No Doc's, Stated Income (Liar loans) etc. On top of those poor originations, many borrowers were fleeced by firms who took their money with no abilty to fund. A real mess and I predict this segment of borrowers will unravel soon. Not trying to add to the doom and gloom beleive me. I saw it close and upfront and it wasn't pretty. I also wrote about way back in early 2007 but not many wanted to hear it.

2009 Mar 30 08:53 AM

[Oso Velo]

Here's an analogy to our advantage as a producer of the world's reserve currency. If a small island publishes an Elvis Presley memorial postage stamp for $2.50 a piece, their profit is about 99% on each sell, because the buyers will typically hold the stamp and not use it. If a majority of buyers want to redeem the stamp at the same time, say by mailing parcels from the island, the island's economy would tank. The stamps are like dollars, held for decades as reserve, then suddenly offered back in return for good and services. The devaluation that we will see will defy understanding,

2009 Mar 30 09:01 AM

[kelm]

Over the centuries it has been shown that inflation rate and crime rate are highly correlated so the Fed's QE strategy will lead to higher crime. Indeed, the local police force, at least where I live are expecting it now that the weather is warming up.

2009 Mar 30 09:03 AM

[Schneidehouse]

OK, so you say that SRS doesn't have enough weak companies to use as a proxy for CRE/REIT, and I am very afraid of picking individual companies to short, does anyone know where I can find the best ETF/ETN to short the CRE/REIT and insurance industry? Are there any 2x or 3x short ETF/ETNs out there?

P.S. I happen to agree with your analysis as well (unfortunately).

2009 Mar 30 09:09 AM

[bagman432]

OMG - smart & beautiful.

Talk about nailing the situation. It might be time to renew that passport, sell that house (if you can), and think about moving to a place with a little less corruption. The way this country is going how long will it be before the government puts restrictions on leaving the country with gold, silver, or other hard assets? I know they trample our constitution on a daily basis. Anyone who thinks for a second that our rights are safe in America is delusional or blind. The clock is ticking and Ms. Bawden's comments are on the money. If you really want to protect your family it might be prudent to consider an escape plan. It may seem absurd to some but considering the average American's apathetic nature I just don't see much hope.

Canada?, Costa Rica?, here I come!

2009 Mar 30 09:11 AM

[Wreckdiver]

Yes, agree as well. I think the biggest surprise will be the unexpected rise in crime particularly theft. Time to be less conspicuous and lock the doors. There will be less empathy as well for those that were robbed.

2009 Mar 30 09:19 AM

[Allan Frain]

Agreed.

While most of these points can be found throughout media, the last regarding the demographics of the Baby Boom is the most overlooked. It was overlooked as the housing bubble was engineered and it is being overlooked as the correction of Real Estate is being fought.

Flying in the face of profound demographics does not make for sound economics. The retirement of the Baby Boom would have weighed heavily on Residential Real Estate even in the best of times.

2009 Mar 30 09:36 AM

[joes]

Funny how everyone thinks that crime will go up, when it was the huge fraud perpetrated by bankers and politicians, I call them Reagan's mafia.

With more light being shone in the area of wall street crime will almost certainly go down, it will take a lot of petty thieves to make up for one Bernie Madoff or Alan Greenspan.

As far as moving to place with less corruption, good luck on that search, there is no place that is less corrupt and that will be the ultimate salvation of the dollar.

The G20 will talk about replacing it as a reserve currency, another cost of the misguided policies and corruption of the last 25 years.

What can be expected of a country that locks up people for 20 years for smoking pot and 3 years for rape, hopefully Obama can turn this ship before it hits the Conservative iceberg we have been sailing towards for years.

2009 Mar 30 09:53 AM

[yolosetodo]

You hit it right on the nail. But lets not forget that this is a world recession and the US will always come out ahead earlier. Also like any other economic cycle, this one also will pass. In times of crisis people tend to focus on the difficulties and not the opportunities. This may be the first time in our generation that one can set himself up for life if you look at the bargains.

"In the middle of difficulty lies opportunity, Albert Einstein"

2009 Mar 30 10:21 AM

[Bill James]

I think you are correct. We hit Peak Oil in 2005. Net World Oil Exports peaked and have declined since, less energy, same efficiency means less economic activity.

We need to fundamentally change our energy efficiency and re-establish the sense of self-reliance. In three critical areas we need to repeat the success of communications infrastructure re-tooling by changing from central planning to distributed self-reliance:

1. Food distribution. Get everyone involved by calling on everyone to plant a Victory Garden and try to grow 1/3rd of their own food. "Many hands make light work." Self-reliance starts with the self and is an attitude.
2. Power generation. Feed-in Tariffs are needed to allow anyone to create and sell electricity.
3. Transportation. Set Performance Standards for transportation efficiency and allow innovators to fill that standard. Cars, buses, trains and planes all use about 1,000 watt-hours per passenger mile (32 mpg). Personal Rapid Transit (PRT), PodCars, JPods use about 130. Converting 85 cents of every dollar spent on oil to jobs and profits is a way to stabilize and rebuild the economy.

2009 Mar 30 10:38 AM

[TeresaE]

Nicely said.

The sheeple have no idea as to the pain that is heading our way.

One added point to Commercial Real Estate. The banks are yanking their funding from paying customers based on the fact that our business is down thanks to their playing in the sandbox.

They screwed up our economy and now are bankrupting paying customers and somehow Geitner thinks this will fix our economy.

The scariest bankruptcies aren't the big guys, they will survive in one form or another. It is the big guys suppliers and distributors that will bear the brunt of the fallout. And after a decade of competing with China, we can't hold on if we have to eat our debt and our customers invoices too.

Say goodbye to your customers, they are being bankrupted in droves to pay Wall Street.

2009 Mar 30 10:38 AM

[Jimbo]

I cannot share joes opinion that the prophet Obama will steer us away from the "conservative Iceberg". The so-called "conservatives" have certainly screwed up things( such as repealing Glass-Steagall) but I fear that the naive and inexperienced Obama and his collectivist acolytes will fly our economy into the ground. I see nowhere to run or hide either.

2009 Mar 30 10:43 AM

[ghostintherafters]

Do they have editors where you work? I agree with some of the substance, but it was so poorly written I think I missed large swaths of your points.

2009 Mar 30 10:52 AM