Equities: In the Eye of the Storm 17 comments
John Browne
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As we enter the height of the hurricane season, it may be worthwhile to recall, when considering the economy at large, the particular deception that lurks in the “eye” of the storm. After a raging tempest, the sudden appearance of the calm ‘eye’ can all too easily encourage people to leave their shelter in order to assess and even repair damage, exposing themselves to the often more devastating second leg of the hurricane.
We have long warned our readers of a coming real estate crash which would then lead to a credit crunch, and eventually a major round of bank failures. We have argued that these developments would be the precursors to a major recession, and perhaps a depression.
As predicted, the collapsing values of bonds backed by subprime mortgages did indeed lead to a collapse of the entire mortgage market, a bank liquidity crisis, a credit crunch and a steep fall in consumer confidence. This was the first leg of the storm, but the full blown banking collapse and the deep recession are not yet manifest. The conventional wisdom holds that the bullet has been dodged.
The markets are buying this hypothesis. Tempted by the latest crop of economic data that seems to show expansion, U.S. stocks have moved sideways, and even climbed slowly. The U.S. dollar has risen from its lows, and the rate of bank failures appears to be under control. In short, with gold off almost twenty percent from its highs, it looks as if many investors have concluded that the worst of the storm has past, and have decided look for good deals amid the stock market wreckage. Proceed with caution.
At its core, our economy is simply showing the effects of a national depletion of wealth caused by decades of consuming more than we produce and spending more than we earn. The natural corrective mechanism to such a condition is a recession. But recession is very bad for politics, especially in an election year. So, the potential corrective recession has been postponed by a massive injection of billions of dollars into the economy. At a time when we needed serious physical therapy, the government instead offered four massive pain killers:
- First, the debased U.S. dollar has boosted exports and helped the GDP to remain positive.
- Second, by setting interest rates below the rate of inflation the Federal Reserve discouraged savings and encouraged borrowing and spending.
- Third, massive government lending kept the financial service industry solvent and the mortgage lenders operating.
- Fourth, stimulus checks have kept American’s spending money that they have not earned.
Although these government palliatives have succeeded in calming the immediate crisis (by saddling American taxpayers with massive liabilities), they have not cured the disease. If anything the huge doses indicate that the patient is getting far worse, even if in silence!
Last week, the FDIC announced that bank losses have tripled to $26.4 billion, leading to a fall of 86.5 percent in bank earnings. The Case- Shiller home price index shows American housing to have fallen in value by some 20 percent and still sliding. These massive movements have yet to be felt along the entire economic spectrum…but it is inevitable that they will be.
Don’t be lulled into a false sense of security and start buying U.S. equities at seemingly knockdown prices. We are in the eye of the hurricane. Beware of the second leg!
For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read Peter Schiff’s book “Crash Proof: How to Profit from the Coming Economic Collapse.”
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This article has 17 comments:
I WANT THE BOOMERS TO SEE THE TRAIN WRECK THEIR DECADES OF ABSURD SELF-INTERESTED DECISIONS AND BAD POLICIES HAVE ON THE YOUNGER GENERATION(S) AND PERHAPS THE FUTURE OF THE UNITED STATES!!!
The spend, spend, spend mentality is finite and I think it terrible there is nothing more than uncertainty left for us younger responsible individuals left to inherit.
That means that countrywide in the USA another 7 trillion of family houshold equity will be wiped out; somehow the Wall Street traders refuse to understand such simple insights. Why they don't want to understand this is unknown to me: having a realistic view on economical affairs always makes more money in the long run.
So not for these Wall Street warriors...
Yes the boomers have it in for you. Remember, at 30 you're still young enough to be drafted if things go terribly wrong.
"We need another Vietnam to thin out their ranks a little." - B. Simpson
Sleep tight.
While I was taxing myself, crafting my rejoinder, you strode in and cut to the heart of the matter. Kudos.
Oh yes..and as far as baby boomers being DEBT free.... There are some, but I personally know more who are NOT. I use to work in the education system, and I can say that most are not financial stable. If anything, their parents GAVE THEM money through real estate holdings or a depleted 401 K.
I'm 29 no debt also and don't hippies.
As to the premise:
Larry-H illustrates a point, however premature in the calling of "productivity". If we end up in the dump (or worse) because the net outcome of productivity came at a "cost" none of us can afford, to what end?!
Problems of this magnitude take decades to create and as such decades to fix -- and as one whom recognizes that at the present, I'd like to get started fixing it -- starting with those that created it.
As to being drafted YEP, and with pleasure. I, like many others come from a long line of military service flowing through my veins (Vietnam included).
You make several salient points. The greatest transfer of wealth in the history of this nation has been from the "Greatest Generation" ( those who fought and won the Second World War ) to their children, the "Baby Boomers" so-called. These " 'Boomers," however, have not quite been spending or making policy over the past thirty years. Indeed -- the "yuppies" ( thirty-somethings ) of the 1980s are the very same people. It is their children, unfortunately, who are now feeling the brunt of the housing bubble "pop," increasingly tighter credit, and a future filled with tax increases to pay the Government "benefits" of the retiring-en masse " 'Boomer" generation.
"Let the snake go" indeed. Such action, however, takes considerable political courage and will -- two things sorely lacking in the current political sea, regardless of party.
If you agree that most of the reins of power in corporate and political America are held by those generations in their 50's to 70's, then you'd know the boomers haven't come into power until the last 10 years, at the earliest. Think Dick Cheney-and he is NOT a boomer. My parent's generation had it pretty sweet post WWII boom where everybody got a house and 2 cars and lots of gadgetry and now, lots of Social Security. My parents retired at age 62. I'll be looking at 70 (and I drive a cheap car.)
Attributing responsibility to bad policies starting in the 1970's would put me at the tender age of 18. (I'm classic boomer age of 56 now.)
Yep, there's lots of clean-up to do. Boomers may just lead the way in that, and not be just the causative effect of it.
Me, I'm going back to smoking pot.
Presidents Reagan and Bush 41 started us down a path of massive debt, and they were helped along in a bi-partisan fashion, from Tip O'Neil to Bob Dole, from Robert Byrd, John Glenn, and Howard Metzenbaum to Phil Gramm, Dick Cheney, and Alan Simpson.
All of these WWII generation people contributed to the massive debt, and Clinton and Newt (both baby boomers) tried to reverse things. Unfortunately, dumb old W reinstituted his father's drunken-sailor-like spending habits, leading us to where we are now.
I'm no fan of the self-indulgent boomers, but the reality is that the "Greatest Generation" has also been the greatest at spending $1.50 for every $1.00 they take in.