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Monday, November 19, 2007

As The Dow Heads South

I wish people would stop talking about "subprime". The problem is precisely that the credit problems were widespread. They cross the commercial/consumer boundaries, and are not limited to real-estate secured debt at all.

Sometimes the words we use constrict our thinking. Probably much of our erstwhile complacency is founded on the improper and imprecise use of labeling.

One example is this article which looks at the alarming fact that higher-end spending is beginning to slow:
Affluent consumers, pinched by shrinking stock portfolios, falling property values and smaller bonuses, are behaving like their less-well-off peers: They're reining in spending.

That portends a steeper slowdown than originally forecast for the U.S. economy, or even a recession, because the richest fifth of American households accounts for almost 40 percent of consumer spending, the main engine of economic growth.

``Upper-income consumers are the bellwether,'' says Joseph Brusuelas, chief U.S. economist at IDEAglobal Inc., a Singapore- based research firm that advises central banks. ``When they begin to capitulate, that's when we all head down.''
So how is this some sudden, shocking revelation? Many of the persons pulling in the big money in recent years have been doing on credit-related business. Builders, mortgage brokers, real estate brokers, and those involved in the securitized credit business are all among those who have been pulling in the big bucks. It's not exactly surprising or unpredictable that this cohort would be hit, is it?

As for the top 20, they still only account for 40% of consumer spending, and if most of the rest of the consumers involved in 60% of consumer spending pull back, you will get a recession regardless. There are countless car dealers, restaurant owners and store owners who pull in big money off that 80% of consumers who account for 60% of consumer spending. Put that way, it looks a little different, doesn't it? If the lower 80% of consumers start to pull back, you are pretty much guaranteed to see a pullback in that top 20%. They don't make their money in a vacuum.

The idea that the small top percentage is what matters, and that the top percentage is somehow immune to the entire market environment also translated into the credit insurance business.

I think the worst factor puncturing the aura of invincible complacency is the slow realization that the insurance companies who guaranteed a lot of the bad credit are in trouble (Fannie is taking large guarantee losses, and the ratings firms are threatening to downgrade other insurers), and thus the real problem is bigger than the talking heads ever conceded. Because once those insurers get into trouble, the protection that they offered to lift all sorts of securitizations into the top ratings categories is gone.

So Swiss RE takes a whack on credit swaps, and everyone twitches. Everyone's freaking over ACA, MBIA and the like. Pretending that these linkages didn't exist can only last for so long. The translation of funny-money debt obligation losses into the public sector is not going to help matters. This time around, a lot of non-federal spending will have to be cut. Far too much of growth in local government spending was derived from property-related revenues which are doomed to fall with property values.

I hope we don't end this week with the Dow in the 12,000s, but I think it is likely. We have created a self-sustaining downturn.

My unofficial pain and suffering index (based on the number of cranky people I talk to in the week) is taking a definite uptick. I expect to hear a lot more whining and bitching as we get nearer to the holidays.
Judging by the food bank traffic, there are real and growing problems out there.
Very good point on the fact that the upper crust makes its money off the rest.

IMHO, the upper crust has been insulated from the problems of the rest by easy credit. In the days of my youth, if the economy went south, doctors and shop keepers knew real soon as their customers could not pay . Now a days, credit cards and the housing ATM insulate those folks, because the rest just borrow more money.

When the music stops, and easy credit ends, then the result will be bad for several reasons. Our betters not only will lose income, but will lost the value of the intangible investments they put their profits in. If they happen to be as leveraged as the the rest, it will be much worst.
Bingo on the easy credit!!!!

Yeeees, Vader wins the big cigar, the practical economics award, and the displeasure of Wall Street economists. No one wants to hear what you have to say!!

It's completely and absolutely true that ratcheting back consumer debt levels means that American consumers will be buying much less. The estimates for autos sold in 2008, I note, keep inching down.
I cannot understand very much about credit and consumers, but the bamboo is whishing to be knocked in like a feeka-driven jumbo-jet which is going to cull some gringos.

Sgufala is the right way!

Sguffalo Bill
PS: This blog is extremely interesting and informative, but never as much as Sgufala.
Nothing is as interesting as Sgufala!
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