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Monday, January 21, 2008

A Rough Ride To Be Sure

Ugly reality is now starting to sink in. For what it is worth, the underlying forces controlling the global and US domestic economy have not shifted since the beginning of 2007. I find it an eerie experience to be updating and analyzing all my data, only to discover that nothing has really changed except the degree to which an honest assessment of values predominates. That honest assessment controls everything from LBO deals to auto loans to company valuations. It is producing bear markets in Japan and around the world in addition to the US.

One of the most facile and erroneous arguments advanced in the run up to what is rapidly becoming a global credit crisis was that the US economy could decouple from the rest of the world, i.e., we could slump and the rest of the world would continue to grow. It's worth noting that this idea was heavily pushed by economists in the US.

The problem for world growth is that most of the money was being invested in energy, food, distribution networks, or countries which have a low level of personal consumption - in other words, in which the mass of the people are poor. Unfortunately countries which are non-democratic in structure tend to have wealth concentrations in a very narrow band of the population. It's a battle even for democratically structured countries to keep wealth circulating, frankly.

Poor people spend larger amounts of their income for food and fuel. Therefore, the ability of world consumers to consume was rapidly being eroded. This left wealthier countries bearing more and more of a share of the world's discretionary consumption. Rising personal debt levels in the EU, the UK, the US and so on dictated that as soon as credit stopped expanding, discretionary consumption would tend to crash, and when it did, China's, India's and SA's emergiing ability to sustain discretionary consumer consumption would also crash, setting up a self-reinforcing cycle. We are still in the very early stages of that cycle, but it is now in force.

ICICI Bank in India is considering lowering its mortgage rates. A number of the large international banks are reserving heavily for growing loan losses in countries like Mexico and Indonesia. For the next few years, countries will be in a battle to attract investment as the great unwind continues to develop. So why is the ability of the US to attract such investment worrying people?

I view the EU as being one of the most worrisome areas financially. A large percentage of recent growth has been generated by loose lending in the Soviet bloc escapees, and many of those economies have not reached maturity yet, if maturity is defined as the ability of a country to generate growth in economic activity within its domestic economy. These countries do not have the heritage of a regulated banking system that operates to filter money into the ground-level economy in an effective manner, and so they suffer the most comparatively in cycles of credit contraction following excessive credit expansions.

China, for example, is now reacting by cutting its export subsidies for food, trying to rein in excessive lending, cutting its subsidies for many businesses, and the like. Chinese bureaucrats have also stated recently that they have to find a way to distribute income back down into the general population. That is easier said then done.

For what it's worth, my belief is that the likely stabilization level of the Dow is between 11,200 and 11,800. That doesn't mean that it won't go below that for a time, perhaps six months. But that is about where currently foreseeable trends seem to put it for me. The big wild card is the behavior of other governments and central banks, especially the ECB which controls the Eurozone. If they do not act soon, Europe will enter a very rough cycle internally which would tend to slow US business growth and would indicate Dow moving down to possibly below 10,000. That is the big worry for some of the US companies.

We are entering a worldwide cycle of asset deflation and overcapacity for some types of production. It will take careful management to sustain not only growth but the reasonable capacity for future world growth over the next three years.

I am trying to figure out how to maintain anonymity and also publish the basics of the type of analysis I do each year on this blog. Perhaps I need to find a way to publish it on the internet in another context. The basics of the current cycle the US and the world has entered are due to poor financial regulation and oversight, and it is important somehow to get that across to people. Strong regulation creates strong capitalistic economies and sustainable growth, and weak regulation creates financial crashes and malinvestment.

But the form of a government does not change basic economic laws. China, for example, has entered its Robber Baron cycle exactly as the US did in the 1800's. The difference between governments and their effect on local economies is often not even the intent. It is the effectiveness of structures which determine success or failure. The lack of a strong banking system cannot be corrected by a government of genuinely benign intentions, because an effective banking structure redistributes economic decision making to a very low level across a huge number of individuals. Those individuals have a high degree of accountability for the results of the decisions they make, and they also have a high degree of knowledge (or can obtain it as a condition of offering credit) about the entities to which they lend and the circumstances which control those entities.

I will be very busy and not posting that much for about another week. I am in the final stages of writing up my stuff, and that involves generating a lot of graphs, and I hate graphics. Therefore I'm bad at them and slow with this part of the process.

I would like to leave everyone with some food for thought, however. The stimulus package Bush has proposed is supposedly a tax refund of $800 per person or $1,600 per household. That sounds good, but I would like to point out that predatory or mismanaged lending can easily cost the average person far more than that a year, and that if Congress would curb some of the usurious lending practices now prevalent, the net stimulus to the economy would be far more. Also, your taxes would not be used to pay for it.

Take the example of my Verizon tech who was given a 28% loan for a medical procedure. The loan was for $5,500. 28/12 is 2.34, so the initial monthly interest on that loan was at least $128.30 (actually a bit more, because consumer loans are usually figured Act/360). If he had been given the loan at 18%, the initial monthly interest would be 1.5 * $5,500 or $82.50.

Multiply that one case by the millions of consumers who are being charged very high credit card rates, dinged with huge late fees, charged for paying over the phone to ensure that the account is paid on time.... Congress could achieve far more economic good by sitting down and doing what it failed to do when it passed the bankruptcy bill that took effect in 2005, and that is to impose some reasonable constraints upon consumer lending practices.

I want to stress that millions of Americans who have never defaulted on credit card payments are being bent over a barrel because these big financial companies CAN, and because they are trying to make up for their own bad lending practices by extracting blood from the reliable payers. When regulation imposes constraints upon credit practices, it really enforces more reasonable credit decisions up front. In a reasonable financial system, a person with relatively good credit history and payment history for this type of credit should not find him- or herself in the situation of paying up someone else's bad debt, and that is what is occurring now. The reality is that my innocent Verizon tech found himself paying the bills of someone like Casey Serin, and that is an economic travesty.

Headless, my friends have done that 2-3 times and all have had to eat the MRES or toss them out. Some buried their guns and ended up with rusted guns.

I assume you are a member of a group or family of professional military or LE types with firearms training, prepared to kill and can maintain the stockades in shifts. Otherwise all a smart ass has to do is kill you in your sleep or snipe you dead from a distance and get to enjoy all your stuff. If you got a heap of guns and gold, he'll bring friends.

You have also just left you IP address on a bunch of server logs and that can be backtracked to you after bragging you have a heap of desirable stuff around. So you are insufficient paranoid to survive.

Can goods will last years. Sealed grains and flour in a basement will last years. Water will be one of the last utilities to die off. Most desperados will not risk death for soap, paper towels or can goods.

In any case, should society break down enough to need a well stocked bunker, those bunkers will be prime targets of folks meaner than you.

Best to fly under the radar screen. Eat beans and rice, offer to folks passing through and help your neighbors.
Highly Skilled And Out Of Work

Long-Term Joblessness Spreads in Middle Class

An unusually large share of workers have been out a job for more than six months even as overall unemployment has remained low, a little-noted weakness in the labor market that analysts said threatens to intensify the impact of the unfolding economic downturn.

In November, nearly 1.4 million people -- almost one in five of those unemployed -- had been jobless for at least 27 weeks, the juncture when unemployment insurance benefits end for most recipients. That is about twice the level of long-term unemployment before the 2001 recession.

The problem is ensnaring a broader swath of workers than before. Once concentrated among manufacturing workers and those with little work history, education or skills, long-term unemployment is growing most rapidly among white-collar and college-educated workers with long work experience, studies have found, making the problem difficult for policymakers to address even as it grows more urgent.

"What has happened is a polarization of the labor market. It was very strong at the very top and very strong until recently at the bottom," said Lawrence F. Katz, a labor economist at Harvard University. "But in the recent weak recovery, and now recession, demand has been very weak" for jobs in the middle

MOM said "I am trying to figure out how to maintain anonymity and also publish the basics of the type of analysis I do each year on this blog. Perhaps I need to find a way to publish it on the internet in another context."

I hope that means you may have a paying gig or insider info, not some end of days nut job is stalking you.

I like what you write your arguments are sound, 1+1=2 in MOM land.

Keep up the good work..

"Water will be one of the last utilities to die off"....I don't personally think we're looking at the apocalypse, but not sure why water would be more reliable than the power grid. In the US, virtually all water pumping is done by electrically-powered pumps, and these things generally don't have generator backup (the gensets would have to be pretty big.)
Vader - you don't understand Headless. He is and has been floored by the weird eruption of exactly the types you are talking about. I know what he's talking about because I encounter them too.

I read economic blogs, many of which are quite good, and all of a sudden these Mad Max types start commenting, predicting some post-industrial world in which the gaunt survivors are roaming the ruins. It's odder than all heck.

Btw, Vader, Alabama's showing in the Rockefeller Institute state tax receipts looked very bad in the third quarter, which is not a good sign for you. In the SE region as a whole, corporate income tax receipts dropped a nominal 4.4%. Alabama's dropped 17.6%, although legislative changes contributed to that. Sales taxes increased a nominal 1.3%, which is far below inflation.

Andy, no, no one is stalking me. It's just that I prefer to be candid. I would never break confidentiality for anyone, but blogging and the type of work I do are not a natural mix. I am very much an economic fundamentals type of person. I don't think economies diverge very much from the underpinning forces. I just believe that a lot of interests get paid for pretending those forces don't exist.

Also, financials have a lot of money to throw around for lobbying, and the US Congress is highly addicted to money. It really doesn't matter who the next president is if Congress won't wake up and start to take care of some of the basics. To even talk about an economic stimulus package without looking at some of our abusive lending practices is STUPID. There's a lot of money in legislative stupidity nowadays. Sure hurts to be at the bottom of that hill, though.
Thank you for he thoughtful analysis MoM.Perhaps you could do a guest Post on CR under the psuedonym "Jane Jazz
".We have those kind of whackos here as well,along with purple people,lots of white indians,tweakers,pot growers and of course plenty of minor nobles with 5 acres of grapes and a 6,000 sq ft house bought with an I/O loan.Oh and 2 buddhist temples in a town of less than 9,000.
I read economic blogs, many of which are quite good, and all of a sudden these Mad Max types start commenting, predicting some post-industrial world in which the gaunt survivors are roaming the ruins. It's odder than all heck. -- M-o-M

I've read the Housing Bubble Blogs for a couple years, and the only thing I can compare their tone to is the Unabomber Manifesto:

Starts out as dry academic analysis and information, then all of a sudden takes this turn into Kooks Magazine and IT'S THE DEROS, SHINING THEIR TELAUG RAYS UP FROM INSIDE THE HOLLOW EARTH!!!!! THE PURPLE HATE BUNNIES ARE STEALING OUR GRAVITY!!!!!

It's like Late Great Planet Earth and Left Behind without the Bible proof texts. There are a LOT of people out there who are going to be seriously bummed if the world doesn't end tomorrow -- whether The End is by Rapture (TM), Nuclear War (TM), Total Global Economic Collapse (TM), or Global Warming (TM).

It's like the end of the Book of Jonah, where Jonah's sulking about how God didn't destroy Nineveh.
We have those kind of whackos here as well, along with purple people, lots of white indians, tweakers, pot growers, and of course plenty of minor nobles with 5 acres of grapes and a 6,000 sq ft house bought with an I/O loan. Oh and 2 buddhist temples in a town of less than 9,000. -- Tom Stone

What part of California are you in? Marin County? Sonoma? Napa Valley? Anderson Valley? (Shitfire, even Boonville is that way these days -- Boont! The Anderson Valley town so isolated it even developed its own unique language!)
RE Boont's own language. They used to have something similar in the Appalachians. The only difference is that the CA valley dwellers are proud of it.
Ran into those in the RunningOnEmpty2 list at Yahoo. Had some woman from Missouri who told me that all the people from Portland would come out to the woods and cut down all our trees. The mind boggles. The worst thing is that these people actually want to see things fall apart.

Vader's article is on what I've been calling career deflation. There is a limit of sorts to how many times you can retrain and still be hired at a new position.

Great analysis at any rate. Mostly, I am getting a lot of interesting calls which start out with "We're getting rid of a few phone lines and want to check to see which one we need for our dsl." Makes me think it's a good time to sell any landline phone company stock you might have.
Yep. The companies everyone thought were so safe are now gonna get a whupping.
Headless,I am in between Bloomfield and Sebastopol.I am very fortunate in my ability to look like a guppy while asking innocent questions that discomfit people just a little bit.having 3 hats in the truck helps,a beret,a well worn resistol,and an NRA life member cap.
Headless,I am in between Bloomfield and Sebastopol. -- Tom Stone

Which according to MSN Live Search Maps and my office's map of CA counties puts you in the Coastal Ranges between Point Reyes and Santa Rosa.

Guessed it right -- Marin/Sonoma/Napa area!

Marin: Retirement home for aging ex-hippies who didn't make it into Sacramento as State Assemblypersons-for-Life. The Sixties (TM) -- as in the Haight -- forever. Home of Taliban John, son of aging ex-hippies.

Sonoma/Napa: CA Wine Country/Yuppie Central. (Check the Sonoma Housing Bubble blog sometime.) Die Yuppie Scum.
Wow! Did you see this? That's a serious stimulus they are talking about. I still don't know how it is going to help with the overpriced housing. However, if people have a way to clean up some of the credit card debt, at reasonable rates, it just might help.
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