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alstry (35.36)

America's Economic Suicide

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April 15, 2008 – Comments (16)

We stopped making things.  Out dot.com craze bloomed and passed.  We were stuck.  How to keep the engine running when there is no fuel?  Just loan money.  If you loan enough people money, they will spend enough to make everything boom.  And boy did we loan and so so many borrowed.

In 2005, almost $1 trillion dollars was extracted from Home Equity loans.  Practically 10% of our GDP in 2005 was borrowed funds from the equity of our houses.  Then add in another trillion in mortgages for residential and commercial real estate and now things were really cooking.  Building we didn't need going up everywhere.  Taxes were exploding to our governments.  Who needed to produce anything when you could borrow as much as you needed and just build and import.

Until we were not allowed to borrow anymore.  Then people started to slow their spending and ran out of money.  Business slowed and tax revenues slowed.  Now we are laying people off by the thousands  everyday.  Deficits are at record levels.  Foreclosures are at record levels.  Bankruptcies are growing rapidly. http://www.bloomberg.com/apps/news?pid=20601109&sid=aaTdhmzxnz1k&refer=home

Bankruptcies just don't affect those companies that go bankrupt, but the entire chain of suppliers that feed into that company.  For example, for every job that is lost on Wall Street, they say two additional jobs are lost.  When an airline shuts down, hudreds of suppliers are affected.  When a retailer closes, trucking companies and vendors are impacted.  Just as growth begets growth, contraction begets contraction.  Without credit in America, there is no growth.

The jobs being lost are not being replaced.  Current jobs are being outsourced.  Our government tells us there is no inflation when the prices of many things we buy has doubled in the last few years.  We are told everthing is fine and a couple months later we are facing the worst crisis since the Great Depression.  The ratings agencies and analysts lie and there is little if any accountability.

Thousands and thousands of retailers are shutting down(see today's NYTimes).  Large municpalities on the verge of bankruptcy(see Jefferson County, AL or Vallejo, CA).  House prices crashing and billions of debt on our bank's books are defaulting.

We are now reaching the point where we will have to socialize or monetize.  With approaching 50 million people uninsured, the health care system cannot afford to maintain the status quo and still make health care affordable for those who carry health insurance.

We carried too many too long with too much debt.  Builders overbuilt.  Consumers over spent.  Municipalities over serviced.  Now we are broke and no one wants to lend us any money.  Our vacant homes are sitting there rotting with insect infested swimming pools.   Vacant offices and retail space grows everyday as business and retailers shut down.  Many downtowns around Amercia are becoming more and more distressed with rising vacancies.

And what are we doing about it?  Giving $600 to encourage spending?  What a joke....let's encourage more of the behavior that got us here in the first place.

Pilots are taking paycuts.  Mortage Brokers are taking paycuts.  Lawyers are taking paycuts.  Doctors are taking paycuts.  Teachers are taking paycuts.  Firemen are taking paycuts.  Police Officers are taking paycuts.  Reporters are taking paycuts.  Mortgage brokers are taking paycuts.  Real Estate Sales people are taking paycuts.  IT workers, if their job is not being outsourced, are taking paycuts.  You get the picture.

And people dismiss when one is concerned with the lying that is being showered  upon us.  Wait as we start feeling the effects of the truth.

16 Comments – Post Your Own

#1) On April 15, 2008 at 7:12 PM, ATWDLimited (< 20) wrote:

The US economy is on the decline, fundamentally weak, it will either a crash soon or b wither away. I think it will kinda crash, than wither unless something is done.

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#2) On April 15, 2008 at 7:37 PM, cubanstockpicker (20.61) wrote:

i say let it crash heavy, let the losses come in. Press the restart button, and let america declare chapter anything it wants. We keep extending the problem, the problem will only get worse.

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#3) On April 15, 2008 at 8:01 PM, alstry (35.36) wrote:

The issue now is that I see no way to extend the problem.  The only way to extend is to lend......and very few are lending or capable of borrowing.

What makes this time different is that each time a business shuts down or a job is lost, there does not seem to be a replacement or alternative.  It is not just one retailer facing difficulties, it is many.  Same with airlines.  Same with banks.  Same with builders.  And now its migrating into healthcare.

It is amazing, but we appear to be frogs in water approaching a boil....and we are being told to enjoy the hot bath until its too late.

It is not just that the American economy is on the decline.....there is a HUGE mound of debt supported by derivitives that can't be supported by current income that is declining daily.

How it unfolds is anyone's guess....the only thing certain is if we continue on this path for a few more months....the outcome will be disasterous.

FORECLOSURES were up 57% from last years elevated numbers.  A total 7,960 filings of mortgage default notices, auction sale notices and bank repossessions were recorded in Riverside County in March, making it the state’s fourth largest location in terms of foreclosure activity.  San Bernardino County had 6,182 foreclosure-related filings, up 25 percent from February and 118 percent from a year earlier.

For those mathematically challenged, that is over 14,000 homes in one month.  14,000.  FOURTEEN THOUSAND HOMES!!!!!!!!!!!! In just two counties.  How can a legitimate homeseller compete?  And the experts say there is no end in sight!!!!!!!!!!!!!!!!!!!!!!!!!!!

STANDARD PACIFIC, A LARGE CALIFORNIA BUILDER DOESN'T SELL 14,000 HOMES IN CA IN OVER FIVE YEARS OF BUILDING.

Folks its not about where we are today, its about where things will likely be in just a few months if we keep walking down this path.

Something very unsettling seems to be looming.  Accountibility is absent on many levels.  How this will play out will likely soon be determined.

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#4) On April 15, 2008 at 8:23 PM, EScroogeJr (< 20) wrote:

The only thing with which I disagree is your complaint about "buildings we don't need". The correct phrase should read like this: "buildings I don't need". Because at the right price, every one of these empty buildigns will find its owner who will need it very much, except, of course that alstry will have them bulldozed way before this right price can be reached. A little frankness would be appreciated here. Still, the post earns a rec for an otherwise perfectly accurate analysis and correct observations whenever personal interests don't stand in the way of objectivity.

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#5) On April 15, 2008 at 8:28 PM, jmt587 (99.88) wrote:

Just to focus on a small piece of your post; aren't the foreclosures a good thing?  I mean, not for any individual family being foreclosed on, but in general?  House prices were too high, foreclosure is one way to quickly bring them back down to a level where housing becomes affordable again.  It can be painful to a family going through it, but I'd argue that if they couldn't afford the house, then maybe a foreclosure is the best thing for them.  A wake up call.  It isn't like this will necessarily make them homeless.  If they still have income, they can rent.  Sure, their credit is in the toilet for years, but I'd think that just means they'll have to pay more in security deposit.  What better and faster way to bring housing prices to a reasonable level is there?

 Perhaps the credit crunch as a whole is a natural market-driven way to force Americans (individuals, companies, government) to begin living more within our means.  Of course the pendulum will swing too far and the credit crunch will bring more pain than necessary, but that is the nature of markets driven by our human psychology.  They overreact.  Boom.  Bust.  It isn't the end of the world.  At least I hope not.

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#6) On April 15, 2008 at 8:38 PM, alstry (35.36) wrote:

Actually, you are dead wrong on this point.  In Florida right now, there is a surplus of warehouse space in the Fort Meyers/Cape Coral area.  There is far too much space for need.  As a matter of fact, you can rent space right now for less than CAM costs.  That right, you can rent space for about property taxes, and get utilities and maintenance for free.  Can you imagine if you had to pay a penny for that building, you would be losing more than 100% of your investment every day.

What you fail to account for is the rising cost of NON housing related expenses.  Assume a family of four earns $50K per year.  As an extreme example, if food prices tripled and fuel did the same, after paying taxes, that family would have little left over to pay for housing.

In many countries overseas right now, food prices are up over 40% in the past year.  In many of those countries, food is the biggest expense.  As food costs continue to rise in America and wages remain stagnant or decline, food will become a greater percentage of American's expenses.  Just like health insurance and fuel. 

You think houses are being foreclosed because of resetting subprime loans.  Think again.  Try loss of job.  Or health issue. And as home prices keep falling, more and more people will have negative equity likely to get foreclosed.  As more and more houses get foreclosed, expect more and more prices declines.  Pretty soon more houses will be getting foreclosed than sold.  Whooooops we are at that point right now!!!!!!!!!!!

 “Stanislaus home prices have plummeted about 30 percent during the past year, according to sales statistics. Sales volume has dropped so much that more homes are being foreclosed every day than are being sold by real estate agents.”

http://www.modbee.com/local/story/269724.html

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#7) On April 15, 2008 at 8:53 PM, alstry (35.36) wrote:

JMT,

A reasonable amount of foreclosures is not catastrophic.  It is when the rate of foreclosures start exceeding the absorbtion rate that a big problem arises.

Too much supply and too little demand.  We get our Fort Meyers situation.  Further to compound problems, if wages continue to stagnate or decline, and non housing related expenses continue to explode, even if you give away the house, many will not be able to pay taxes, insurance and maintenance.

I was predicting a 50% housing price decline a couple years ago.  People thought I was nuts...which may be the case anyway.  Now if we continue on the current path, I believe that America will be facing very serious economic issues by mid to late summer.  Much sooner if we have a major stock market correction.  There is simply not enough income to service a huge pile of debt as more and more defaults everyday.  It was debt that drove our economy and inflated the value of America's investments.

Think about it. As credit contracts, how much will revenues and earnings continue to decline.  As earnings decline, how many will be fired and how much will the business decrease in value.

In general, where do America's wealthy invest their money.  Stocks, Bonds, Businesses, and Real Estate.  Three out of the four asset classes are crashing right now.  If the stock market corrects, there will not be any place to find sanctuary and the chair will have no legs.

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#8) On April 15, 2008 at 9:23 PM, EScroogeJr (< 20) wrote:

Hmm, I haven't seen many houses offered for a penny, have you? We have discussed prices in Orange County, disagreening about whether it's 650K or 400K. Suppose it's 400K. Wouldn't it indicate that there are plenty of people who, for whatever reason, need OC houses at this price? If they didn't, these houses wouldn't get sold, right? Now, how many people would buy these houses at 350K? Picture buyer traffic increase by an order of magnitude? How about 300K? Two orders of magnitude, no less. I mean, who wouldn't buy a house in Orange County for 300K? Now, about 200K? Still claiming that nobody needs extra houses? 1c, anyone? A house in California for 1c, just pay property tax and utilities? No buyers, you're sure? No need for this product?

:):):)

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#9) On April 15, 2008 at 9:53 PM, alstry (35.36) wrote:

Actually yes, I have heard of a bunch of houses selling for $1.  Not may there be no need, but housing could become unaffordable even if it is priced for free if taxes, utilities, and maintenance continue to rise.  You may want to take a drive through the rust belt if you want some evidence.

In the past year, hundreds of thousands of Californians have seen the interest payments on their mortgage adjust.  In the next year, they are likely going to be hundreds of thousands more.  Hundreds of thousands of Californians have lost their jobs in the last year in mortgage finance, real estate sales, and construction alone.  Few of these people have been able to replace their incomes at the amount they were making.  Hundreds of thousands of additional Californians are likely to lose their jobs in the next year, especially as the State starts imposing budget cuts.

Two years ago, many people were willing to pay $1MM for a house.  That same house probably declined in value to $750K and many people were willing to pay that price last year.  Now that same house is $500K and a number of people are still willing to pay that amount.  The problem is that as more and more people lose their jobs and more and more distressed inventory comes to market, I am sure many will be willing to pay $250K for that house this Fall.  Then as inflation kicks in and interest rates rise, it would not be unlikley that a few people wouldn't mind paying $125K next year.

Then as more and more houses keep getting foreclosed and the banks get desperate for buyers, who knows how low prices will go, especially if there are few jobs to be had.

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#10) On April 15, 2008 at 10:45 PM, EScroogeJr (< 20) wrote:

"Not may there be no need, but housing could become unaffordable even if it is priced for free if taxes, utilities, and maintenance continue to rise"

Theoretically yes, practically no. Houses in bubble states are still very far from being priced for free, to say the very least. Worrying about the problems that come with zero prices would be equivalent to prescribing a pill against low blood pressure to a hypertonic patient. It's not that houses don't sell well because too few people want them, it's that too few people can buy them because prices are too extortionate. The right course of action is to build more houses so that prices can drop so that people can start buying them,  not vice versa.  By the way, the problem with ghost towns is not high maintenance costs, it's the crime rate, joblessness and alcoholism. You can't survive in this social mileau, that's why property values are low. A robot would buy such a house for retirement and do very well economically.

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#11) On April 15, 2008 at 10:53 PM, Hezakiah (93.94) wrote:

I read all of your posts and agree with most of your arguments.  The one area that I diverge is in the timing/magnitude of "America's Economic Suicide."  I do not disagree with you here, I just hold a lot more uncertainty.  The one variable that is almost impossible to account for is government intervention.  When hard times hit, especially in an election year, the only certainty is that nearly every politician is going to start proposing creative solutions to the problems.  Most of these "solutions" will be doomed from the start, but they can drastically alter the investment landscape.

My question for you is your best play in this market.  There are very few safe places to hide in my opinion.  The U.S. market only works if you can outpace inflation and the dollar decline.  Most commodities are priced higher than would be due to speculative demand and also are at risk of a major global recession.  Looking at your picks, I would guess your top play is shorting something.  Just curious what you feel most negative about.

 Keep up the insightful and entertaining blogging!

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#12) On April 15, 2008 at 10:59 PM, alstry (35.36) wrote:

"The right course of action is to build more houses so that prices can drop so that people can start buying them,  not vice versa."  Tell that to the people in Cape Coral, FL.  Homes sell for below construction cost discounting the land for free.  How long can you keep building houses for a loss to drive prices down?

You seem to not want to address the fact that incomes are falling all over California.  Incomes for governments.  Incomes for businesses.  Incomes for individuals.

Incomes have never fallen in America for a protracted period of time....until now.  If you take out the top 10%, the decline is pretty staggering.

Let's see how low incomes will go.  Then we may have a pretty good idea how low housing may go.

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#13) On April 15, 2008 at 11:01 PM, alstry (35.36) wrote:

"The right course of action is to build more houses so that prices can drop so that people can start buying them,  not vice versa."  Tell that to the people in Cape Coral, FL.  Homes sell for below construction cost discounting the land for free.  How long can you keep building houses for a loss to drive prices down?

You seem to not want to address the fact that incomes are falling all over California.  Incomes for governments.  Incomes for businesses.  Incomes for individuals.

Incomes have never fallen in America for a protracted period of time....until now.  If you take out the top 10%, the decline is pretty staggering.

Let's see how low incomes will go.  Then we may have a pretty good idea how low housing may go.

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#14) On April 15, 2008 at 11:17 PM, alstry (35.36) wrote:

The one area that I diverge is in the timing/magnitude of "America's Economic Suicide."

Here is the problem.  Over the past 7 years, estimates are about 20% of the American GDP was directly or indirectly related to housing/real estate...construction, finance, ect...  Another 20% or so is attributed to health care.

Much of the growth of Real Estate was predicated on credit.  The same could be said for autos and retail sales.  Combined with Real Estate and we are probably looking at about 1/3 of the economy.  Take the tax revenues from the above and we looking at a significant chunk of local, state and federal taxes.

Now credit is evaporating very quickly.  So is revenues and incomes.  So is taxes.  For the first half of this year, we are running the highest federal budget deficit in history.  As things slow, it will likely get higher.  Same can be said for local and state taxes.

The problem is that all solutions cause pain.  If the government tries to spend its way out of the hole, then deficits will go out of this world and inflation/interest rates will quickly get to double digit rates.  With American wages constrained by international pressures, what do you think would happen to housing and retirees with double digit inflation/interest rates. 

Cutting back is the other alternative.  With the economy slowing rapidly, that leaves little doubt that a very severe recession/depression will result from additional slowing.

Either way we are hosed.  Due to the fact that a credit bubble caused this mess, it is very likely, due to the nature of credit bubbles, the unwinding will take place much quicker than many expect.  You may want to talk to some Bear Stearns shareholders for perspective on a 80 plus year old institution.

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#15) On April 15, 2008 at 11:18 PM, EScroogeJr (< 20) wrote:

Cape Coral is less extortionate than other places, and thanks to builders for that. And now we need to turn the rest of the country into Cape Coral. Especially places like California, where prices still represent a scary rip-off.

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#16) On April 01, 2009 at 3:56 AM, FrancescaW (< 20) wrote:

Thanks for opening this topic. In the realm of home foreclosure, a lot of people suffer from bankruptcy. The global economic recession and stagnation we experience just teach us to be wise investors and financial managers. Loose lending, irresponsible borrowers, a flat real estate market, and rising interest rates are just some of the factors that can cause home foreclosure. If you'll remember Willie Aames, a popular actor in a certain sitcom, also suffer from home foreclosure. He just filed bankruptcy last late years. But he found a great solution to his financial troubles. He may have well done well to look for a payday loan. Now he is holding a yard sale of his personal effects and memorabilia he can stand to part with. It seems Charles should have stuck around a little longer to help out Willie Aames again.

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