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alstry (35.70)

Postive Outlook?

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June 14, 2008 – Comments (4)

Two years ago, I realized that a huge percentage of our economy was being supported by an unprecedented amount if new credit creation.  Crazy Mortgages, Home Equity Loans, Private Equity Debt, Municipal Debt, ect....  All this borrowing generated an amazing amount of spending which in turn brought the perception of properity to many.

Borrowing levels became so high that it was clear that the path was unsustainable.  I became concerned what would happen if people stopped borrowing(never even considering inflation)....and that is where the problem set in.  Without borrowing, people, business and government couldn't spend and if they couldn't spend the economy would contract.

A contracting economy is bad enough....but when an economy contracts upon a bubble of debt, you get rapid and accellerating declines as debt obligations can't be serviced.  The bigger the bubble the bigger the crash.  And this is the biggest bubble ever!!!!

As debts default, lenders pull back further amplifying the downward spiral.  At this point, revenues are shrinking everywhere.  Consumers are defaulting.  Business is shutting down and municipalities are cutting back.  THE BIG ISSUE IS THAT TRILLIONS IN DEBT REMAINS ON A LOWER BASE OF REVENUES.

Yes, there are still cars in the parking lots.  But the ability of those consumers to spend is declining daily and if you own your own business you are feeling it.  Not only is spending constrained, but costs are skyrocketing.  Costs for just about everything we spend money on and a factor I never considered when I started thinking about this mess.

I am not sure many realize just how much money was borrowed in the past seven years.  It was more money than was borrowed in the preceeding seventy years.  Borrowing money and spending it can be fun....the problem kicks in when you can't borrow anymore and must pay back your debt.

Now to throw fuel on the fire, intererst rates have started increasing rapidly.  Rising interest rates directly result in lower asset values.  Bond values crash.  Commercial RE values decline.  Homes become more expensive to finance decreasing affordability.

Think about the following for a second:

Asset values are crashing while incomes are contracting. 

Add in a unprecedented debt load, rising interest rates and rising prices............how can one have a positive outlook on the economy for the foreseeable future?

 

4 Comments – Post Your Own

#1) On June 14, 2008 at 10:29 AM, alstry (35.70) wrote:

The issue now is where will America turn for money?

Clearly the free love debt spigot has been shut off.

Aside from the relatively small military and export industries... Due to declining revenues and/or margins, most American businesses are downsizing or cutting back.  When one industry is "right sizing" that is fine, but when everyone is cutting back, there is no place to go but down.

Construction projects are being put on hold, even health care projects.  Retail expansion plans killed.   Retailers and restaurants shutting down increasing commercial vacancies.  Think of all the industries laying off or scaling back millions of workers:

Airline, Auto, Banks, Construction, Government, Mortgage, Manufacturing, Retail, Restaurants, Hotels, Legal, Pharma, ect....

Quite frankly, I think everyone is scared as hell.  Every asset class in America is vulnerable to collapse.  With no money you can't spend, and if you can't spend, assets can't be purchased.

How much would you pay for a $5 million dollar yacht that costs $300K per year to maintain and gets 5 gallons of marine fuel ($6 per gallon) to the mile if cashflow is tight?

Cashflow is tight for many.  No one is immune.  Consumers, Business and Government.  More and more are waking up and realizing the the difficulties of the problems they are facing.

At this point, I simply see no way out.  With jobs and incomes declining, access to credit evaporating, asset values imploding....there just doesn't seem any other path but for a massive collapse followed by a major restructuring.

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#2) On June 14, 2008 at 11:12 AM, ATWDLimited (< 20) wrote:

Yes, I am glad you understand, but the government, the politicians, the Fed, they do not get it. They ignored and they think they can stop it, or fix it. As I have pointed out over and over again, was the precise debt level of the Us. I railed against our debt and economy, and few listened or believed it would effect us today. Even back a few moths ago, many still thought I was exaggerating and that the problem was small, not huge.

The US has $110 trillion in debt obligations. $55 trillion for medicare/social security, another $55 trillion in all other debts, both private and public. The economy is only 14 trillion, and all of its growth has been supported by larger and larger leverage. In order to achieve 1% growth, the US borrows 37 times more than it did back in 1950, if that does not outline a fundamental weakness I do not know what does. Couple this with inflation, stagnating productivity and standard of living, for the last 30 years, even when more people work per household and have less children.

That is why If the US was a company I would short it and make an etf that is inverse 10x. This is what commonsense says, debt growth today=double trouble tommorrow.

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#3) On June 14, 2008 at 11:20 AM, DemonDoug (98.86) wrote:

damn alstry you are going for the record for most blog posts in a month you are on FIRE right now!

(not to mention the FIRE economy is going down the drain - Finance, Insurance, Real Estate.  yowza)

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#4) On June 14, 2008 at 2:39 PM, alstry (35.70) wrote:

Demon, you think I am kidding when I say the economy is shutting down.  My guess is that half the current retail space could be vacant within two years.  Most retail growth over the past fiver years was directly related to consumer borrowing and outlying developments.  Now both are dying fast.

When I hear the nonsense being put out there, I am amazed how few see what seems so clear.   With declining revenues, high debt and overhead....businesses shut down.  No business no jobs.  No jobs, people can't afford a house at any price.

“Gas prices above $4 a gallon are causing consumers who are considering whether to buy an existing home or build a new one to avoid a move, said Ric Zehr, VP of subdivision developer North Eastern Group. ‘Gas prices are a huge, huge factor,’ he said. ‘It’s changing the way we live.’”

http://www.journalgazette.net/apps/pbcs.dll/article?AID=/20080613/BIZ/806130428

“With a force not seen in decades, the high cost of energy is hammering the economy in Sacramento and beyond. It’s keeping shoppers away from Arden Fair mall and thinning out the crowds at Sacramento International Airport. It’s hurting restaurants and crippling SUV sales.”

“Thanks to $4.50-a-gallon gas and $130-a-barrel oil, energy is consuming nearly 7 cents of every dollar of economic output in the United States. That’s about twice as big a bite as last year and nearly as much as in the late 1970s, when oil shortages sent the country into a nasty recession, said James Hamilton, an energy economist at the University of California, San Diego.”

“Chronic $130-plus oil could bring changes in land-use patterns. It could hurt those far-flung commuter suburbs, like those in Yuba and Sutter counties, which were conceived when gas was cheaper but are now suffering some of the worst of the foreclosure crisis.”

“‘Developers will certainly think twice about looking at land in far-out locations,’ said Dean Wehrli, VP with Sullivan Group Real Estate Advisors in Elk Grove.”

http://www.sacbee.com/103/story/1013197.html

“A combination of slow sales and a desire to do something different has led Gary Robinson to close his 33-year-old business, The Yard Lumber & Fence Supply in Modesto. Construction-related businesses, from contractors to furniture stores, have reported slow sales over the last year as part of the meltdown in the valley’s housing market.”

“At The Auction Park in Salida, owner Roger Ernst said he’s had about 20 business liquidations in recent months. Many of them are from construction-related businesses that are closing or consolidating, Ernst said, and have too much equipment relative to their workload.”‘

I am aware of similar stories around the country.  What is different now is when space goes vacant, it generally stays vacant.  And lots more space is scheduled to go dark in the near future.  Furniture stores are shutting down, department stores are shutting down, hardware/lumbar stores are shutting down, restaurants shutting down.....it is a fricken mess.

Now with interest rates skyrocketing, asset values are likely to implode faster than most think.  Just a half a percent change on a 3 1/2% discount factor makes a huge difference in the value of a bond or the value of a business.

Quite frankly, I am not sure much equity out there has much value because debt coverage is becoming so low.

Imagine what happens if Stocks, Bonds, and Real Estate crash all at the same time.  Right now just bonds and real estate is crashing.  Batting .600 puts you into the hall of fame in any league.

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