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"Worst Is Yet to Come"; Peter Schiff is Right Part 2.



February 22, 2009 – Comments (15) | RELATED TICKERS: WMT , WFM , FDO.DL


There's no question the American consumer is hurting in the face of a burst housing bubble, financial market meltdown and rising unemployment.

But "the worst is yet to come," according to Howard Davidowitz, chairman of Davidowitz & Associates, who believes American's standard of living is undergoing a "permanent change" - and not for the better as a result of:

An $8 trillion negative wealth effect from declining home values.

A $10 trillion negative wealth effect from weakened capital markets.

A $14 trillion consumer debt load amid "exploding unemployment", leading to "exploding bankruptcies."

"The average American used to be able to borrow to buy a home, send their kids to a good school [and] buy a car," Davidowitz says. "A lot of that is gone."

Going forward, the veteran retail industry consultant foresees higher savings rate and people trading down in both the goods and services they buy - as well as their aspirations.

The end of rampant consumerism is ultimately a good thing, he says, but the unraveling of an economy built on debt-fueled spending will be painful for years to come.

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FYI - Peter Schiff was Right (Part 2) Peter takes out some more Fools here.

Here is the Classic Peter Schiff was Right Part 1. 

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15 Comments – Post Your Own

#1) On February 22, 2009 at 4:19 PM, BradAllenton (31.54) wrote:

I agree on the world of hurt view, but I was out this weekend and the mall I went to was packed. My girlfriend is also the manager of a popular restaurant near us and she told me that they were packed all weekend too. I don't get it if nobody has money wtf are people doing? Something is off.

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#2) On February 22, 2009 at 4:32 PM, kdakota630 (29.47) wrote:

Great videos, as usual.  I'd never seen the Peter Schiff was Right CNBC Edition before.  I particularly liked that bonehead at about the 6:00 mark, and the woman at the beginning touting the U.S. auto industry.  LOL!

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#3) On February 22, 2009 at 4:46 PM, CoastalTrader (96.88) wrote:

Brad, I think that what is "off" is the following:

Unemployment is currently less than 8%.  Full employment is 3-4% "unemployment".  Therefore, unemployment is really less than 5%.

That's bad for the people without a job, but how bad is it really in absolute terms?  How bad is a 8-10% reduction in revenues in absolute terms?  How bad would you be off if you had a 10% cut in pay?

I believe that the doomsayers are making it worse than it is.

OTOH Brad, maybe those people at the mall were sort of going to the "zoo" to look at all of the cool "stuff". ;-)

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#4) On February 22, 2009 at 5:09 PM, jacoborjake (< 20) wrote:

Wow, Peter Schiff was right!  BradAllenton, you are right - the malls and restaurants were crowded in my area too.  Does anybody have anymore Peter Schiff material? 

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#5) On February 22, 2009 at 5:09 PM, Seano67 (24.46) wrote:

My best friend is the chef/owner of a small, high-end restaurant here in Portland. I mean this is really high-end, and he is a world-class chef. Now the economy here overall is not good, and I would expect his business to be suffering even more than most others, because when times are tough it seems almost intuitive to think that the among the first things that people are going to cut out of their financial outlays is eating out at expensive restaurants. I mean that's sort of the ultimate in discretionary consumer spending.  But his business is absolutely booming, it's through the roof, and has been really since the first of the year.

I'm thrilled to death for him, but I'm absolutely befuddled by that. It's turned all my preconceived notions right on their head. I have no idea what's going on either, other than that like others are saying, maybe the perception is actually worse than the reality. 

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#6) On February 22, 2009 at 5:33 PM, kerg01 (< 20) wrote:

your comment about unemployment is hillarious.... if we measured unemployment like we did in the 1930s it would be around 15%, or coincidentally about the same as it was at this stage of the Great Depression.....

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#7) On February 22, 2009 at 7:12 PM, angusthermopylae (38.07) wrote:

This happended to me a few weeks ago--a dying mall (my opinion) that was a lot more crowded than I expected.  No sales, no "stimulus checks", not even close to the first of the month (I live in a high unemployment area, so lots of welfare checks).

It's a puzzle. Either the economy is moving in different directions than expected; it's a last hurrah before the final meltdown, or the "recovery" (whatever that will be) is already building....'s a CAPS idea:  a CAPS-created "index fund" that could be used to track things like consumer spending, luxury spending, entertainment, etc.  It might shed light on puzzles like those mentioned above:  Some sectors/business that are "supposed" to thrive/fail do the opposite...

A little historical pricing might show that these community-created indicators could be better predictors of economic trends---either as a lead indicator or a lag indicator.

(From a technical standpoint, it would probably have to work like a tag system:  "LowEnd_Entertainment", "Popular_Restaurants", "Middle_Class_Luxury", "Basic_Foods", "Raw_Materials", etc.  Maybe voting weighted by CAPS score to weight inclusion in a particular "index")

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#8) On February 22, 2009 at 8:24 PM, Tastylunch (28.76) wrote:

You guys are reading way too much into one weekend at one mall, chances are your eyes aren't attuned enough  to know to accurately judge whether footraffic was off 5% or how much said footraffic might hvae reduced their average expenses.

Ancedotal evidence produces a ton of false positives and negatives. E.g. if you looked at my shop you'd say the eocnomy is great! If you looked at my neighbor's who is liquidating you'd say it's the apocalypse.

Numbers from the industry I'm seeing says footraffic levels during the high times (the wekend) are still pretty strong but during the week they are getting weaker. This varies heavily by location. The strong malls in many cases are actually doing better than they did before because the weak malls are completely gone!

For a counter example My mall, The City Center in Columbus, that I used to go is of last week 100% vacant now.I went to auction last week to buy some fixtures for my store. However Easton is doing extremey well in Columbus.

The other factor you are ignoring is the degree of markdowns being run at apparel stores right now. 70% is the new 50% off and that is just crushing retail margins but that's what it is taking to get people to keep spending.So it's a lose-lose right now for many retailers.

Granted brad's girlfriend's experience at here restaurant was a good sign, but i think it's less indicative of trends than what the fashion retailers are doing as eating out is more of asocial experience.

You have to remember the mall is part of people's social lives now for some it's even daycare replacement, they are likely to still go there even if they aren't spending as much.

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#9) On February 22, 2009 at 9:13 PM, angusthermopylae (38.07) wrote:

Good point about weekend vs. weekday, Tasty.

Another factor may also be consolidation--not from the business point of view, but also consumers.  For example, the local Family Dollar is busier than ever.  That doesn't mean the economy itself is doing great, just that a lot more people are going to the cheaper stores.  Looks great for FDO, but horrible if you're a competitor.

Same with restaurants--maybe people are getting pickier--and Brad's story is just one of a good restaurant as opposed to the dime-a-dozen O'Charley's or Outbacks.

I guess that's the point of the Fool--there's usually money to be made somewhere, good times or bad.  You just have to be willing to look elsewhere than normal.

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#10) On February 23, 2009 at 2:54 AM, coralbro (93.96) wrote:

Forget the senate!  Peter Schiff for president in 2012!!!  If he goes to the senate he will get brainwashed before he can get anything done. 

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#11) On February 23, 2009 at 6:16 AM, AnomaLee (28.54) wrote:

So much research in these comments. I may as well ignore comp sales :D

Unemployment is currently less than 8%.  Full employment is 3-4% "unemployment".  Therefore, unemployment is really less than 5%.

That's bad for the people without a job, but how bad is it really in absolute terms?  How bad is a 8-10% reduction in revenues in absolute terms?  How bad would you be off if you had a 10% cut in pay?

First issue is that unemployment (U-6) data is not a macro-measurement of underemployment which is the highest it's been since the early 1980's. If you worked 35 hours per week and your hours are cut to 25 you are still considered employed. 

Most of the job creation over the past decade has been in part-time, self-employed, and small business of which the majority were propriertorships. Most were related to housing and the retail(particularly third party telecom retailers)

The second issue is that there is no such thing as full employment. There is only natural rates of employment and natural rates of inflation. Full employment is a goal similar to the Fed target of inflation to near 2%.

Both of these were targets of the Philips Curve and was used in economic models for decades until it was debunked by the period of stagflation in the 1970's. I'm still being taught models based on the Philips Curve today :( 

Third, there is no such thing as absolutes. Everything is relative. If this weren't true we'd have no need for Einstein.

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#12) On February 23, 2009 at 12:50 PM, russiangambit (28.96) wrote:

Here is an idea. All unemployed and underemployed people have nothing to do, so they spend their time at the malls?

What else is there to do ? Sulk at home? Go to a museum? At least, the mall is free.Plus, unemployement benefits are extended so many people unemployed people still getting some money because majority were laid off in December - January. They are not at the end of the rope yet.

I think, the tzunami wave of unemployement will come in 6 months, when many people will be closer to the benefits expiration.

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#13) On February 23, 2009 at 3:34 PM, bostoncelitcs (67.29) wrote:

Wait when the price of gas jumps back up to $4/gal again this summer......It's going to be a free for all!!..........The stimulus bill was way too big.....the Federal Government is way too big!!  There needs to be major cuts at the federal level like the FHWA, and Homeland Security......The stimulus is only adding more government bureaucracy at the state level!

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#14) On February 26, 2009 at 12:41 PM, StatsGeek (28.73) wrote:

I would give my left pecan to see all these moronic former market chearleaders go on the air and admit they were wrong.

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#15) On February 28, 2009 at 7:09 PM, jszoke01 (26.20) wrote:

I agree with the previous post regarding Peter Schiff running for public office, but I just don't think (even after all that we've been through) that America is ready for his type of leadership.  He is gaining in popularity, but you can easily see by going to the malls and restaurants you speak of that his model of restraint would not be well received.

I still have friends and colleagues who are living on credit.  Like a lot of the people in the outlet malls, I think that they're just trying to suspend disbelief by doing what they've been doing for the past several years.  Come to think of it, their attitude is much the same as the governments vis-a-vis the stimulus plan.  It makes you feel nice and seems productive, but is just going to have a disastrous result when the free money dries up.

It's going to take something disastrous before popular sentiment turns to the philosophies offered by Schiff.  That being said, I don't think that it can happen soon enough, as I really really really want to see some type of healing process.  A real, fundamental healing process.

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