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alstry (36.34)

So where are we now---Really?

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May 31, 2008 – Comments (7)

In looking at the market or government statistics everything seems fine.  Things seem to be chugging along. 

But reality tells a different story.  Many of you CAPs players seem to disagree with "analysts" and your own perspective of the facts.

Another small bank failed yesterday, based on the rumblings from the FDIC, we could see many more as we progress into the summer. 

In looking at our industries, I have identified at least six that are in a depression: Airline, Auto, Housing, Commercial Construction, Trucking, and Mortgage/Finance.  The above six effect a huge percentage of our economy directly and indirectly.

The problem is not too complicated.  In the past seven years, we loaned everyone with a pulse just about as much money as they wanted.  Income really didn't matter.  People took that money and spent it, especially on housing, and we had a boom like we never saw before.  Property taxes and sales taxes exploded and our government saw a huge rise in income.  Officials took that new cash flow and borrowed even more providing new services and building new infastructure.  Life was good for many.

Unfortunately, much of the growth was based on spending from issuing new credit, not productivity.  So as long as new credit was being issued, everything was fine.  But some of wondered when the "funny" money stopped flowing, how were people going to be able to pay their debts? 

We now have trillions of dollars of debt that was created in the last seven years and there is not enough income to service it.  Home Mortgages, Home Equity Loans, Commercial Real Estate Loans, Municipal Bonds, Credit Card ect....It was incurred because everyone thought the party would last forever, or some just didn't think.

Now, without access to credit, people must live within their means.  Absent any other changes, that number is a much lower number for those that borrowed.  But so many people borrowed, the entire structure of our country became dependent on the borrowing for revenues including commercial development, government budgets, and household budgets.

We simply over borrowed, over spent, over built, and now have to smell the coffee.

Without new credit, old debt can't be paid.....and the total debt out there now has accumlated to relative and absolute levels we have never seen before.  Levels that are now suffocating many parts of our economy.

Just the above analysis creates a bleak outlook as the debt bubble unwinds.  Massive defaults.  Unprecdented foreclosures.  Bankruptcies like we have never seen before.

But the problem has now become compounded by a new factor, rising costs.  Not only has the cost of debt has skyrocketed for many since they took out their loans initially, the cost of food and fuel and other items also have accelerated at unprecedented levels. 

So now, even those that didn't even take on more debt, such as fixed income retirees, and many many others are having trouble making ends meet.  Many Americans have not seen their incomes rise in the past seven years....but we have all seen property taxes skyrocket, food and fuel, insurance premiums, and other things keep going up and up.  You can only have rising expenses and flat incomes for so long.

So where are we now?

There are tens of millions of Americans without the income to meet their monthly needs.  Our state and local governments without income to meet budgets.  Business are watching revenues decline because people and governments can't afford to spend.  The evidence is everywhere.

The big issue ahead is where are we going? 

As many spend down their savings and access to credit keeps shrinking,  we are likely to see failures rising rapidly as the problem feeds on itself.  Vacancy rates at shopping centers will continue to rise.  Revenues to our governments will continue to shrink.  Layoff notices will continue to increase.

Just this week, we read that GM was eliminating 19,000 jobs, Ford 2,000 and Delta 3000.  That is just three companies announcing 24,000 job reductions in one week.

We are still at the beginning of this unwinding process.  As people, governments and business spend down their savings, or have no more access to capital.....expect the defaults to accellerate....not slow down.  As the defaults grow, we will all be affected as the entire system contracts at an ever increasing rate.

I am not sure where this is going....without some sort of major stimulous, it is clear that further defaults and contraction is ahead.....the problem is trying to figure out how much further.

How do we stop the air from flowing out of the balloon when not much is being blown in?

7 Comments – Post Your Own

#1) On May 31, 2008 at 10:04 AM, TMFJake (29.82) wrote:

Yes, I think the worst may be behind us in the mortgage crisis, but we may be in the first quarter of a broader consumer credit crisis--this coupled with the risk of inflation and ongoing chaos in the finance sector keep me from sleeping soundly.

I feel like my dad, but I'm looking for the major stimulous you calling for to be directed towards re-invigorating U.S. manufacturing--whether we're talking green energy or other technology, biotech, etc.  The larger role of Finance in our GDP has created the black hole that's pulling down the economy, and we don't want our economic policies to assume that the only cure is to treat the finance sector symptoms... 

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#2) On May 31, 2008 at 11:01 AM, mandrake66 (41.69) wrote:

It's tough to see what kind of stimulus could possibly re-invigorate U.S. manufacturing, something that's been steadily declining for decades due to high costs, cheap competition, no well-defined industrial policy as in other advanced nations (our horrible replacement for an industrial policy is simply massive military spending), lack of national health care and retirement plans, poor educational system, etc. Furthermore, incentives like subsidies and tax breaks are probably not too difficult for a nation running surpluses, but debtor nations just go into more debt trying to do such things on a large scale.

I think only a severe devaluation of the dollar could reinvigorate U.S. manufacturing, of the sort that would probably turn us into a third-world nation. 

Also, manufacturing is very energy-intensive, much more so than services. We'd probably need to import more oil, absent abundant alternative energies.

The simple fact of the matter is that the US $ is the world's reserve currency. This dictates that we will be a consuming, debtor nation -- since other nations need our currency in large amounts, they will build goods and we will buy them in exchange for dollars. This is incompatible with the US being a net exporting nation. 

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#3) On May 31, 2008 at 1:28 PM, alstry (36.34) wrote:

You guys bring up valid points.  Inflate or Depression.

The problem right now is that many are on the brink of default.  Banks, Business, Municipalities, and Individuals.

Remember, when revenue streams drop $1 below minimum payment level, you default.  The city of Vallejo tax revenues did not stop, they just dropped to a level where it could no longer meet expenses and meet debt obligations.

This is happening all over America at levels we have never seen before.  The recent run up in commodity prices has only accellerated the problem.  Savings are running dry.  We have never had such widespread municipal or banking distress.....ever!!!!! 

At this point, I am quite certain what is coming is going to be much much worse than most expect.  The issue now is how will be get out of it.

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#4) On May 31, 2008 at 4:09 PM, bobbyj0708 (< 20) wrote:

Yes, I think the worst may be behind us in the mortgage crisis

 No

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#5) On May 31, 2008 at 4:10 PM, bobbyj0708 (< 20) wrote:

http://bigpicture.typepad.com/comments/2008/05/mortgage-delinq.html

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#6) On May 31, 2008 at 4:23 PM, alstry (36.34) wrote:

A very strong argument can be the worst is behind us in the Subprime Crisis.  Actually an incredibly strong argument.  Since some tranches are now trading at $0.05 cents on the dollar.....95% of the worst is behind us.

Sorta like telling a family of a dying patient that the worst of the suffering is behind him.

Regarding Alt A, Jumbo, and other mortgages, the party is just beginning.

We are now ending a month where a bunch of defaults will likely arise.  Just wait until the end of June where we end a quarter and even more payments are due.

 

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#7) On May 31, 2008 at 4:49 PM, bobbyj0708 (< 20) wrote:

Okay, now I'm on board. Alt-A and jumbo is going to be a thing of wonder to watch when all the POA's go TU.

 

I'm sure you've been following Mish's WAMU Alt-A CDO... 

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