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TheGarcipian (33.17)

The Coming 2008-2011 Recession



June 06, 2008 – Comments (6) | RELATED TICKERS: AAMRQ.DL , GM , SHLD

My crystal ball is in the shop for repairs, so I’m working with my Magic 8-Ball today, and she’s showing a mean spirit on the question of “Will the US economy improve over the next 3-4 years?” as shown in the picture below.


I’ve just finished reading John Mauldin’s “Investors Insight” post of June 2nd, 2008, seen here.

He had a guest columnist, Michael Lewitt, writer of the HCM Market Letter. Lewitt had some interesting thoughts, most (but not all) with which I concur. It’s a long article, but you can find it here. Although it’s a bit light on actual data, I think he brings up some good points. It is a particularly gloomy almost melodramatic picture about the economic outlook, and it’s my guess that the gloom may only last for 2-3 years, but could stretch longer, much much longer. Hopefully, Lewitt is wrong, but I fear he is not.

I’ve summarized some salient and interesting passages below for you. Any text or comments of my own within Lewitt’s quotes have been placed in [square brackets]:

• He “…harps on this leadership void because policy failures led us into our current difficulties. Inadequate financial regulation allowed unfettered securitization and leverage to push the system to the brink of collapse. A complete failure to fashion a responsible energy policy has led to skyrocketing gasoline prices. The damage inflicted on investors, consumers and businesses by these failures were avoidable. Instead, the political and financial elite placed their own short-term interests ahead of the long-term interests of everybody else, and the results are plain to see: burgeoning inflation, choked credit markets, and a deteriorating physical, moral and cultural climate.” [Like I said earlier, a bit melodramatic, but the point is made.]

Three areas in trouble: “An array of American industries is beginning to experience deep distress. Three in particular are about to experience a wave of restructurings or defaults that will drive a stake through the heart of the American economy: airlines, automobiles and retailers.”

• “The bottom line is that airlines, which are marginal businesses in the best of times, are unsustainable businesses with oil at current levels. The industry was partially nationalized after 9-11. The current oil spike should finish the job.”

• “It is both startling and depressing to hear American automakers just now coming to the conclusion that they are still manufacturing too many gas-guzzling trucks and SUVs and too few hybrid and diesel passenger vehicles. Few industries have seen such profound failures of vision and leadership.” Not that the weeny Democrats are much better , but thank you, George Bush, Dick Cheney and a Republican-led Congress for not only a lack of vision and inaction here, but also for actually rolling back the national EPA standards, forgoing conservation strategies, and encouraging the nation’s oil lust (which undoubtedly have made some oil men very rich during your tenure, George).

Related to retail, Lewitt notes that fewer people are going to drive to the mall to buy goods when they are fighting to keep a house over their head and can’t afford to drive their 12-16mpg vehicles at $4.00/gallon. To quote him: “Sears is what we at HCM [Lewitt’s newsletter] call a melting ice cube. It continues to consume itself through share buybacks and misbegotten marketing ploys. The unhappy truth is that Sears and Kmart are yesterday's retailers.”

• But the problems of firstly getting consumers to the market, and secondly, getting them to buy discretionary items is only one part of the problem. Lewitt explains: “Many financial institutions have been willing lenders to the retail industry over the years in view of the high rate of defaults that this industry has seen. Retailers are generally loathe to amortize debt - they would rather open additional locations… they make the worst of borrowers because they always need more money and never repay the money they borrowed in the first place. There are few barriers to entry… retail ideas are easily copied... Even more disturbing are the high prices at which recent retail LBOs [Leveraged Buy Outs] were done in an era of low cost capital [as we’ve experienced over the past 3-4 years]. These transactions were almost assured of running into trouble, as they are now beginning to do. There will be more bankruptcies to come.”

Regarding oil: “For several years, the IEA [International Energy Agency] has predicted that supply would keep up with demand that was expected to reach 116 million barrels a day by 2030, up from around $87 million barrels today. The agency is reportedly now coming to the conclusion, which will warm the hearts of believers of the Peak Oil thesis, that it will be difficult to squeeze more than 100 million barrels per day out of the ground over the next two decades. It appears that higher oil prices are here to stay.” [This was partially the subject of my earlier “Consumption Junction” blogs, and why issues like conservation, alternate energy research & a general policy shift in the President’s Administration are so vitally important.]

• “Over time, holding currencies such as the Singapore dollar, Taiwanese dollar, Hong Kong dollar, as well as those of growing giants India and China, will handsomely reward investors.”


Lewitt also argues that the world is a much safer place over the last two decades, and because so, the rest of the world does not seek safety as readily in the U.S. dollar due to political instability. Rather, these foreign markets are increasingly investing in Euros and other non-US currencies. A lot of people do not understand this fine point and what it means to the stability of our economic future. For decades, the US dollar has been the safe haven for the world’s investors in rocky times (and in good times, no doubt). And because of this, the world’s oil producers have always chosen to price their product in the most stable of worldly currencies, the US dollar. To quote Lewitt on this subject: “The world has not yet crossed the Rubicon whereby oil will no longer be priced in dollars, but that is no longer an inconceivable concept, although its consequences for the U.S. currency are well nigh inconceivable… The growing distrust of this capitalist model is further enhanced by the very legitimate questions raised by the asymmetric compensation schemes that rewarded many of the promulgators of these financial [banking] disasters while leaving institutions representing retirees and municipalities and other "mom and pop" investors nursing enormous losses.”

That’s a very scary idea indeed, for all Americans. For when that day comes, we will definitely be on the backside of the Economic Hill of Prosperity. We are already a debtor nation, a nation that imports more than it exports, a people with a deplorable savings rate, and a country that (except for an all-too-brief time under Bill Clinton and a semi-responsible Congress) chooses to live beyond its means, spending more than it takes in, more than it budgets itself. The pain is coming. Are you ready for it?

One final point: In its April 2008 report, the International Monetary Fund (IMF) sees global recession in place through 2009. I’m betting it will last a bit longer, somewhat dependent upon how quickly the US pulls itself out of the muck. The IMF sees only a 3.7% growth (if only we’d be so lucky!), and emerging markets slacking a bit from their recent rocketing past. The full story is here but of particular interest is this quote near the beginning of that article: “World growth would achieve little pickup in 2009, and there is a 25 percent chance that the global economy will record 3 percent or less growth in 2008 and 2009, equivalent to a global recession.”

Fasten your seat belts. It’s going to be a long, bumpy 3-year flight.

6 Comments – Post Your Own

#1) On June 06, 2008 at 2:15 AM, Tastylunch (28.76) wrote:

Nice post Gar, depressing but good info. 

RE: Retail

I think you'll see a big push back into urban retail Pedestrian retail might make a comeback like it was pre 1960, but that's going to be a rude awakening for consumers I think.  The Wal-Mart model of steep markdowns  might breakdown a little dense urban areas. Rent and construction sis just so much more expensive, the consumer may save on gas but they'll pay for it through merch and they won't like that.

I'm certainly positioning my business for that . I don't know if we'll be able to take advantage of it but we'll try. Our sales are up this year so far so it seems to be working.

I'm not sure I'm bearish enough to say we'll have a recession past 2009 (It wouldn't surprise if the American consumer finds a new way to go further into debt and prop us up again), but I'm sure we'll have a RE slowdown at leastwell  into 2010 and perhaps much longer in the 'burbs. 

also this why is Blockbuster's buyout of CircuitCity is madness. Where are they going to get the money to do this? 

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#2) On June 06, 2008 at 8:26 AM, OLD1953 (< 20) wrote:

Well, yes, I expect at least three years of pain, and that's assuming Democrats control Congress pretty completely.  Four more years of inaction while we wait for "the markets" to decide they are tired of squeezing the life out of the middle class and tired of making huge quantities of war profits, will mean an extended disaster, perhaps total collapse.

Assuming the Dems get elected, and manage to grow a pair, we would see effects of conservation/reinvestment/rebuilding policies in about two years.  Which gives that three year scenario these guys are all talking about.

 The hidden item that most don't realize is this, improvements in infrastructure are always realized in the economy as improvement in productivity!  If we don't need to send 80 billion overseas for foreign oil, then it stays here.  If it stays here, then it circulates and produces here, thereby improving the velocity and efficiency of US loans/production.  The same applies for anything that remedies traffic jams (wasted fuel, wasted time) or improves medical efficiency (wasted time and money on unneeded tests and insurance paper filings) and so on and so forth.

 This is a cyclic thing, the Republicans come in with ideas to fix the nations problems, and they keep applying more and more of the fixes that got them elected EVEN AFTER THE ORIGINAL PROBLEM IS REDUCED TO NONEXISTANCE!  Democrats do exactly the same thing.  Thus, every twenty or thirty years, we totally exchange powers in office to allow the problems the LAST group in power ignored to be fixed.

Unhappily, this cycle was extended by the unfortunate combination of the Bill Clinton scandals and the 9-11 attacks.  Had 9-11 occurred during the first Bush presidency or the Reagan presidency, it would have been all but forgotten by now.  GW used it to extend political power for his party in a way not seen in this country since the Civil War, and this resulted in the excesses of the Republican cycle being extended for a much longer period than otherwise would have occurred in the natural order of such things.

 So we will have an  extended period of bad or negative growth due to these "messes" being allowed to ferment several years longer than would otherwise have been the case.

 Total collapse is a bit extreme to predict, given the current circumstances, but some thousands of business bankruptcies would not be out of the question.  80,000 or so over the next three years would be in line with my expectations.

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#3) On June 06, 2008 at 6:09 PM, darroj (27.79) wrote:

Good post. I'm just sad now. :(

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#4) On June 06, 2008 at 6:26 PM, TheGarcipian (33.17) wrote:

Crud! I just noticed they took down my picture of the Magic 8-Ball! Well, here it is anyway, via a link rather than an embedded picture:

TASTYLUNCH: What's your business? Just curious. Hopefully, you won't be impacted too much. I don't think the recession will last until 2011, but it very well could (according to the article). I also initially didn't think the housing financial fiasco would last through 2009, but that's what some estimates are now. People tend to think with a "recent bias", meaning they give more credence to more recent events simply because they remember them more clearly. I do it too, and it's hard to overcome. Was that Tech Bubble Burst of 7 years ago really all that bad? Oh yeah. Will the Housing/Finance/Oil Bubble Burst be even worse? Yep, probably. Is it going to be very painful? You bet it will.

OLD1953: Good summary. I completely concur. Both parties suck, though I tend to lean toward the Democrats right now because they suck less, being a bit less adept at fooling so many people with their rhetoric, less adept at pulling off bold-face lies the likes of which we've seen over the past 7 years. Funny thing is, I'd read an article in the last year or so that pointed out a non-profit, non-partisan government office (the GAO, maybe?) that showed how Democrats and Republicans fared on several different metrics in terms of percentage completed/enacted vs. promised (note: this was during a Republican Administration). The Democrats led in all categories by 5%-15% over the Republicans (though they both stood to improve their scores much!) except for one: cutting taxes. Since this is the cornerstone upon which the modern neo-con Republican rhetoric machine is built, that makes sense. The stunning thing was the actual figure by which Republicans actually cut taxes. It was something like 0.2%. Yep, less than 1%. How can this be? Well, people have yet to realize that when you cut taxes at the Federal level, then it's the States that have to pick up the slack, or else there's going to be a lot of hurting going on... The GAO report looked at the entire picture, not just what the politicians want you to focus on. We all need to do the same. Unfortunately, a good deal of people do not.

Back to the economy, people also need to understand that without a balanced budget and without paying down our debt, then more and more of your tax dollars go out the window to the debt holders. We get nothing for that, except less of an ability to provide for ourselves, be it through tax breaks, better health care, better roads, cleaner air, whatever.

And now, we're finding we're really screwed. Why? Dumbya, er, Dubya, plundered the Treasury even before starting his war, walking away with the first surplus we've had in a very long time (thanks to Bill Clinton and a Congress that worked together to pay down our national debt). Those asleep-at-the-wheel policy makers (mostly Republican Congressmen because they've been in control of Congress for most of George's tenure, but a lot of Democrats too) have let the Big Banking Boys get away with greed (via their loose lending practices and relaxing of many cross-checks), and those costs will invariably be passed down to us citizens. As I've written several times in the past, it's not fair business practice in a free enterprise system that is supposed to reward you for ingenuity and punish you for bad decisions if you privatize the profits but socialize the losses.

People deserve the officials that they elect. Maybe the fiasco that is known as George W. Bush's Presidency will sharpen people's attention span beyond wondering if their candidate would be a good guy to have a beer with, and focus on the stuff that really matters at the federal level: balanced budgets, fair trade for everyone (not just the Big Boys, but Small Business too), Medicare, poverty, national infrastructure concerns (highways/bridges/etc.), national security & international diplomacy. Leave the rest of the law-making at the State level, just like the original true Conservatives had proposed.

Anyway, that's enough from my soapbox. Enjoy your day and try to grin and bear the pain that is approaching... hopefully, it won't be as bad as these writers predict.

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#5) On June 06, 2008 at 6:43 PM, sandvig (98.95) wrote:

Excellent post.

Bring out the leeches and suck out the poison.

Airlines, autos and retail are the tip of the iceberg. It is easy to see how high fuel costs are devastating to them. Most businesses that deliver products or services are affected by the high energy costs. I visit with lots of small business owners, and the cost of gasoline is universally near the top of their gripe list.

The federal government runs up huge deficits. I suspect many states do the same. Americans have a negative savings rate. We all know where that combination eventually leads.

Yet, my natural sense of optimism leads me to believe that every problem has a solution. There will be pain- how long, and how severe- who knows? Change is almost always difficult. But people are resourceful, and competition rewards those who provide solutions.

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#6) On June 06, 2008 at 11:59 PM, TheGarcipian (33.17) wrote:

Sandvig, amen to that, brother! And to those providing the solutions go the spoils...

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