Here comes the recession

Everyone I talk to is wondering . . .

1. What the hell is going on?
2. Where is the bottom to this mess?
3. What does it mean to me?

Personally, I think we're in for a rough ride. Analysts I've read are split between thinking 2008 will be a dreadful year or that only the first half will be dreadful and the second half will be much better. Capital needs to flow somewhere, and at some point, all those trillions of dollars sloshing around out there will return to the US markets as asset prices reprice below their historic highs. That game is already beginning but only just. The dirty little secret of the American economy over the past ten or fifteen years is that it has been kept perking largely on the energy of two successive bubbles.

The recent financial turmoil has many causes, but they are tied to a basic fear that some of the economic successes of the last generation may yet turn out to be a mirage. That helps explain why problems in the American subprime mortgage market could have spread so quickly through the world’s financial system. On Tuesday, Mr. Bernanke, who is now the Fed chairman, presided over the steepest one-day interest rate cut in the central bank’s history. The great moderation now seems to have depended — in part — on a huge speculative bubble, first in stocks and then real estate, that hid the economy’s rough edges. Everyone from first-time home buyers to Wall Street chief executives made bets they did not fully understand, and then spent money as if those bets couldn’t go bad. For the past 16 years, American consumers have increased their overall spending every single quarter, which is almost twice as long as any previous streak.

Worries That the Good Times Were Mostly a Mirage - New York Times

If you scratch the surface, you find that there has been no wage growth in this country except at the top. Everyone else, the vast wash of consumers whose mighty spending has kept the economy perking, have actually seen their inflation adjusted earnings decline. So their liquidity has come from either self improvement (move up the job scale to a better job) or spending driven by what in retrospect was an increase in either their stock portfolio or their real estate investments. Or both. Meanwhile, the social safety net has frayed, and now lots and lots of people are looking at a lethal triple play

1. Loss of savings value (on too meager savings and investments)
2. Loss of home or home value
3. Loss of security, particularly health

This is a toxic brew. Populists are just getting started on this, which isn't necessarily a bad thing. Consider this from Lew Dobbs

All Americans will soon have to face a bitter and now obvious truth: Our national, political and economic leaders have squandered this nation's wealth, and the price of this profligacy is enormous, and the bill has just come due for all of us.

Bernanke endorsed the concept of a short-term economic stimulus package, but he cautioned that the money must be spent correctly: "You'd hope that [consumers] would spend it on things that are domestically produced so that the spending power doesn't go elsewhere."

Just what would you have us spend it on? The truth is that consumers spend most of their money on foreign imports, and any stimulus package probably would be stimulating foreign economies rather than our own. Imports, for example, account for 92 percent of our non-athletic footwear, 92 percent of audio video equipment, 89 percent of our luggage and 73 percent of power tools. In fact, between 1997 and 2006, only five of the 114 industries examined in a U.S. Business and Industry Council report gained market share against import competition.

Over time, the wild card may be the Millenials. Consider this from BusinessWeek

Given all the pressures and economic gloom, you might wonder why today's twentysomethings don't despair and disengage. There's a simple answer: They weren't raised that way. Growing up in the era of cater-to-kids politics, the V-Chip, and helicopter parenting, they were the most coddled generation ever, infused with their elders' belief that they possessed unique abilities. They also have been the most marketed-to generation, giving rise to their BS-despising, post-ironic disdain for any political solution—or candidate—that doesn't seem straight up. Thus their attraction so far to candidates, like Obama, McCain, and Paul, who they believe are outsiders representing change.

As any chief marketing officer knows, this generation believes in "owning" its favorite brands. Its members carry the same ethos to their political activism. Bringing the music and media industries to their knees was also empowering—providing Gen Yers with the self-confidence for a third-way, post-partisan manner of doing things. It's striking that the largest group of 18- to 24-year-olds, some 40%, consider themselves independent, according to a recent survey conducted by Harvard University, with 35% identifying as Democrats and 25% as Republicans. Millennials, like many Americans, may have lost faith in the political Establishment, but they have utter faith in themselves and their wiki-inspired abilities to get things done.

Personally, I don't think there is enough populist energy in the country at this point to push decision making at the top in a meaningfully different direction, but that doesn't mean that over time that won't happen.

Over the short term, individuals probably want to think about their own personal decision making, particularly as it relates to spending, savings, and investing. Recessions are driven by fear, and the cycle has begun. There is no external force that's going to keep people from thinking conservatively given the state of things. $150 billion or whatever the pooh-bahs in DC are thinking about stuffing into the economy isn't going to help much. Yeah, the folks who will get it will appreciate the money, but on average, it's going to be about a paycheck. Keep in mind that 40% of all Americans don't pay federal income taxes because they don't make enough. So I think it's fair to assume that this year is going to be rough, regardless of who is nominated. Plan accordingly. And if you have cash and some courage, there is going to be a heck of a buying opportunity sometime later this year. My 2 cents

 

Post script

 

A good friend sent me this about that . . .

You know, that question bothers me as well. I see nothing to save the
world except future growth. In the long run, I believe that:

        -the Global economy is chugging along quite well right
now.
        -the world population will continue to grow more
affluent creating more demand for more goods.
        -India, China and Brazil will continue to outgrow the
US.
        -the US consumer is too stupid to save so he will
continue to spend.
        -the US companies earnings' are much stronger than
expected (except financials).
        -the US stock market is trading at the cheapest
valuation that I have seen since either 1990 or maybe as far back as
1981, which is not a fair comparison due to the rates on bonds in those
days.
        -the weak dollar will put the US assets on sale to the
rest of the world.

The laws of logic have not been repealed, they just aren't working at
this moment. I am concerned, however, that you and I and the other 250
million Americans will not understand what to do if we are not the
dominant power in world affairs. The US has been in charge of the world
for over 100 years. Sometimes our reactions to world events and our
perceived role scares me to death. And the choice of future leaders may
be even more scary. What is to save us? I hope it is logic.

 

Blogged with Flock

Tags: GenY, Millenials, Lou Dobbs, Obama, McCain, Ron Paul, Bubble, Economy, recession

Comments

[David Wolfe]

Kevin,

Nearly 20 years ago I predicted the coming of the "Great Real Estate Recession" which would most likely be accompanied by a really big financial crisis. I said it would happen because behind the boomer pig in the python was an empty alimentary canal. Historically unprecedented population implosion in key big spending age cohorts. There will be virtually no population in the under 50 adult population over the next 40 years in the developed nations of the world. In fact, most are facing dramatic population shrinkage.

BY separate email I'll send you the PowerPoint deck of a presentation I did in Portugal two years ago. You'll find some interesting charts there.

Population implosion began in key age cohorts Japan over two decades ago in Japan, finally stalling the Japanese "miracle" that was supposed to have Japan's economy passing the U.S. economy by 2000.

When I did my first lecture tour in Japan in 1990, I told my hosts what their country was facing. They didn't want to hear what I was saying. The following year Japan's now 17-year-long period of recession and anemic growth shows no sign of robust recovery -- just as I said would be the case. Now the U.S. is pointed in a similar direction though it might not be quite as bad in the long term for reasons I'm not going to take time here to lay out. Point is, what our economy is experiencing was predictable and became inevitable decades ago -- actually as long ago as 1974 when U.S. fertility rates fell below replacement rates. That happened earlier in most European countries but not as early as in Japan where it first happened in 1957.

David