Sunday, September 30, 2007

Knowing the Price of Everything and the Value of Nothing

The american consumer today can be summed up as having the "whats the monthly payment?" mentality towards purchases. As long a monthly payment is even possible to do, a purchase will be made even if the purchase makes no sense at all. You can see it in purchases of furniture, vacations, cars and especially real estate. Monthly Payment syndrome has transformed the US consumer into an animal that basically spends absolutely every cent they make as they make it, with no savings being accumulated. In past generations aging parents usually had a bit of a nest egg that they were planning on passing down to their offspring. I believe going forward, unless things change, most parents will be spent out at the time of their passing, perhaps even passing debts down instead! While the process of monthly payment syndrome has allowed most people to live quite a respectable looking lifestyle, it has also caused a total lack of understanding of value. By expanding payments over time, consumers are able to become sort of like a stock for a company. The share price of a company is determined by the companies total profits over all time, divided by shares. Share prices fluctuate as the future prospects of the company rise and fall and investors regauge their numbers. In this loose sense, the consumer is taking their total earnings for all time going forward, and spending it in the current time. Almost every penny is budgeted per month, and as more income is made, more monthly payments are incurred. The US consumer is "Priced to Perfection" to borrow another stock term. Any stop in income flow or stop in income increases will throw the system into dissarray. This mentality is going to be tested I think in the near future by two major occurences:
1. Unemployment is going to rise
Mortgage lenders are laying off people in massive numbers. Residential construction is falling off a cliff. The consumer is tapped out (witness a negative savings rate over the last year, first time since the GREAT DEPRESSION), realtors are struggling, and all areas related to real estate are going to get pinched.
2. Home Values are falling and will continue to fall
In a previous post I noted that a house is sort of a forced savings plan. Homes have been used as an ATM the past few years, and ever escalating home prices were seen by the consumer as a never ending source of credit debt payoff. Thats all over now, and as the single largest monthly payment item most have falls in value, there is no rescue from crushing debt.

Whats all this mean? I dont know, but I imagine a gradual return to more reasonable living standards will occur. What a shift in mentality from "spend everything all right now" to "spend what is reasonably comfortable" will mean to the stock market and economic growth is hard to say. I dont think it is going to be good though.

Saturday, September 29, 2007

The Disconnect WILL be Televised!

My main reason for this blog is to try and get people that are understandably very busy (work, kids, just trying to find some good down time) to take a look at what is going on behind the scenes. Circumstances have emerged to gift us with a perfect example of Economic Disconnect. You may or may not have heard that the third largest mortgage lender in England, Northern Rock Bank, had substantial losses and resultant credit and liquidity issues last month. Things got so severe, and old fashioned "bank run" actually occurred!:
Things got so bad, the government in England had to guarantee the deposits at the bank:,,2171255,00.html
I know, move along nothing to see here, and besides it was in England anyway.

Well, after the closing bell on Friday (a closing on a friday that just so happened to be an options expirations date!) we get a buried story about a bank failure here in the good ole USA!:

Now Netbank is not a major bank, but the process by which it failed is not a unique story just applicable to that one case.

I had mentioned this event to my wife, and she asked me about our accounts. Our money is at two different banks, one major and one regional, and both are under the FDIC insurance amount of 100k. I assured her that our money was safe. I then had an absolutely terrible thought that has stuck with me, and it is this;
If a major bank like say bank of America, or Washington Mutual were to fail, I think that getting my money from the FDIC is not going to be my major concern going forward.

Now I am not one of these Gold Bug ( I am long lots of gold miners however! full disclosure) survival nuts that has a well stocked bunker ready for Armageddon in the woods, but think about it for a minute. If the FED had to supply money to the FDIC to guarantee deposits of a MAJOR bank, what would happen to the US dollar??
If you had say 20,000 in the account, after the printing presses are running full speed, will that 20k have anywhere near the same purchase power? Would submitting your forms to the FDIC be your first concern?
I do not have answers to these questions, but they are worth thinking about. The DOW is almost back to its all time high, and all the talking heads on the financial shows were wearing their bull horns today. The Economic Disconnect of everything is great versus all the money injections the FED is doing, and in a cutting interest rate environment are clear. Perhaps the FED and Wall Street are afraid, maybe you should be too.

Friday, September 28, 2007

Friday Perspective

One final note for my first day. When I feel overwhelmed by day to day concerns and I get frustrated over things, I find it helps to have a little perspective. Take a good look at the below photo, it is the sunset on the planet Mars taken by the amazing Spirit rover:

Makes you feel small.

For more info on Spirit:

Friday Wrap-Up

My first day on the new blog! I realize my first few posts are a little bit rough, and going forward I am going to do less explanatory posts, as this blog is meant for people who already have a good understanding of things economic. Friday is the end of the week, and a wonderful wrap up of lots of stories was done by the great work over at Mish's blog. I suggest this post be read in full with particular attention to the summary points at the end:

  • Current Conditions Summary
    Public spending is out of control in the US and UK.
    Banana Republic charges are being leveled at the US and UK.
    Runs on the bank occurred in the US and UK.
    The Fed is accepting mortgages as collateral in the US for the first time.
    Foreclosures are at all time high in the US.
    The US dollar is at all time lows.
    Japan is still struggling with deflation.
    Two failed banks in Germany were bailed out by the ECB.
    There are US Congressional threats of tariffs against China.
    There is a proposal to freeze short term commercial paper for up to 7 years in Canada.
    Housing bubbles in the US, Spain, and Australia are deflating.
    Housing bubble in Canada is still inflating.
    China refuses to float the RMB and sterilize US dollars flooding in. That in turn is fueling Chinese inflation.
    Price controls that can't possibly work were implemented in China in response to Chinese aforementioned Chinese inflation.
    Commodity prices are soaring.
    Oil is at record high prices.
    A Massive carry trade in Japan is fueling a plethora of asset bubbles around the globe.
    $500 Trillion in derivatives are floating around dwarfing the size of the global economy.
    The global credit bubble dwarfs by orders of magnitude the credit bubble preceding the great depression.

Other than the above, the global economy seem pretty normal and rather well balanced. It's a tribute to just how well central bankers have done their jobs.- Mish

A great post and one that captures clearly the Economic Disconnect that this blog is focused on.

Real Estate: The Ultimate Disconnect

There may be no more subject more illuminating that the current real estate bubble and the related problems that it has spawned. I am going to offer my thoughts on this subject in two parts, what was and what is to contrast the differnce in thinking that has lead to a disconnect.

What WAS

Residential home purchases, in my view, historically were a sort of forced savings plan most benefiting people without access to major anounts of capital (not alot of cash) and people with limited investment opportunities (not alot of cash, perhaps no 401K, etc.). A couple would buy a home, pay down the mortgage, and after a while, they had built up equity in the home that could be used at a later date as needed. There are tons of debateable benefits of home ownership (stability, tax breaks, not paying a landlord, etc) but for this discussion they dont matter. A home was viewed as a place to live, as well as a way to build a financial nest egg for a later date.

What IS

Home purchases have become the newest and most dangerous speculative plays since the Dot com era of 2000. Homes have been purchased not for a long term investment, but as a get rich quick scheme. I will not go into the particulars in depth, there are plenty of blogs and sources that can better articulate the process better than mine (read the blogs over on the left panel). For my discussion purposes what I want you to take away is that from about 2002 to late 2006 the vast majority of home purchases were made not to invest long term but to make a killing short term.

Where We Are

Currently we are at a point where home prices are so out of line with incomes and reality that a historic price correction has just begun. Not since THE GREAT DEPRESSION have home prices declined on a national basis, but they are falling right now. The news is filled with details of record foreclosures, subprime mortgage meltdowns, and collapsing home prices in hot market areas like Las Vegas and the Florida coast. To get an idea of what happened, take a long look at the Case-Shiller index at the top of this post (from the NY Times 9-26-07). The big disconnect in real estate was that prices cannot go up forever. Incomes have no way to keep pace with home prices, only exotic mortgages and the entrance to the market place of rampant speculators drove prices up. Now that banks and mortgage companies are getting hit with huge losses, we will now see the disconnect unravel and reality return. It will not be pretty.

Inflation Nonsense

The best way to try and give readers an idea of the purpose of this blog, I would like to start with a post on inflation. Inflation is the gradual (sometimes not so gradual!) increase in the price of items and services. The government publishes numerous inflation numbers every month, and I urge you to begin to read that number on a regular basis. While there are many different reads on inflation, the purpose of this post is to highlight a major Disconnect between what is reported and what you see everyday. Now the last year has seen the CPI (a measure of inflation) hover around 1.8%-2.8%. That seems pretty low. Now think about how your costs in the following areas have fared in that same time period:
1. Gas
2. Food
3. Health care
4. Heating/Cooling bills
5. Real Estate Taxes

Chances are you will not recognize the wonderful 2% inflation in those areas! This is what I hope to discuss on this blog. Just today, one of my favorite blogs, The Big Picture, had a post on inflation absurdity
and I recommend reading that post.
Another excellent phrase that sums up what is going on today is what Todd Harrison over at likes to call "Inflation in things we need, and Deflation in things we want". As all the necessary costs skyrocket, things like TV's, cars, and computers go down in price. Thats helpful isnt it?

Welcome to Economic Disconnect!

I have bee a huge fan of blogs for a while, and now have started my own. The purpose of this blog is to highlight and discuss the major disconnect between the picture of economic strength and well being that is being paraded out in the media and by our elected officials, with what the average person sees for themself with their own eyes. I will also throw in snippets of things that interest me (Sci-Fi, sports, space, fishing) and link to the very best of the web which exposes what is going on in todays complicated financial world. If you have come to this blog, welcome!