Monday, December 10, 2007

The Consumer is a Willing Partner in Their Own Demise

That was a busy weekend for me! Sunday was capped off with the New England Patriots victory over the Pittsburgh Steelers. The 3rd quarter was all that was needed to be seen, as the supposedly "old and tired" defense shut out the Steelers and the offense really turned a corner. With 3 weeks to go I cannot see how the Pats will not go undefeated for the season. Fun times.

My Personal Shopping Experience
One Saturday morning every year in December the wife and I get up very early (6am) and head out to do the bulk of our holiday shopping. I will list my shopping impressions for what they are worth:
  • The mall we were at was basically empty from 7am-10am. After 10am however the place was swarmed with people, and by 11:30 both the wife and I had enough of being bumped into and pushed around by rude people. If there is some kind of consumer recession, it only exists before 10am!
  • Maybe I am just getting older, but it seems to me that the SAME stuff has been in all the stores for the last 5-6 years. Unless you are into electronic doo dads there are very few new ideas out there as far as gifts go.
  • Paying with cash is a real confusing thing for clerks to handle. After spending about $300 at Macy's on various items, I payed with cash and it required a manager to come over and check over the money like it was counterfeit. I quipped that due to the FED printing tons of money it was kind of "fake" in a sense, but by the look on his face I don't think the manager reads financial blogs! Side note: I laugh when people get all worked up about things like the Patriot Act and the government possibly watching them. The same folks pay for everything with a credit card or a debit card, and the mountain of information that the retail sector shares about your habits is enormous. Cash is anonymous.
  • While the FED says there is no inflation, I definitely spent more this year on a comparable amount of items.

Anyways, that was my 1 day. The rest I will do online, so the powers that be can know my every move. My trusty tinfoil hat does prevent them from accessing my thoughts however.

NAR Forecast - Show Us the Model!

Everyone and their brother have piled on the NAR housing forecast, and it is just too much of a joke to leave alone! Headline from AP:

AP Trade group lifts outlook for 2008 home sales, insists US housing market is stabilizing Monday December 10, 2:03 pm ET By Alan Zibel, AP Business Writer
WASHINGTON (AP) -- Bucking conventional wisdom, a trade group for real-estate agents on Monday said the battered housing market is on the verge of stabilizing and inched-up its outlook for 2007 and 2008 home sales. The revised monthly forecast from the National Association of Realtors, which followed nine straight months of downward revisions, calls for U.S. existing home sales to fall 12.5 percent this year to 5.67 million -- the lowest level since 2002. Last month, the association predicted 5.66 million existing homes would be sold this year, down from 6.48 million last year.
The Realtors' group also forecast sales will rise slightly in 2008 to 5.7 million, up from last month's prediction of 5.69 million.
The Realtors group also forecast the median price for U.S. existing homes -- the point at which half sold for more and half for less -- will sink by 1.9 percent to $217,600 this year and rise 0.3 percent next year to $218,300.

Now I understand that the NAR is a biased voice in this forecast, but that is not my gripe. Look at the silly numbers that they are pushing. The new estimates for sales volumes are basically unchanged from their last forecast, and this is a new positive outlook? The NAR plugged whatever numbers into their model and came up with a 0.3% increase in price for 2008? Why not go for .5%? For the NAR to have any credibility (it doesn't) they should present their model used to arrive at the estimates. That same model missed home sales for 2007 by a cool MILLION units, but I am sure its a fancy model. My own model forecasts the NAR to miss sales units by 25% and price by 5% both to the downside. I did not even need a calculator, I just subtract from their fancy numbers!

The Consumer is a Willing Partner in Their Own Demise

In my post from Friday evening, I had observed that the banks and the FED are attempting to provide cover and time so the losses from the housing bust do not swallow them whole. One of the best things about blogging is the comments section, and Economic Disconnect benefits from the discussions. Loyal reader Kevin had this thought (reproduced with his permission):

"The players would have you believe that the entire financial system will collapse without a home price prop put into place."

Unfortunately they are going to have to find some kind of prop or at least away to slow the deflating bubble if possible or that is exactly what will happen. The financial system it seems to me would collapse. I don't think Paulson, Bernanke or anyone else involved thinks this will keep housing prices from falling or the borrowers from eventually defaulting anyway as they are just trying to slow the decent with a longer time frame and trying to replace it with another expanding sector of the economy which unfortunately will probably lead to another unintended bubble. The consumer was used by Greenspan to give corporations time to clean up their balance sheets after the dot boom crash, now it will be their turn to give the consumers time to clean up theirs with pehaps subsides, and tax incentives to get corporations to borrow, spend money and invest even in the face of falling demand. The alternative to that is government spending, or massive tax cuts, but as a county we are basically broke so I don't know how that will work out.Every river in Japan has a cement bottom as a result of their r/e and stock market collapses they also lend money for less the 1/2 percent interest - it could happen here and would be somewhat foolish to eliminate it as a possibility IMHOP. That doesn't mean I like it though. Kevin"

I had never considered Kevin's excellent observation of what happened in the aftermath of the 2000 Crash. Greenspan and company used easy money to ignite spending by the consumer as a prop for the collapsing business investment. The reason interest rates were kept so low was to stoke the artificial demand for credit. The losses form the dot com bust were recouped by jamming cash into the consumer's hands to buy homes, SUV's, vacations, etc. The consumer was all to happy to play along. The US consumer was played for a fool by the credit bubble, and like a champ played the part to perfection!

Along the same lines, reader Rob had this to add (reproduced without permission, but it is my blog!): "Hasn't the Fed already signaled its willingness to take our country down the path of the Japanese? Hyper-inflation through artificially-inflated reserves seems to be their medicine, and you can't blame them; a natural (albeit magnificent) correction would leave Americans questioning how we got here in the first place, and that would lead them to the doors of none other than the great Federal Reserve System. The bargain-basement lending rates of the Y2K era (which merely compounded the near-permanent Greenspan-put) should have been the Fed's last attempt at using multiplicative credit to maintain our bubble economy, but here they are again."

Again, it is amazing that readers of this blog are better and more insightful analysts than anyone on TV or in most Newspapers. My take home point is this; The FED used artificially low interest rates to engineer demand that simply was not there. This was done to keep the US economy from a recession due to over investment by business in the late 1990'-2000. The FED sees the US public not as citizens that need to be protected, but as a debt vehicle. The easiest path for a spending explosion was the US consumer and the FED delivered the goods. While business was able to shore up their act after the stock bust, the banks went wild with mortgage loans. How long must we now wait for the banks to get well? How can the US consumer keep piling on debt now that the home ATM is over drafted?

While I have some sympathy for the troubles some people are in right now, its a very small amount. The US consumer was a willing partner in their use as a credit multiplier. Now that things have become untenable the consumer will have to pay the price. Perhaps next time the public may see that they are being manipulated and used by big business and the government and may say "No Thanks" to the next debt bomb they are offered. I Doubt it., but you never know.

Have a good night.

2 comments:

Anonymous said...

getyourselfconnected

"I payed with cash and it required a manager to come over and check over the money like it was counterfeit. I quipped that due to the FED printing tons of money it was kind of "fake" in a sense, but by the look on his face I don't think the manager reads financial blogs!"

"Perhaps next time the public may see that they are being manipulated and used by big business and the government and may say "No Thanks" to the next debt bomb they are offered. I Doubt it., but you never know."

I think you had first hand experience with the public, that manager is probably about as average as they come. Most of them, I would venture 70-80% don't have a clue.

Kevin

Debbie B said...

Great post. It pains me to think of how well the population can be manipulated. Man, have they got our number or what?! Hey, but isn't it our patriotic duty to buy, buy, buy? Only Osama wants us to pay back the interest AND the principal.