Thursday, November 20, 2008

The Big L – Gloom and Doom Part 3

Here's what Richard Russell (Dow Theory Letters) -- one of the few market commentators with first-hand experience of the Great Depression -- has to say:

“The market is warning of a coming depression. Next year there’ll be a huge problem of unemployment, job openings will have disappeared, and every business will be going over its personal thinking in terms of who the business can do without.

“The sentiment in the country will be dark grey to jet black. Fortunes will have been wiped out. Thousands of savings plans and 401Ks will have been shattered. Americans who have never experienced true hard times will be living hard times. Confusion and fear will be rampant. How do I know all this? I’ve been here before, I know the signs.”

By now, even those among us that think economists are people who know what they’re talking about, realize this: that the genie is now out of the bottle. Few believe that the government has a handle on where this ship of state is headed, financially. Despite Wall Street and its current health, next year and quite possibly the year after, 2009 and 2010, will almost certainly be a disaster. Even if a traditional-style recovery on Wall Street were to start happening now, there is no imaginative vehicle, like CDO’s or SIV’s, that will be the “next big thing” to bail out this economy. Wall Street may recover slowly from here, but it is more likely that any rally that occurs will be a Bear Rally, to be followed by pain -- a lot more pain.

What lies ahead is not a V or a U – traditional symbols of a bounce in Wall Street that signals we are recovering. The big L is now what is predicted if we are lucky enough to avoid the big D.
This describes a long, long, slide down – followed by a very long period of flat or low economic activity accompanied by deflation. It is clearly NOT a period of recovery – it is a period of economic stagnation. Few new jobs, little housing activity and disasterous, permanent downsizing. Only afterwards, assuming that rational economic policy – worldwide – is put into place, can there be any growth.
If you doubt this, contemplate the fact that Japan was in the dumpster for 17 years before it began to recover. Contemplate the fact that real economic activity after 1929 did not occur until World War II – and that any stock purchased in 1929, which was followed by SEVEN major drops before it ended in 1932, did not regain its value until 1954.

We are now still on the slide. Housing has another year or two before it hits bottom. Many houses in the Hamptons have already dropped by 50% in value and Manhattan condos and coops are just now beginning to fall in value. Many of the sales figures that real estate companies provide are hype. Few brokers will tell the truth that activity has fallen by 30-35% and that prices are buoyed only be the averages artificially skewed by a few extremely upscale new developments which are as close to speculating in tulips, as one can imagine.
Price drops are now common. They will soon be the norm.
With 50,000 Citigroup pink slips, 10% of JPMorgan Chase employees being dropped and the combined redundancies at the Merrill/Bank of America merger, the Lehman fiasco and the disappearance of WAMU, not to mention the bank failures across the country – credit, capital and investment is fast disappearing. The recovery figures in housing are based upon limited sales – foreclosures and short sales. By the end of this year and next, several million more people will be out of work and the foreclosures may INCREASE rather than decrease as a result.
There are convincing arguments that we are, in fact, no matter what anyone does, headed into a Depression by 2011. This is based upon the cumulative begging, borrowing and stealing now going on by the Federal government – which uses printed money to solve an essential problem with our economic model. And, that is, there is a limit on how long you can pay your bills and the interest on your bills by borrowing yet more money. That process, created by massive leveraging, does end somewhere. And, since we are still leveraging our way out of this mess by printing more money, issuing more Treasury Bills, and bailing out more inefficient businesses, the end will not be pretty.

What is to be learned from this?
Nothing. This is our future.
Everyone needs to understand where we all going.
To know is to be forewarned.

Buying gold is a hedge but until grocery stores start accepting gold coins for bread, the only transactions that can be had are with Steve, the coin dealer. It is neither realistic nor practical to hoard gold. And, don’t forget, those who bought gold at $950 an ounce a few months ago, have lost $200 on that investment already.
Reducing expenses, downsizing your business, limiting unnecessary purchases and increasing your productivity are among the few things you can do personally. If you MUST attend a political fundraiser, be damned sure that he or she represents your needs and will give you real promises.

What may be helpful in knowing what is about to happen, assuming that GM, Ford and Chrysler do get a bailout or bridge-to-nowhere loans (since non are viable business models), is that voters need to keep a sharp eye on the politicians.
Forget Bush and forget Paulson – the Goldman Sachs CEO who bailed out his buddies on Wall Street first -- and then scrapped plans to buy the toxic debt which he used to convince Congress to give him the money. Paulson had resigned effective January even before he got the green light from Congress, so he’s already accomplished what he needed for his friends.

But, local politicians need to be watched like a hawk.

In the Hamptons, where a bankruptcy in the Town of Southampton is not unlikely, more local residents need to understand that the Republicans have been running things for decades. They are used to living off of the fat in the real estate game – by taking the property taxes and the transfer taxes intended for the Community Preservation Fund to run the government. Fred Thiele, former Town of Southampton Supervisor, buddy of Democratic County Chairman Rich Schaeffer and friend of racist County Executive Steve Levy – created the Preservation Fund to buy vacant land not to be developed. That fund has now been raided by Supervisors in East Hampton and Southampton in order to pay salaries and other expenses. In other words, instead of the painful decisions, they have dipped into that money improperly, if not illegally.

What does this tell you? It tells all of us that the source of funds to run the government – the money used to abuse New Yorkers, landlords, non-resident taxpaying property owners – has dried up. The entire local economy in the Hamptons is in deep, deep trouble. And still, like before, they exclude the ONLY source of money in their planning or government. Calls for a Hamptons Advocate fell on deaf ears in the past. That is unlikely to change with another administration of Republicans who only want power.
With wins by Obama, Pope and Schiavoni, the economy as well as the political landscape may change without their cooperation.

In Manhattan, there is more subtlety. But, change in Manhattan will come in the form of alternative political structures. The fact that Democrats control the agenda in a liberal or progressive city, may be challenged. As the economy tanks in Manhattan, politicians may find that they do not have guarantee of a sinecure in office.
Fundraising will change. The money will not be there.

As the budget decreases, as tax revenues dry up, and the City and private workforce decreases – and as deflation takes hold, politicians will have to work harder to retain the trust of voters. The Obama win will comfort many but change is the message – not status quo.

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