Interesting economy take

[Finglefinn]

At present, the economy is at the proverbial fork in the road. There have been few other times in history where the economy has gone to the recessionary precipice and teetered on the edge. While real estate and the credit markets are attempting to tip us over, low interest rates, a weak dollar and the almighty consumer are all that stand between standing upright and going into a freefall.

The key to this balance lies now with the consumer. Household debt has risen rapidly for many years, and the savings rate is close to zero. Without home equity, credit card debt availability and a stable labor market, the fear is that households turn into a major destabilizing factor. The problem with this view is that it does not align with the facts. Up to this point, household spending has acted like a buffer to shocks such as 9/11. Over the past 2Ys, changes in spending
variability has been only 50% of that of changes in real income and only 20% of household wealth. The stabilizing tendency of consumer spending is best proven by the fact that over the last
25Ys, spending has posted no quarterly decline with the exception of the 1991 recession. This is against a backdrop of disposable income that has contracted for 14 quarters during the
same time frame. Even today, with an average of a 9% decrease in median home values across the US, record energy/commodity prices and falling confidence, spending has increased at a 2.5%
annualized pace and has just started to settle down closer to a 1% growth pace for the rest of 2008.

Like the spending downturn in 1991, energy prices were high and confidence lagged. Unlike 1991, short-term interest rates are going to be in the 2% range instead of the 8% range. Moreover, a
fiscal stimulus package that will boost household disposable income is set to take effect within a matter of months.

The best argument we can make as to why the US economy will not teeter into oblivion is that the Boomers are still sitting on a fair amount of stored wealth in the form of housing equity,
investment balances and potential inherited wealth. Boomers have become accustomed to a rising equity and real estate market and seeing few other investment opportunities will reinvest their money back into these markets over time. This will result in a slow and steady rebound starting the later half of this year. For those households that don’t have wealth, despite the
perception of severe credit market tightening, consumer installment debt and revolving home equity lines have been growing at a healthy pace. Asset sales, while a less attractive
option, are still an option for many households.

2008 will continue to be rocky for sure. While the cheap dollar will keep foreign investment flowing in to the US to help, it will be the mighty US consumer that once again stabilizes the economy and keeps us from the “doomsday scenario” that is often discussed in the marketplace.

- Steve Brown & Chris Nichols, 3/6/08

[Partha]

The best argument we can make as to why the US economy will not teeter into oblivion is that the Boomers are still sitting on a fair amount of stored wealth in the form of housing equity, investment balances and potential inherited wealth. Boomers have become accustomed to a rising equity and real estate market and seeing few other investment opportunities will reinvest their money back into these markets over time. This will result in a slow and steady rebound starting the later half of this year. For those households that don’t have wealth, despite the perception of severe credit market tightening, consumer installment debt and revolving home equity lines have been growing at a healthy pace. Asset sales, while a less attractive option, are still an option for many households.

Translation: The American consumer will put themselves into debtor's gaol and throw all their long-term investments on the fire to keep buying HDTV's.

Ooookay.

[Finglefinn]

Huh? That quote talks more about about shifting investments than pure consumer spending.

[Partha]

I repeat what the article said: People have no money. Costs are up, wages aren't, savings is down, consumer debt is at an all time high.

What money are they going to use to reeinvest in these things?

Of course, you should ask what these two do for a living, as well...

[Embar Angylwrath]

I repeat what the article said: People have no money. Costs are up, wages aren't, savings is down, consumer debt is at an all time high.

What money are they going to use to reeinvest in these things?

Of course, you should ask what these two do for a living, as well...

All are true except the part about "people have no money". Money is out there, and it's being churned through the economy, its just that the money isn't coming from HELOC atms and refi cash-outs. Boomers still sit on liquidity, just not as much liquidity. Remember, all those 401(k)s are about to start kicking in. That's a helluva lot of cash.

Although... when I first opened up a 401(k), a rep from the company came out to explain what a 401(k) was, and how it worked. They said that by investing in mutual funds, a person could amass a retirement fund. I asked.. Are these mutual funds traded on the open market? Yes, was the answer. I then asked... what happens when all these people start selling their mutual funds on the open market at the same time, as they retire? Doesn't that increase the supply of the mutual funds and therefore decrease the demand, lowering the selling price of the funds?

/deer in the headlights

Its the dirty secret of 401(k)s. In order to get cash, you have to sell the funds that populate your account. If everyone is selling at the same time, inventory goes up, and prices go down, devaluing your investment. Fund managers don't want you to know that. It all looks very rosy when everyone is buying funds, because demand is up, therefore prices are up, and it looks like you're making a shit-ton of cash. But once the tide turns, and people start to unload those funds, supply will go up, prices will drop, and that 10% return you counted on will crash.

Best bet? Emerging markets and (you won't want to hear this) real estate. The US is still the global powerhouse for driving consumer-based economies. Interests in companies that sell to the US are still in a favored position over the next 10 years or so. China, India.. etc. If China and India ceased to exist tomorrow, the US economy would fail in 90 days.

And then there's real estate. The population gets bigger, but resources either stay the same or are reduced. Land is something you can't create more of. The planet doesn't increase in proportion to the population. Sure, there's still a lot of land, but buildable land with infrastructure, or economic access to infrastructure.. that's another story.

Embar's guide to wealthy retirement for the averge Joe? Buy a home, pay it off as soon as you can, buy rental property, buy funds that invest in emerging markets.

Oh, and buy pharmaceutical-heavy funds. People want to live forever, and there's a lot of boomers that are about to start pouring billions of dollars per year on drugs that they think will make them look younger, feel younger, fuck longer, etc. Viagra should be a lesson to everyone. Any drug that makes someone feel like they can do shit they haven't done since they were 25 is a fucking gold mine. (No pun intended)

[Ddrak]

There's no "doomsday scenario". That's just a strawman. I think what you're seeing is the start of the end for the US being the centre (look, I'm practicing Aussie spelling) of the global economy and a move to the EU, China and India as a more diversified global system. Here's something I found difficult to swallow:

While the cheap dollar will keep foreign investment flowing in to the US to help...

Sorry, but that's bullshit. Foreign investment runs from a falling dollar, and runs from low interest rates. Rates over here in Oz are around 7% and investment is pouring in from pretty much everywhere as a result. What a low dollar does is promotes domestic industry and exports as you get more dollars for your product. The problem for the US with a heavily import-oriented economy is this also gives a significant kick to inflation, and the cost of maintaining the deficit also rises.

There's no question in my mind that the US economy is in for a rough decade as we see the fallouts from massive deficit spending, a stronger China and rapidly rising oil prices alongside the continued military spending in Iraq and the loss of global confidence in the US as a whole. The world can't afford the US to come anywhere close to failure so you won't see anything like *that*, just a correction as the global economy becomes more global and less US. I expect oil to be bought and sold in Euros (not exclusively, but a significant proportion) within 5 years, for example.

Embar's right about real estate is an excellent bet in the US right now. Low interest rates, falling prices and far too much supply makes it a good time to buy. Could even hold off 12-18 months (I'd guess) for the market to properly bottom out as I don't think the market's seen the end of the loan crisis yet. The dollar could well go down to 70% or even 50% of it's current value before it levels out so investing in strong overseas markets could be an excellent payoff as well.

I think Embar's wrong about mutual funds though. They are essentially just a composite of the stocks they contain, and funds that are due to be sold off are largely moving to bonds as the primary component now. Selling off a fund that contains mainly bonds isn't going to tank the fund's value any more than selling off a bunch of bonds would. Fund managers aren't stupid - they know the selloffs of certain funds are coming and have moved those funds to stable investments rather than the more volatile compositions the funds due to mature further in the future.

Dd

[Kulaf]

Huh? That quote talks more about about shifting investments than pure consumer spending.

Not really. You will see a large upswing in Reverse Mortgages and that money will reenter the economy instead of being absorbed by the government in estate taxes.

[Embar Angylwrath]

Dd... everyone seems to hold the opinion that the Iraq war is breaking the bank and straining the federal buget. It isn't. It's less than 1% of the GDP. I've heard economists speak about this (on NPR) and all of them say the expense of the Iraq war has no significant effect on the economy here.

[Ariannda Kusanagi]

What money are they going to use to reeinvest in these things?

Well the tax rebates, DUH !

and I don't quite understand reverse mortgages. How can they give you money, that you don't have to pay back. Obviously I have no need to worry about such trifles as a reverse mortgage, but I still don't understand... does the bank just get the house when you die or something ?

[Kulaf]

What money are they going to use to reeinvest in these things?

Well the tax rebates, DUH !

and I don't quite understand reverse mortgages. How can they give you money, that you don't have to pay back. Obviously I have no need to worry about such trifles as a reverse mortgage, but I still don't understand... does the bank just get the house when you die or something ?

The house is sold upon your death and the Bank gets it's money plus interest and any remaining proceeds go to the estate. There is a max amount you can withdraw however.

[Croinc]

When in doubt, use wikipedia, stupid

http://en.wikipedia.org/wiki/Reverse_mortgage

[Finglefinn]

Of course, you should ask what these two do for a living, as well...

Those two gentlemen are two of the smartest bankers and financial analysts on the West Coast. They run an elite banker's bank out of San Francisco. They are very highly regarded in their industry and consult hundreds of banks across the country on improving profitabilty, employee retainage and portfolio management.

[Ariannda Kusanagi]

When in doubt, use wikipedia, stupid

http://en.wikipedia.org/wiki/Reverse_mortgage

Wiki is teh devil... as are you sir.

[Partha]

Of course, you should ask what these two do for a living, as well...

Those two gentlemen are two of the smartest bankers and financial analysts on the West Coast. They run an elite banker's bank out of San Francisco. They are very highly regarded in their industry and consult hundreds of banks across the country on improving profitabilty, employee retainage and portfolio management.

Indeed, they make money when banks loan money, that's clear. Therefore, it's in their best interest for banks to continue loaning money. Even if it comes from them basically making shit up to advance their cause...which article, BTW, I haven't been able to Google and you haven't linked.

The best argument we can make as to why the US economy will not teeter into oblivion is that the Boomers are still sitting on a fair amount of stored wealth in the form of housing equity, investment balances and potential inherited wealth.

Today's Wall Street Journal, that bastion of liberal financial lying:

With home values declining, last year marked the first time American homeowners, in the aggregate, owned less than half the value of their houses. Their share of home equity -- the market value of a home minus the size of its mortgage -- dropped to 47.9% in the final three months of 2007, down one percentage point from the third quarter, the Fed said in a quarterly report.

Equity as a percentage of home values has been falling from a high of more than 80% since 1945, when the data started being recorded, but that decline generally has been a result of mortgage debt rising faster than home prices.

Lately, the downturn in homeowners' equity has accelerated, and it is being driven by falling home prices, which is more ominous both for consumers' net worth and for the loans collateralized by those homes. The decline could portend an increase in the delinquencies and foreclosures that have roiled global credit markets.

"There are more homeowners who are getting pushed to the limit, where they have little equity left in their homes," said J.P. Morgan Chase economist Michael Feroli. "That makes it difficult to refinance."

Yes, the Fed is lying, and these two know the truth. Either that, or these two want to continue selling the financial equivalent of soap flakes.

[Embar Angylwrath]

Partha - even though the equity level has fallen, it still is substantial. You get that, don't you?

[Ddrak]

Dd... everyone seems to hold the opinion that the Iraq war is breaking the bank and straining the federal buget. It isn't. It's less than 1% of the GDP. I've heard economists speak about this (on NPR) and all of them say the expense of the Iraq war has no significant effect on the economy here.

GDP is a bit of a silly thing to measure it against don't you think? After all, you're spending tax money, not using it as a balance of trade or something.

The Iraq war is definitely hitting the federal budget in a significant way. You can't just go and spend a few trillion dollars without raising taxes or making significant cuts to services to cover it and expect it all to hide under the covers indefinitely. If the government was managing it sensibly and not spending money on credit to cover it then it would have no effect on the economy. The fact they're not doing that is a serious problem.

The secondary issue (or maybe it's the primary issue) with the Iraq war and associated issues (ie Iran) is it's destabilizing the middle east and driving oil prices higher while increasing the global market volatility. That *is* a serious effect in the US economy.

Dd

[Partha]

Partha - even though the equity level has fallen, it still is substantial. You get that, don't you?

What part of Feroli's quote was hard for you to understand?

[Finglefinn]

Um, what do you not understand, Partha?

47.5% of the total value of all homes (the equity number Feroli is referring to) in the US is a rediculous number. That number has four commas in it. The vast majority of homeowners have very secure equity positions. If that number was more like 25%, I'd be worried. So what it has dropped from 80% in the last 60 years. I'm sure that the number of homeowners has increased exponentially since then. What do you want more? More people owning homes or less people with more equity in their homes?

Indeed, they make money when banks loan money, that's clear. Therefore, it's in their best interest for banks to continue loaning money. Even if it comes from them basically making shit up to advance their cause...which article, BTW, I haven't been able to Google and you haven't linked.

Making shit up to advance their cause? Huh? Are you that clueless?

They make money when banks they work for are profitable. Just because banks loan money doesn't mean they make money.

I did not link the article because it is not available publically, which is why I quoted it in it's entirety.

[Partha]

47.5% of the total value of all homes (the equity number Feroli is referring to) in the US is a rediculous number. That number has four commas in it. The vast majority of homeowners have very secure equity positions.

Uh-huh.

So what it has dropped from 80% in the last 60 years. I'm sure that the number of homeowners has increased exponentially since then. What do you want more? More people owning homes or less people with more equity in their homes?

So let me get this straight.

You think it's a good thing that a lot of people have a shaky hold on their equity?

You think it's a good thing that banks are loaning money to buy houses to people who are less likely to pay it back?

This is bullshit. Smokedancing masquerading as solid economics.

I did not link the article because it is not available publically, which is why I quoted it in it's entirety.

It's not publicly available because the reality on the ground makes them look like idiots and worthy of targeted laughter. They should go back to selling software.

[Embar Angylwrath]

Dd.. where are you getting that "few trillion dollars" amount? My understanding is the operating costs of the war are projected at $110 billion in 2008 as requested by Bush. The annual budget is close to three trillion dollars, which makes the Iraq war cost less than 1% of the annual budget.

The trillions of dollars figure I see is usually the result of economists projecting the TOTAL cost of the war, not the annual. And they include stuff like loss of productivity of Iraq war veterens, hypothetical losses from trade loss related to the reputation of the US, increased healthcare costs of US veterans, loss of productivity if the money had been spent in other programs, fuel price increases attributed (I use that term loosely here) to the Iraq war, etc., etc. In short, the "trillion" dollar figure is a hypothetical number, and it isn't related to the DIRECT costs of the war in Iraq.

Can you provide a non-partisan link that shows the actual annual spending for the war in Iraq?