Futures: Charles Schwab, Barak Obama and me

I understand completely the importance of optimism about the future when it comes to social, political or economic change. One has to believe in positive future outcomes if one is to invest time, money, effort and hope in projects that will not come to fruition for months or years. I get it and, more importantly, I buy into the proposition that tomorrow grants us an opportunity to better ourselves and the world. So why do I find it irksome when companies hype the future, or when commentators pounce on some obscure economic indicator and turn it into the harbinger of prosperity? The new Charles Schwab ad says "Dwelling on the past won't help my future. Do something about it." Very paternal, Chuck. 

I think most people's problems from the economic downturn are not grounded in the past; rather, it's the present and very immanent future that most of us are contending with: drained retirement accounts, loss of jobs, cut hours, lack of available credit... While there is no doubting that years from now we'll look back at the 2008-2??? depression and laugh or grimace, but now is the time to think clearly about what we should be doing with dwindling, threatened or otherwise reduced resources. Pretending, as suggested by the Charles Schwab ad, that we're out of the woods and that our reluctance to go whole hog back into the stock market, or supermarket for that matter, is based on an irrational reaction to past events is foolish to say the least. 

Prudence is called for. While it might be tempting to bet on the stock market or take out more credit to get out of our current financial doldrums, we should be looking instead for sustainable solutions. Americans should not re-adopt their role as the world's economic engine. As we are finding out, the growth in the world's economy from 1995-2007 was largely based on consumers and companies overextending themselves on credit, on insane financial commodities and an irrational belief that real estate can leap in value year after year...forever. What a difference a year makes, no? How about more sustainable investments: a car that uses less fuel, appliances that use less energy, solar tiles for your home, community investments that bring quality of life returns, or an investment in education? These things won't make you rich, but some will allow you to save money and others will contribute to a genuine sense of well-being, which is what all the over-leveraging lo these many years was supposed to do, right? Here's to hope!   

An interesting take on first quarter numbers

This is an excerpt from Warren Brussee's blog. He's a smart guy, one of the few who saw that the world's financial system was in hot water long before other economists and bloggers like me, but he does have a book to sell, so take his prognostications with that in mind.

THE MASSES ARE MOBILIZING

 

In my book, I predicted that by 2012 people would begin to actively and sometimes violently protest against what they perceived as inequalities.  We are already seeing inklings of these protest movements.

 

In 1933, in “The Nation,” James Steele wrote about how 10,000 people protested against the eviction of Cleveland resident John Sparanga.  Once again, groups in Cleveland have rallied outside the Cuyahoga County courthouse, calling for a foreclosure freeze.  In Boston, the Neighborhood Assistance Corporation of America protested in front of Countrywide Financial offices.  The Mabuhay Alliance, joined by the Mexican-American Political Alliance, staged a protest in front of Countrywide’s San Diego office.  In Los Angeles and Oakland, groups like ACORN have organized low-income homeowners.  Contra Costa Interfaith Supporting Community Organization (CCISCO) protested in front of several Antioch bank branches, forcing the banks to renegotiate their members’ loans.

 

Such protests have not just been limited to foreclosures.  Groups have marched on the homes of those receiving the bonuses from AIG.  In typical mass protest confusion, the protests centered on homes where the AIG employees had already agreed to give up their bonuses!

 

And that is the problem!  Mass protests include many people who will not be rational.  It is only a matter of time until someone in these protest groups steps over the line, or they are confronted by a police team that loses their cool and becomes physical in their response.  A Vietnam-era Kent State confrontation scenario seems inevitable.  Once that happens, we could see total chaos as police and communities refuse to take on protest groups and pressure builds to stop foreclosing on people. Our financial institutions will not know what to do with such a situation.  And corporate leaders who are receiving huge bonuses or salaries will find themselves under ever-increasing pressures from stock holders and others who feel that these corporate leaders are prospering while others are hurting.

 

The Obama team will really start earning their incomes if such protests become commonplace and violent.

 

HOUSING   The January 2009 Standard & Poor’s/Case-Shiller 20-city housing index dropped a record 19% versus a year ago.  This index has dropped 29% from its peak in 2006; but housing prices must drop another 15% to 20% to get down to their historical inflation-adjusted level.

 

The New York Times and others have reported that banks are sometimes going through the foreclosure process but stopping at the last minute, insisting that the property owners still own the homes and must pay taxes and do required repairs. Banks are doing this on homes that have been vandalized and are largely not saleable.  Although the exact number of homes involved are not known, they are included in the 700,000 estimate I included in my mid-March update.

 

THE ECONOMIC NUMBERS   Recently, some economic numbers have given substance to those who believe that the downturn has bottomed out and “happy days” will be starting soon.  But it behooves an investor to do some examination of these numbers.

 

For example, in February, new home sales rose 4.7% versus January sales.  However, putting this in historical context, February’s new home sales were the second-worst on record and well below last year’s numbers.  It’s just that January numbers were so bad that February numbers look better in comparison.

 

Consumer spending in February was up for the second month in a row.  However, looking at the numbers for the past year, for the first six months of that year, the monthly change in consumer spending averaged +0.42% per month.  For the most recent six months the average change was -0.35%.

 

Perhaps a better view of the whole economy is reflected in the job benefits numbers. The Labor Department reported that initial jobless benefit claims rose last week, and those continuing to receive benefits set a record for the ninth straight week.  This means that laid off workers are having a harder time finding jobs.  The proportion of the workforce that is unemployed is the highest since 1983 and almost double what it was a year ago.  And these data do not include the almost 1.5 million receiving extended unemployment compensation.. 

 

THE STOCKMARKET   With the recent jump in the market, the S&P 500 price/dividend ratio is now at 37.  This is well above its historical median of 26 and my entry price goal of 17.2.  However, even with the recent rise in the markets, the S&P 500 is down 11% for the year.

Return of the artisan

Considering the dismal unemployment data out today, and the even more dismal predictions, we find ourselves at a juncture where there will be a nearly unprecedented number of people out of work. Depending the unemployment figure you are looking at, we are approaching the same number of people that were out of work at the height of the depression in the 1930s (12.5 million today vs. 14 million in 1933--the worst year for unemployment during the depression). 

With so many people out of work, and so few available jobs, we may see the rise of a kind of neo-artisan. During the months that it can take to find work, there are many of us relying on our secondary skills (gardening, cooking, music, art, writing, foreign language ability, etc.) to get by. I would predict that many of the closet artists, writers and musicians would tap into the skill set that was deemed "unprofitable" during the go-go economy of recent years and find ways to make it work for them. In developing these skills, making contacts, gaining confidence and buyers along the way, bankers may find value in throwing pots, insurance adjusters might instead make their dough by baking and former Wall Street Execs could make a respectable living playing the blues. 

Who knows? But I would bet that we will see a flourishing of artisanal entrepreneurs and a proliferation of talent in the months and years to come. So, if you are looking for work, or fulfillment, begin nurturing that hidden talent, and, when you have something that someone else might buy, hang a real and/or virtual sign out and see what happens--you might surprise yourself. 

The photo is of "Joe the potter" at Horseshoe Mountain Pottery ; see also John Sanchez at Sanchez Art Werk and guitarist Brendan Burns for examples of folks who have been putting their talents to work for them for a number of years now and using the internet to their advantage.

Drought in the golden state

Here is another argument for establishing community gardens. 

"The almond orchards are beginning to bloom in California’s Central Valley, the vast swath of fertile, flat land that runs up and down the middle of the state. Bees are pollinating the rows of flowering trees, and the harvest will shape up over the coming months. But for many farmers, one crucial thing is missing from this picture – water.

The US Bureau of Reclamation, which manages water allocation in arid regions, announced last week it will not provide vital irrigation to Central Valley farmers this year because of drought, and the California State Water Project expects to meet only 15 percent of water requests.

“That’s unheard-of,” says Jim Jasper, an almond farmer in Newman, Calif. “We’ve never seen a zero allocation for water.” Many growers here are destroying older and less productive trees to conserve water for other crops.

The University of California estimates that the drought may cause 847,000 acres to go unplanted this year, with income reductions of more than $2 billion and the loss of 70,000 jobs" (Christian Science Monitor 2/26/09).

With climate change, the precipitous fall in all commodity prices, the flight of cheap immigrant labor and the difficulty in securing credit, relying on the agricultural pipeline to continue supplying our supermarket shelves with fresh produce, dairy and grain may be a mistake. It makes sense to begin appropriating community plots now and planning for spring planting. This can do three things immediately: 1) provide local food security, 2) improve local nutrition, and 3) provided your locality successfully bids for federal relief funds, community gardens can create paying jobs. For more information on community gardens see http://www.mrsc.org/Subjects/Parks/comgarden.asp

The end is near...er

The economic crisis ranges in titles from the hilarious "economic shitstorm" to the more somber "global economic readjustment." I like the former because it is descriptive of the havoc the crisis wrecks in individual lives. It captures the anxiety, worry and, ultimately, the sense that what we're experiencing is so profound, nothing will ever be the same again. The latter sounds like an economist's euphemism that obscures more than it describes. And it undoubtedly does just that. "Readjustment" is similar to the more familiar and hated "restructuring." When the unemployed are feeling glib they say "I was restructured" to that they were laid off. That said, I like "readjustment" because, while it is not as colorful, it gets to something deeper: something went wrong with the fundamentals of our (really, the world's) market economy.

Whether you are talking about the stocks that make up you 401k, the value of your home or the grievous errors in judgment that your banker made in the past several years, the issue at stake is the fact that, at some point, the wheels left the pavement. That is, the value of the stock, home or bundled securities simply did not reflect its real market value. Profitless companies were able to sell shares of stock for more value than they really held.  Houses were sold at inflated prices to customers who could not afford them; this was based on the crazy logic that they would forever increase in value. And the bundled securities, or derivative, market was a ponzi scheme based on misinformation (perhaps willful ignorance) and speculation. 

In fact, that is what the "readjustment" is all about: it is a period where values finally begin to reflect reality. Until we can eliminate the very human tendency to speculate and act according to expectations (which can be based on everything from very solid information to wishful thinking to calculated lies), markets will never be just markets. They, like the commodities they trade, will always hold a fetishistic attraction for us: "it's more than just a home/stock/derivative, it's an investment."   

As things get worse (a mantra we've heard a million times now, followed by "before they get better"), they are also getting more real: things are readjusting. Your home is finding a market value for which a loan can be had--the same goes for the stocks in your retirement fund and the bundled securities held by your bank. Of course, this is little consolation if you've lost your job/home/savings. And it is high price to pay for the trillions of little lies and bubble-headed fantasies that have landed us in this mess. Unfortunately, most of us are complicit to some degree in the collective delusion that washed over the industrialized world for the last decade and a half. 

Just as speculation and loose financial practices can inflate value, it goes the other way as well. Expectation of future losses can drive values below the point at which they would normally reside. Time is the only remedy...we've got to wait it out. The best we can hope for is an economic system that, post-readjustment, is characterized by more honesty, transparency and rationality. So, as we press on through this shitstorm together, just remember that, without a doubt, the end is nearer.   

The end of the world as we know it, or cultural renaissance? You decide.

The paradox between the economic disaster of the 1930s-40s and the flowering of cultural achievement in that era has been often commented upon. We get writers like Henry Miller, Ernest Hemingway, Zora Neale Hurston, TS Elliot, ee cummings, Langston Hughes, etc... And artistic movements from documentary realism to expressionism and surrealism. Not to mention the music, this was the golden age of Jazz/swing and the first time marginal genres like folk and country received much wider appreciation. And the same goes for Hollywood and theater in general. How did so much artistic creation rise out of the wide-spread poverty and despair of the first great depression?

There are many answers to that question. For example, there were WPA programs like the Federal Theater Project that funded local theater groups. There was no TV, so people were more likely to get out of their houses in search for entertainment. And 1933 saw the end of prohibition, making night clubs and dance halls possible.  

Beyond the misery produced by such economic downturns, there are other less negative effects as well. When business is slow, or non-existent, people may have more time on their hands. More time to think and create and/or more time to appreciate music, art, theater and writing--the former may also be encouraged by economic imperative, the latter motivated by a desire to escape the confines of their situation. 

Today, our cable TV and the internet are a mixed blessing. These are relatively inexpensive sources of endless entertainment, which can be a good thing when you are too broke to go out. But they are also easy, habit-forming options for unimaginative, and this could wind up being a detriment to the growth of our cultural resources, and a drag on the recovery of the economy as a whole.  But, who knows, perhaps folks will take their economic stimulus (in the form of paycheck tax reductions) and go buy a book, see a theater production or a band--supporting the artistic rebirth of the early millennium, an historical event that our great grandchildren will point to as evidence of our collective cultural sophistication and elan.  

Economic terrorism?

I was half-listening to the news the other day when a concerned security analyst mentioned that not only has the economic crisis risen higher on the priority list of security-minded government agencies and think tanks, it has surpassed terrorism as a threat to our nation. This made sense to me. Poor countries tend to be more unstable and the ensuing social unrest due to the inability of governments to promote prosperity has toppled many a regime in the past. But then the analyst began talking about economic terrorism in relation to countries like China. The idea is that China could do sneaky things like stop buying our government bonds or, worse, start cashing them in. This would in turn destabilize our already stressed economic system and lead to some unspoken cataclysm. 

There are several obfuscations going on in this line of discussion. First, through a kind of willful ignorance that borders on the criminal,  regulatory agencies in the United States government let the dogs run wild on Wall Street and in the banks for years. If there is a culprit in the current crisis, an underwriter of the current global social and economic chaos, if you will, it is the US. It seems kind of, well, predictable, that in the middle of a mess of our own creation, government officials would start fishing for a new, immediate, less tired, distraction for people to get worked up over. Second, the exact definition of economic terrorism is left open. Some say that an economic terrorist must be a non-state actor bent on wrecking havoc on our economy. Others use the term to indicate states that might use economic means to weaken our position in the world. In using the first definition, I give you Lehman, Abermoff, Stanford. In using the second, may I present the Clinton and Bush administrations. Finally, as this meltdown is really a problem with an economic philosophy that has prevailed in many countries, especially over the last twenty years, it would be more than a little ironic to begin fingering so-called communist nations like China. If there is such an animal as economic terrorism, the US would do well to adopt a more humble posture.