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.

Destruction of wealth

Recent numbers:

1) According to a report issued by the Fed: In the third quarter of 2008, U.S. households lost $647 billion in real estate; $922 billion in stocks; $523 billion in mutual funds; $653 billion in life insurance and pension fund reserves; plus $128 billion in private business interests. 

2) The Treasury reports that $330 billion of the TARP have been allocated to banks, yet by far most of this money has gone into the "re-capitalization" of these banks. That is, this lump sum of taxpayer money has not worked as planned to loosen credit markets. 

3) The amount of household wealth destroyed in the third quarter alone amounts to $2.8 trillion--apparently the worst quarterly loss in recorded history (although sources don't claim to adjust for inflation).

4) Deflation is here. U.S. consumer prices fell at an annual rate of 12%; producer prices fell at an annual rate of 26.4%; commodity prices are down as much as 70% from their peak.

All of this indicates that we are about to witness depression era levels of unemployment, business closings, bank failures and scarcity in the coming year. 

What does this all mean? Things will likely be changing on an unprecedented scale. Make it a priority to create stability in your home, your community and beyond. Think about self-sufficiency and, beyond that, what you can do to make your community better able to withstand the shock of dwindling government largess. By all means, stock up on canned- and dry-goods, learn to bake and cook from scratch, put in a garden, etc., but also take time out of your week to donate time, money, goods and good will to community projects. Instead of "battening down the hatches" or "hunkering down," we'll get through this mess far better working together.

Global Depression

It has spawned many names: financial crisis, economic meltdown, depression 2.0, depression 2009, financial armageddon, economic catastrophe, TSHTF... you get the idea. I insist on the label "global depression," because one of the distinguishing features of this financial downward spiral is that it is the first of its kind that will touch each of the 7 billion people on our planet.

Globally, markets are linked together in an intricate web of trade and transaction, so much so that an event in one sector quickly spreads throughout the system. Early on, in September and October of this year (funny how that seems so long ago...way back when I had a retirement nest egg), there were some economists speculating that China, that dynamo of economic growth, might pull markets out of their tailspin--today there are few such optimists left. China's growth has come to a screeching halt: AFP reports that China's growth has slowed to a 20-year low and millions of urban workers are returning to the countryside in one of the largest outmigrations in the nation's history. Even for countries peripheral to global high finance the impact of the economic downturn if being felt. According to IMF reports, the financial crisis is severely impacting the countries of Africa.

The global extent of the coming depression is disconcerting in that social and political instability are sure to increase as markets and prices fall (as it turns out deflation can be more destructive than inflation). Today a full 50% of the world's population lives in urban areas. City dwellers are dependent on the currency for their very survival. As unemployment rises and money becomes scarce, what will these billions of marginally employed people do to live? The future could get very bleak very quickly for many. The depression of the 1930s was bad enough, but at that time the vast majority of the world's population lived an agrarian life where sustenance was not an issue. If you grew crops for your livelihood, your harvest might have fallen in value, but at least you had something to eat. If the global financial crisis does not turn around very soon there will be first a major shift in migration patterns for the millions who still have an option to move out of the cities (as noted above we are already seeing this in China), and then an unprecedented degree of social disintegration as our swollen cities convulse with violence and unrest.

As our financial system is not localizable, the political unrest due to poverty will not be contained within national borders. It will have effects here as well. Take a walk around downtown Philadelphia, Baltimore, New York City (just beyond the gentrified sections of the city)...the millions living at the margins are in a precarious position. With no savings, no jobs and dependence on a bankrupt state, their options are few. As Bob Marley so aptly put it: "a hungry man is an angry man."

One way to avoid potential social collapse is to support poverty fighting measures in your own backyard. Speculate on worst case scenarios for the next few years. As jobs become scarce and state largess evaporates, how can your community put those most at risk in a less precarious position? I suggest developing or radically expanding community agriculture projects that would at the very least ensure a local supply of fresh food for the most at risk families. If the downturn turns around, and the darkest of outcomes is avoided, you have contributed to the development of a diversified local economy (mixing agriculture with other industries), added to your region's green cred and created jobs to boot!