Economic Cycle has Turned
PIM of SPAIN | October 7, 2009 at 07:27 amby
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Now, the economic cycle has turned. Businesses still have the wage cost. But instead of using the money to buy things, the employee uses it to repay loans for purchases made last year or the year before. Now the business has the cost but not the revenue.
This process of de-leveraging will be slow. Maybe five years. Maybe 15. Maybe 25. It will go up and down, with high unemployment because businesses will cut their wage costs as sales fail to recover, resulting in lower prices, at least in real terms, consequently lowering profits, and slow growth, or none at all.
Economies need to adjust to the new realities of the post-credit bubble world. It will take time. And with the world' financial authorities fighting it every step of the way, this process could take a LONG time. Governments cannot draw forth the future apart from the fact it has no idea what the future will be. Instead, all it can do is to try to recover the past. That's the idea of the 'recovery', trying to coddle, protect and pay-off yesterday's success stories. From Wall Street to welfare, governments attempt to prevent correction.
Moreover Government's only real function is providing protection and order. And what can it protect? Only that what exist not what is to be.
And so the feds try to forestall and prevent the future from ever happening. The future will happen anyhow whether they like it or not. They can't stop it. The future will come. But they still can make a mess of it.
Unemployment is rising; activity at factories is falling; and consumers aren’t doing much of anything. All of this adds up to a sluggish economy, much more sluggish than the bulls on Wall Street expect.
Wall Street are too optimistic, it would not be the first time. Investors are prone to excess, both on the upside and on the downside. Without any fundamental underpinnings as profit, investment for productivity improvement, innovations, increasing sales, all this is just hype and will come down. Stocks are trading at 19 times FALLING earnings, and there’s very little indication that earnings will improve, much less that it’s going to improve any time soon.
To the contrary: “The backlog of [mortgage] foreclosures is building like water behind a dam. - Once the dam gives way, the market may be shocked at how quickly the headline foreclosure numbers accelerate.”
”The Sept. 23 issue of Amherst Mortgage Insight is the best attempt so far published to quantify the ‘shadow inventory’ of houses.” - “It leads with a sober estimate of the residential housing supply situation:
The single largest impediment to a recovery in the housing market is the large number of loans that are either in delinquent status or in foreclosure that are destined to liquidate. This creates a huge shadow inventory. We estimate this housing overhang at 7 million units, 135% of a full year of existing home sales.”
“Amherst Securities has been ahead of the curve, - in warning about the deterioration in mortgage securities and this market’s impact on the health of the banking system.”
“Billions of dollars of future write-downs and losses are still buried inside Wall Street's balance sheets. Lehman Brothers appears to be among the most vulnerable of all the investment banks.”
"Many lost jobs in US will never come back..." says The Wall Street Journal.
People building houses aren’t needed anymore and the car industry has a 30 – 40% overcapacity that has got to be reduced too. Staffs in the big financial industry aren’t needed either. People want to get rid of credit, not getting more. All those jobs are gone forever.
There have been 7.2 million jobs lost since this recession began. Many of these jobs were Bubble Age jobs. Millions of people, for example, earned their money in 'housing.' They were putting up houses in everywhere, installing luxury kitchens and bathrooms, or selling, flipping, financing the houses. Those jobs are gone forever. Never again in our lifetimes we are likely to see such an explosion in the housing industry again. Sure, people will still build houses, and do all the other work involved in the traditional housing industry. But it will be only a tiny fraction of the industry it was in the 2002-2007 period.
Also all the jobs involved in selling things to people who didn't need them and couldn't afford them. Labor was needed at every step of the way, manufacturing, shipping, stocking, retailing, fixing, and financing the stuff, and all the other things that supported the over-consumption of the Bubble Age.
And now the Bubble Age is over. It will not come back, no matter how much cash and credit the feds pump into the system.
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PIM of SPAIN
San Pedro de A, Malaga, Spain
San Pedro de A, Malaga, Spain
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