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Economic Cycle has Turned
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by PIM of SPAIN | October 7, 2009 at 07:27 am
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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
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bpulhem
New York, New York, United Statesnanute
New York, United States
Hugh Askew
Omaha, Nebraska, United States
cassy82
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Most RecentMost Recommended Comments (10)
at 08:39 on October 7th, 2009
Likely not scary enough.
It is anyone's guess as to what happens when the inflation fallout lands on us. Anybody care to forecast the results of putting a couple of trillion dollars worth of funny munny into this economy?
at 08:45 on October 7th, 2009
Good piece, except it ignores the UK where none of this is happening. The UK has rising house prices, booming housing market, rising credit expansion, full restaurants and shops. In short, it is like the US in 2006. The UK has found the cure...
at 09:05 on October 7th, 2009
http://www.nakedcapitalism.com/2009/09/guest-post-deflation.html If you think inflation is a given as a result of the recent injection of "funny money" into the system, check out this link for a more nuanced discussion on inflation vs. deflation.
at 09:29 on October 7th, 2009
nanute thanks for the link, which I've activated.
I personally do agree with three biggest deflation bears mentioned. It is the unemployment factor, which counts most. And in the foreseeable future there is no improvement to expect any improvement. It is getting worse in the coming years. 1,5 million jobs have to be created every year, after the lost 7,5 million -as mentioned- are compensated with a decent job! Creative Destruction will take quite a long time before the new normal is settled in the economy.
Indeed the global pension scheme is little discussed, another deflationary time bomb waiting. I'm fully in agreement with the statement below, as many readers of my essays may know.
"Bernanke and the Fed do not understand these concepts, nor does anyone else chanting that pending hyperinflation or massive inflation is coming right around the corner, nor do those who think new stock market is off to new highs. In other words, almost everyone is oblivious to the true state of affairs."
The Great Depression 2.0 is becoming more obvious by the day despite Ben Bernanke's statement earlier this year that he has avoided it!
at 13:18 on October 7th, 2009
Pim
You are most welcome.(Thanks for activating the link.)
You are not advocating an approach that lets the market dictate the outcome of the current economic instability, are you?
While this current crisis is global in nature, and different than the Great Depression, there is still a functional role to be played by government.(s)
My biggest complaint with the current approach by the US Fed, and by extension, the Obama Administration is that there is not enough of a regulatory component to the "bail out." Furthermore, propping up institutions that are too big to fail, only perpetuates the too big to fail entities. As part of the "lending" of taxpayer dollars to the likes of BOA, Citi and others, these entities should have been required to separate the various subsidiaries that are not traditional banking institutions. Compounding this problem was, in my opinion, the suspension of the rules of mark to market. It astounds me that financial institutions are recording profits, while at the same time booking risky assets at cost. Wishing that at some point in the future something will be worth what you paid for it, is not consistent with GAAP, and flies in the face transparency. The current "profits" being reported are illusory and any investor that continues to put his or her money in these stocks needs to have their head examined.
The public is in no mood to see a continuation of subsidizing people that pretend to believe in the principles of risk and investing without extracting a pound of flesh. No one is being held accountable and if the Fed , the administration and congress doesn't take some serious action soon, the risk of total economic/market collapse is not far off.
at 23:17 on October 7th, 2009
Nanute yr above comment shows that you have a very good understanding and insight by putting the logics together. Apparently Governments fail such people as you. Its in the first place an old boys network in the financial industry Geithner, Paulson and more. I wrote an article recently about that aspect. They cover up the system and its clowns. Obama doesn't master economic knowledge and swept Paul Volcker out, the only one who could have given him the right advice. Of course when providing the banks with taxpayers' money they should have required stricter new regulations applied as you suggest and indeed splitting up the bank entities that were the cause of the financial crisis.
Banks should value their assets in accordance to market price, and that is not happening. I wrote an essay about the spanish banks that carry their mortgages and real estate participations to 2007 values. If they should value to today's prices they are broke! The bonuses is another hot issue. It is unbelievable that as such can happen and is tolerated by the authorities. Proving my conclusion that it is an old boy network. People that caused the financial crisis should have been sacked. No this government let them continue and keep pouring taxpayers' money. Irresponsible, in business you wouldn't get away with such.
Contrary to what you supposed I'm in favor letting the market work and don't intervene as is happening nowadays.
at 09:25 on October 8th, 2009
Very accurately written. This is a boondoggle that no living creature can excavate without first destroying all the excess that created it.
at 10:32 on October 8th, 2009
Thanks bpulhem, since I know yr interest I may recommend you to read my follow-up story Government is lying to you. Its regrettable that things are as you described.
at 15:12 on October 9th, 2009
as usual stimulus would be the solution until overspending collapse our economy.
http://www.tradeviewforex.com/blog/post/2009/10/06/g7-finance-ministers-announced-a-us-dollar-weakening.aspx/
at 03:12 on October 10th, 2009
Probably you want to refer to this text jnkns? Because the original link didn't work.
"The U.S. dollar fell in Forex Trading Platforms on Monday after the meeting of finance chiefs from the Group of “Seven wealthy” nations, in which they announced that policy-makers are resigned to a gradually weakening of U.S. dollar. The G7 finance ministers and central bankers, who met in Istanbul, also said that too much foreign exchange volatility tends to threaten economic stability; it is not a wonderful revelation.
Another reason the U.S. dollar decline was the gain in global stock markets and the expansion in the U.S. service sector in September, as economic data showed. It improved risk appetite and decreased safe demand for the US dollar in Forex traders."
Read my upcoming today's posting about the killing of the US Dollar