Thursday, January 10, 2008

Hard rain gonna fall...

NEW YORK (CNNMoney.com) -- The question for many economists is not if the U.S. economy will fall into a recession. It's whether it already has.

The formal recognition of a start of a recession probably wouldn't come for at least six months if not more than a year, as official judges from the National Bureau of Economic Research (NBER) pour[sic] through various economic readings.

Usually I'm an optimist. By the mid-Eighties, I was no longer scared of the Russian Bear. In the early Nineties I won money from pessimistic baby boomer friends by covering bets on the Gulf War (although I'd guessed two weeks to Baghdad; the Army beat the point spread.) I'm generally not a doom 'n' gloom kinda person, but I have to disagree with pdb's sanguine take on the economy. I think our only hope in the near future is that things will just be Carter-in-the-70s bad instead of Roosevelt-in-the-30s worse.

My reasoning is based on a confluence of several different factors: First, the foreclosure pig hasn't passed through the mortgage python yet; we won't know how bad things will really get until the bulk of the loans reset to their shiny, higher rates early this year. Second, more and more baby boomers are due to start cashing in on their retirement funds here in the near future, because they won't take fifty shares of IBM at the Piggly-Wiggly. Thirdly, energy and metals prices are high and climbing higher due to increased worldwide demand and a sagging dollar. Fourthly (and hopefully lastly) is that the minimum wage is due to climb this year because a bunch of cretins in congress think you can just wave a legislative wand and magic everyone rich, not stopping to think that the money to pay the burger flippers has to come from some place (HINT: Laid-off burger flippers and more expensive Big Macs and we're all right back where we started, except less of us are working.)

Now, provided that nothing else happens, we should just see a nice 70s-style recession. Unfortunately, there are plenty of things that could happen. China could mess with our money by selling off dollars or floating the Yuan. A liberal Democrat or big-government Republican could get in the White House and, with the active help of a Democrat Congress, start pulling levers left and right trying to play FDR. A destabilized Pakistan or an especially cranky Iran could cause a more general war in the Place That the Oil Comes From. Any one of these things (or more than one) could really tip things off the rails.

So, this is uncharted territory for me, this 'not being optimistic' thing. I think I'll take up vegetable gardening.

20 comments:

BryanP said...

A liberal Democrat or another big-government Republican could get in the White House

You forgot a word. ;)

Who is..... Carteach0? said...

Tamara...
I am by nature....ah..... not optimistic.

If you like, I would be happy to share ideas and methods on storing hard core reserves.

I may not be good with money, but those I am responsable for will eat well, and be as safe as I make them.

I agree with your assessment, but it doesn't change much we might do.

Oh... Part of my back yard is a built up 'soil bank' and I have good quality hybrid and heirloom seeds in cool dry storage :)
There WILL be food on our table.

Helps to live in Amish farm country.

Anonymous said...

There is never just one cockroach. Write this down. Counterparty risk in the credit default swap market will be a huge story in 2008. Losses are going to mount far higher than estimates from just a few months ago. I believe that many financial institutions will be taking large losses every quarter for the next few quarters. At the end of each quarter, investors will hope that this is finally the end. "Surely this time they have gotten it all out in the open." It won't be, because banks can't write down loans until the counterparty risk problem is solved.Forget residential....watch the commercial paper.... Who's got your back?

B&N said...

"A liberal Democrat or big-government Republican could get in the White House and, with the active help of a Democrat Congress, start pulling levers left and right trying to play FDR..."

cue up Bring On The Clowns and watch 'em yank on those levers, just 'cuz they can.

Jeff the Baptist said...

Anonymous is right. The sub-prime realty crisis is largely overblown. Or so say the realty types who's job it is to study these things. Outside of certain localities (like California) their market share is very small.

The real issue is corporate credit. This is also in a meltdown and it is going to have severe repercussions throughout most of the economy.

Anonymous said...

No one has mentionned the Federal debt which is increasing by leaps and bounds. Left uncontrolled, the temptation to just print more money will be strong with more inflation the inevitable result.

rickn8or said...

Nonnymous--

Not to mention private credit-card debt.

"Mebbe the gummint will step in and bail out those people who've maxed out their plastic and can't pay it back."

Yeah, that'll help.

OA said...

And you didn't even cover the weather.

If the real scientists ("truthful scientists" might be more accurate) are right when it comes to the sun and our weather, the soloar cycle that just started should make things less than enjoyable 8 minutes and 20 seconds away from ol' Sol.

Jenny said...

wish I could disagree, but can't really.. mostly on the "IBM at the Piggly Wiggly" point. That it and the related social security mess have been a known issue since before you and I were born, well... wotcha gonna do?

I don't see that there's much TO do to stop it..for that very reason. Too many folk with power in a position to win either ignoring the problem and continuing business as usual, or waiting to play Santa Claus when it finally hit.

Only thing I can think to add is making community connections. So that when things get sour, they'll be lots of folk you know that can all hang together.... which means you're in a good little community right there on the porch. :)

Kevin said...

So! I guess that means I need to move my 401(k) funds into bonds yielding 1.3%?

Matt G said...

That's just it, Kevin! Long bonds suck. Short bonds suck worse. Our dollar is shrinking.

And China hasn't even cashed in her chips on US dollars, yet.

I feel like a guy watching a tidal wave coming at him, without a boat or a pair of water wings to hop into.

BryanP said...


"Mebbe the gummint will step in and bail out those people who've maxed out their plastic and can't pay it back."


Oh yeah. So those of us who have zero credit card debt, in fact zero debt period other than my mortgage, and make a point of living within our means should bail out these irresponsible schmucks.

Anonymous said...

Logan's Run is my modest proposal.

Word Verification: yjbdusi

rickn8or said...

bryanp--

"Oh yeah. So those of us who have zero credit card debt, in fact zero debt period other than my mortgage, and make a point of living within our means should bail out these irresponsible schmucks."

Oh, eg-zackly! Because we're the ee-vil ones with all the money. And we've got the money exactly because we did live within our means.

staghounds said...

Why is ANYONE surprised that the ant and the grasshopper is coming true AGAIN.

The evils of free money will be solved by more free money.

And remember the old investor's advice- buy on the rumor, sell on the news.

Word verification, no kidding- YAKLIE

Les Jones said...

Jeff, the problem isn't subprime. The problem is that the bubble has burst.

One in five mortgage holders is underwater. Some of them have lost their jobs. Some of them are facing or will soon face resets on option ARMs that will double their mortgage payments. Those resets are going to hit their stride in 2009 and 2010. People are going to start walking away from mortgages in droves.

Once the banks foreclose they'll have to sell the overpriced real estate into the worst recessionary economy since World War II. The $800,000 Manhattan Beach house will be lucky to sell for $400,000. Once it sells the bank will have to mark down the value of that $800,000 asset to the $400,000 they actually got for it. That kind of loss and that kind of realistic check on the bank's assets will wipe out overleveraged banks.

Here's the latest: FICO CEO says "worst is yet to come" for mortgage problems.

Tam said...

Kevin,

"So! I guess that means I need to move my 401(k) funds into bonds yielding 1.3%?"

...and wouldn't you have felt like a genius? ;)

Les Jones said...

I just realized I responded to a year old post. D'oh!

Tam said...

Yes, but except for the sunny optimism, doesn't it feel all current and up-to-date? :D

Matt G said...

Yeah, and it would appear that the wave is just now cresting over our heads.