The Adventures of Charlie Champion

World wide production is expected to shrink by almost 3% in 2009.

While house prices are falling, the houses themselves are no more affordable than last year.

Income and employment are also falling, and mortgage rates are inching up.

The institutions with mortgage money to lend, have increased the level of scrutiny and the criteria necessary to grant loans. 

They have learned to be much more careful to whom they lend money, thus trapping potential buyers between  falling incomes and a more stringent lending policy.

Consumers are cutting back. They are no longer exhibiting the  ” keep up with the Joanes’ ” mentality, which has ruled our society for the better part of 40 years.

Smaller houses are in : more affordable, easier to maintain.

Less utility and energy consumption is in.

Smaller more energy efficient automobiles are in.

More modest vacations, including stay at home planning is in.

More modest retirement plans are in.

Public colleges are in.

Two year community colleges are in.

Moving back home by children and grandparents is in.

Saving is up from 0% to almost 7%, while spending has steadily declined.

The vast amounts of liquidity being pumped into the system by the government has created an illusion of new economic growth, but without a return to consumer consumption, there can be no lasting recovery .

Anything else is just that, an illusion and false reflection engendered by government printing presses and the shuffling of funds between the Feds and  the States.

The “green shoots” they talk about implying the beginning of a recovery, is a marketing gimmick. A way to create a false sense of economic recovery, to encourage consumer spending.True growth can only begin to germinate when that which we have broken gets repaired and renewed. A long and painful process, destined to drag on for many years.

THE DANGER IN OUR FUTURE

More Later

My puppy needs dinner and a walk

The American household, and the reconstruction of the family living unit is a phenomenon directly attributed to the worsening recession.

Beginning in the mid 1980’s easy credit, a booming real estate market, and a highly resilient stock market, had the effect of creating separation among families.

It became economically affordable for families to split. Walking rather than talking created a psychology conducive to going on their own.

Money and easy credit  encouraged a rift to become a canyon of misunderstanding, and generated a quest for independence.

Adult children could afford their own places, and grandparents could afford to live in senior communities to be with their own age group.

Divorce was easy and affordable, and single parents became a common option when husbands and wives had  a dispute.

The houses were getting bigger while the number of residents shrank.

The bad economy has changed all of that.

Many children are moving back home to save money while they look for jobs.

Grandparents, having lost much of their retirement nest egg are moving back to live with their adult children.

Spouses are attempting to work out differences and to remain together . Separation and divorce are expensive, and must be a last resort rather than a quick fix.

Multi generational households are becoming a common and indeed desirable , as each generation supplies help ,advice, and security to the family unit.

American society is undergoing a fundamental change in action and perception.

Less bad is the new good!

Smaller  is now  becoming fashionable!

Less is more!

Luxury is out!

Practicality is in!

Buy what you need, not what you want!

Make do with what you have!

Charm counts more than splash!

What is out.

Big houses

Fancy vacations

Expensive restaurants.

Big tips.

Putting on a big front.

Frills are out, practicality is in.

The credit card mentality is out, downsizing is in.

Canning, gardens, wood burning stoves ,bicycles, and walking for exercise are all in.

Downsizing is in.

The landscape of America is beginning to resemble the 1950’s rather than the 21st century go go world of just 2 short years ago.

This is not a regular run of the mill recession.

We can not ride this out like the dot com bubble, or the S & L scandal, or the various  “boom bust” cycles of the past 30+ years. 

In fact, our economic “ship of state” is sailing in uncharted waters, and it feels like the boat is taking on water and listing to the left.

Recent popped bubbles, and their resultant recessions, have been  rescued by lowered interest , easy money, and a consumer shopping  frenzy fueled by credit cards and home equity loans.

This rescue spending , which translates into 70% of our economy, is gone. It has disappeared, along with 50% + value in our 401K’s, and the precipitous fall in the equity of our homes.

The American public has been frightened into  sobriety.

The ongoing loss of jobs( real unemployment approaching 14%)  and the  near collapse of our banking system has changed our spending and saving habits.

The staggering liberal economic spending agenda aimed at an attempted fix, has left most sober minded Americans, unnerved by the $ trillions being spent as a cure.

Our leaders have reportedly told us that this is the worst economic downturn  since the Great Depression.

As I explained to you several times in the past, the  Depression did not begin with the stock market crash in October 1929.

In November of 1929, unemployment was approximately 7 1/2 %, extended to 8 1/2 - 9% by  January 1930. but was settled back to 6 % by June 1930.

The attempt at stimulating the economy in the Summer of 1930. followed by passage of the Smoot Hawley Act and the resultant protectionism, resulted in increased unemployment, ultimately settling above 20% for much of the next 3-4 years.

Some comparative numbers parallelling  1930 and today.

In 1930                                                         Today

World output  - 15%                             World output  -15%

Stocks                - 15 %                               Stocks             -30%

 World Trade     - 14%                             World Trade   -22%

The protectionism of the 1930’s set off a world wide ripple of protectionist laws, intended to protect local populations. The resulting shrinkage of trade fueled the Depression.

Today, protectionism is being fueled by consumer choices, and international trade is one again shrinking . Third world manufacturere are being forced to adjust to new spending patterns by Western consumers.

The operative word is “purchase by need not by greed”.

The Next Problem, Later

This recession/ Depression has caused major disruptions and disasters for the banks, the automobile manufacturers, the insurance industry, as well as energy producers, but very little attention has been paid to arguably the largest industry in the United States.

I am talking about construction.

Every business begins with some attention to real estate, location and construction either past, current or future.

Commercial real estate including industrial, office, hotels, restaurants, and even parking facilities,  are necessary considerations involving economic expansion.

When the economy is healthy, construction is expanding, and hundreds of thousands of new  jobs  are created.

When the economy is stagnant or falling, construction becomes stagnant. The depth of the recession helps to define the degree of stagnation.

Despite the optimistic mutterings of the ” experts and pundits” this is a deepening neo- depression.

Besides commercial construction, there is also infrastructure and residential .

Much of the funding for roads and bridges was supposed to come from the “stimulus” package, but the pragmatic observations are much of the money is being diverted to other applications by desperately insolvent governments, with many projects being delayed by governmental red tape, and laborious allocation bottlenecks.

The sub prime fiasco has resulted in the cessation of much new residential construction.

Defaults and foreclosures are far more prevalent than renovations or new construction in the residential market.

There is a national network of independent businesses, ranging from a Home Depot, to the small local tile installer, who account for millions of jobs.They supply, install, build and maintain the flow of residential and commercial constrction.

The sad reality is that most of these businesses are in dire financial peril as a result of this widening depression. Many of them are in real danger of going out of business, with a resulting tidal wave of new job losses.

Most being independent entrepreneurial business people , their cry of impending disaster is barely heard by the national scene, but these people are the backbone of our economy and provide the true  job creations in good times and job loss in bad.

Now is bad, Very bad, and the impending crash is totally unanticipated by the National pundits.

As they are forced to close in ever increasing numbers, the unemployment figures will expand exponentially.

Look out below!!!

My dear friends,

You interest in my writings, and your responses give me a great deal of satisfaction.

Thank you for trusting my observations.

I wish I was wrong.

I had to laugh.

Yesterday, the stock market was up 200 + points.

The spark for this rally was supplied by a surprise jump in consumer confidence. “The biggest increase in almost a year” they trumpeted . And then of course they add the idiotic addendum,” consumer spending comprises almost 70% of the U S economy”.

Now lets see, how should we interpret  this amazing jump in confidence, from dire to just plain bad.

Could the fact that we have been bombarded with dire predictions and massive stock losses and a sharply contracting job market no longer count?

Is our attention span too short to stay negative past a certain date?

Perhaps the end of a very long weather challenged Fall, Winter ,Spring season has breathed a shot of optimisn in an otherwise frightening economic and social atmosphere.

“Its warm and sunny out, I don’t feel like worrying today. Perhaps I will buy a new bathing suit, or a pair of flipflops.Perhaps a new dress for my sweetheart.

A new Grill would make it less painful to stay home and skip some of those expensive restaurants.

Of course we feel less depressed its Summer!!!

Now reality check.

People are spending money differently than any time in the past 50 years.

Contrary to past recessions, where the wealthy appeared immune to economic squeeze, the higher priced stores are loosing market share and many are closing.(See Fortunoffs et al)

On the other hand discount stores are  doing well, and the creative ones are growing.

These changes in shopping habits are becoming a permanent long term alteration in consumer spending.

Our interests have turned from extravagant trips and expensive new cars, to stay at home type improvements .

New large screen T V’s, and audio systems. Possibly even a jacuzzi  to massage our clenched muscles.

We are purchasing gardening equipment and seeds to grow our own food,  and alarm systems, guns .and safes to keep our homes secure and more enjoyable.

Americans appear to be acclimating to a more modest life style.

The world of “Charge It” is gone, possibly forever.

Shopping malls and restaurants are no longer a destination for spending orgies.

Eliminating debt by saving is the new investment to create wealth.

I read recently, that during the first quarter of 2009 Americans saved an annualized $450 billion, compared to $ 30 billion in 2008.

This economic fix, is the reality of our economy for years to come. You can’t spend to save, you must save to spend.

If only our government got it.

Heroes are often ordinary people dealing with extraordinary events.

On Memorial Day, we remember the fallen heroes, who died defending our Great Nation

Their sacrafice is the ultimate cost for the freedom which we, as Americans, enjoy.

For anyone who has ever been in the military,  you know that the Armed Services are comprised, for the most part, of ordinary Americans, just trying to get by.

Of course the military does appear t0 have a surprisingly large number of “gung ho” and A H , types, but conventionally they are the skeleton of the Military machine, your “average Joe, or Josephine, represents the flesh and blood of any military.

So to the flesh and blood heroes who have fallen to protect our Nation,  “THANK YOU!!WE HONOR YOU TODAY AND ALWAYS,DEATH TO PROTECT FREEDOM IS A VERY NOBLE DEATH.”

Now, I’m about to get sneaky with  you.

As long as I have your attention I’m going to teach you something.

I want to make you think.

I believe we have some very big problems, and the people we are paying to fix our problems, have no clue, what to do.

Here is an example of how do gooders don’t do no good, without even trying.

Last week Congress at the behest of the President, passed a credit card reform bill.

Everyone has a credit card annoyance story. We spend too much, they raise interest, or shrink our credit lines for no obvious reason. The mail is slow one month and we get hit with late penalties. etc.

Those darn credit card companies are pigs, they overcharge us all kinds of hidden fees, who isn’t cheering for this bill? They are finally getting what they deserve. 

Here’s the other side of the story. You judge how much you like this new law.

The law essentially imposes limits of how much credit card companies can charge in interest.They put time constraints on current balances, and prohibits or controls other “penalty” fees.

In effect the Congress has eliminated the card companies from adjusting to greater lending risks. If a customer is consistently late, or if a new applicant had a credit history of being a poor risk, the banks can’t increase his costs of borrowing.

In most cases the banks will simply stop lending, and further reduce or eliminate any clients that are not A + credit.

In this way Congress is damaging the general public, which the bill was designed to help.

“If we can’t charge more for bad credit to help defray some of the losses, then we won’t lend the money at all.”

The obedient press. the clueless pundits and experts, and the highly connected insiders  have begun floating increasingly yet cautiously optimistic verbiage concerning the improving state of our recession.

The first two categories have no clue, the latter have the real knowledge but a very different agenda.

We are hearing that the recession is  bottoming out.

” The free fall is beginning to slow down.”

“Advertising is slowly coming back”

“Two women at a networking gathering got new jobs, at close to their former pay”

“Recovery will begin by the end of 09″

Yes, yes, the broken economy is fixed. It was easy, just like all the other busts that we have fixed in the past 30- 40 years. The formula works. It always has. All we have to do is throw a lot of money at the problem, let the insiders slide out with a minimal amount of damage, and time will heal all

Lay low for a few years, and then bring on the next game. The Fed Will Set US Free.

Oh yes, Our official unemployment is almost 9%, but when you include people forced to work part time or who have given up, the number is closer to 15%, , but numbers have grown so large so quickly that we are all numb. Ten million, twenty million, billions, trillions, numbers have begun loosing their meaning.

Housing prices, which are the major collateral asset behind this economic disaster have fallen 29 months in a row. The average value has dropped by almost 40%. Herein is the problem.

What sub prime loans really are, is another way of saying loans made to people with questionable credit rating, and income insufficient to comfortably cover the monthly payments.They had less than a prime credit rating.

To a certain extent, the social engineering which was the initiator of this type of loan , was a noble experiment, and a darn nice thought. AQ house for everyone, whether you can pay for it or not.

Who knows, the way the real estate market kept going up, these “sub prime borrowers” (S P B ERS) could live the American dream and the World would live “happily ever after”.

REALITY CHECK, Nothing keeps going up forever.When the frenzied speculation pushed real estate prices too high, the buyers stopped bidding up the prices.

The derivative instruments, (see my post from yesterday)  which were combinations of sub prime mortgaged, leveraged 20 or 30 to 1, were exposed as standing on a collateral base of over priced real estate  which was worth less than the mortgages which they carried.

These various derivitives were sort of worthless, being collateralized by aptly named ”Toxic Assets”.

World wide, the banks have been exposed with vastly over valued balance sheets, and the recession which began at least 1 year before the “experts” figured out there was one, fell deeper and deeper into the financial abyss.

It took us at least 20  years to create this credit bubble. We are in (according to the Administration) the worst economic disaster since the Great Depression, and they are now telling us that creating new debt to stagger the imagination, we are fixed in just 4 or 5 months? No No No!

There is more.

I want you to be aware, because you are my friends, and I don’t know how to help any of us, except by sounding the alarm.

When the politicians forced the sub prime issue, the bankers and brokers became creative and agressive. The Feds through FANNY & FREDDIE were providing the grease. In order to reach more buyers , and to tap new markets, they began pushing the Adjustable Rate Mortgages(ARM’S)

Very briefly, ARM’s are mortgages at a very low interest rate, enabeling a person to purchase a more expensive property. The monthly mortgage  payments would be $100’s possibly $1000’s  less than a conventional mortgage.

Sounds like a great idea. Buy a bigger house. Have lower monthly payments. The value keeps going up,. The more expensive the house, the bigger the profits. Sell the house at a profit, buy two new houses. Repeat. Live the good life.

The Catch: ADJUSTABLE. Your low interest rate, and low mortgage payment is for a fixed number of years, possibly only one or two, but usually 4, 5, or possibly 6 years. The specifics are secondary. The fact is that when the interest rate adjusts your payments go up. Usually  too much, and almost always at a very bad time.

Now is a bad time, and the end of next year and 2011 are very bad times.

That’s when the bulk of the ARM’s from the housing boom are due to adjust. In the middle of a deep recession. With major unemployment. With shaky public confidence, and a shaken banking industry.

Not Good!

More Later