Economic Cold and Flu Season
We are just two days into 2008, and the tendency is, as it always is this time of year, to look in the rearview.
So, how did the U.S. economy fare in 2007? Well, the dollar declined 10% in the last year. Today, the greenback extended that decline, falling further against the euro (EUR) and dropping near the lowest point in three weeks against the yen (JPY).
This dollar weakness has pushed the price of gold to almost $860 this morning. Don’t worry if you didn’t get in on our Trade of the Decade while the price was low – we know of a way to pad your portfolio with the yellow metal – for a penny per ounce. Find out how here.
Today’s stumble for the already flailing U.S. currency followed the Institute of Supply Management reporting that the U.S. factory sector contracted in December.
MarketWatch reports: “The ISM index fell to 47.7% from 50.8% in November. Economists expected the index to slide to 50.5%. Readings under 50% indicate more manufacturing firms were contracting than were growing in December. It was the lowest reading since April 2003 and the first sub-50 reading since January 2007.
“‘Today’s release is definitely unsettling,’ wrote Stephen Stanley, Chief Economist at RBS Greenwich Capital.
“‘The real question is whether today’s data point to a brief pause in activity or a more persistent trend. It is always tough to make that call when faced with one outlier downside reading. We are inclined to wait a month and see what the January figures look like before tossing the manufacturing sector onto the trash heap,’ he added.”
The ISM index is just the tip of the iceberg. 2007, as The New York Times puts it, was not for the faint of heart. The bursting housing bubble, mortgage debt rotting the banking system, soaring energy prices…the list goes on.
Some of the main concerns for the health of the U.S. economy are the effects that are still being felt from the bursting housing bubble. The rate of foreclosures is unheard of – even before many mortgages have reset to higher rates.
This leads many to believe that homeowners are falling behind on mortgage payments because suddenly, inexplicably, their home is worth less that it was months earlier. How could this be? Read our full report here.
Unfortunately, we haven’t hit the bottom of the housing market quite yet. Many expect housing prices to fall by 5 or 10 percent more in 2008.
Meanwhile, unsold homes continue to sit, vacant. “2.6 percent of the nation’s housing stock is unsold,” reports The NYT. “Even in the worst years of recessions in the early 1980s and 1990s, the share of vacant homes did not exceed 1.9 percent.
So, will the U.S. economy shake this news off…like it did in 2007? That’s right, despite the volatility of the credit crunches, subprime bust, CDOs, SIVs and more billion-dollar writedowns than you can shake a stick at, 2007 will go down in the books as a “positive” year for the markets, Addison and Ian at The 5 Min. Forecast tell us.
“Benchmarks fell on Monday, the year’s last day of trading, by about 0.7%. Nevertheless, the Dow finished the year up 6.4%, the S&P 500 ended up 3.5%, and the NASDAQ reigned supreme once again, up 9.8%.
“But, the real growth in 2007 came from abroad. The FTSE All World equities index rose 10.3% last year,” they continue.
“No surprise, the Chinese market proved to be the cream of the crop… the Shanghai composite ended the year up 96%. Brazil and India took the silver and bronze, up 76% and 74% respectively, according to the FT.”
Only time will tell what 2008 will bring…but that won’t stop us from speculating.
“Either the negatives finally metastasize and drag the economy down, or a fresh source of growth emerges, helping to sustain consumer spending despite the ongoing worries about housing and tight credit,” says The New York Times.
“There are even odds of a recession,” said Mark Zandi, chief economist at Moody’s Economy.com. “It literally could go either way.”
Either way, stay tuned, dear reader. We have an interesting 12 months ahead.
The Daily Reckoning
P.S. We received this cryptic note from Bill:
“We’re refugees,” we explained to the cheerful hotel clerk when we showed up at about 5 minutes to midnight on New Year’s Eve. “We can’t go home because the roads are washed out….
“and we wrecked our car and spent the day in hospitals and the police station …
“after running out of gas in the swamp…and getting thrown from a horse…and coming down with something like malaria…”
More to come…
The Daily Reckoning PRESENTS: Apparently, we at the DR HQ aren’t the only ones wondering what’s ahead in 2008. James Howard Kunstler tells us exactly what he thinks we should expect in the coming year in the essay below. Read on…
by James Howard Kunstler
For the tiny fraction of people who actually pay attention to real events – those, for instance, who know the difference between Narnia and Kandahar – the final hours of 2007 leading into the fog-shrouded abyss of 2008 must induce great racking shudders of nausea. Has there ever been a society so exquisitely rigged for implosion? The whole listing, creaking, reeking edifice stands like one of those obsolete Las Vegas pleasure palaces awaiting a mere pulse of electrons to ignite a thousand explosive charges perfectly placed to blow away the structural supports.
The inertia holding everything together that I described in last year’s forecast finally melted away at mid-summer and events began spooling out of control. Specifically, the massive tonnage of debt-backed securities circulating through the financial sector stood revealed for the mostly worthless bales of paper they truly are, and the investment community was left suspended in mid-air, grinning unconvincingly, like Wile E. Coyote thirteen yards beyond the edge of the mesa, with a sputtering grenade in each hand and an anvil tied to his ankles.
The whole second half of 2007 in the ranks of finance was a desperate rear-guard action to stave off the inevitable work out. The fiasco over at Bear Stearns was instructive. Not long after two of their hedge funds blew up in August, the company announced that the funds had been chartered in the Cayman Islands and were therefore beyond the reach of official U.S. legal machinery – meaning, forget about lawsuits, you losers, chumps, and suckers who bought into our jerry-rigged scams…submit your complaints to the Tough Noogies desk and begone with you! This dodge might have benefited Bear Stearns in the short term, but in the long term it’s hard to see why anybody would ever after cast one red cent in Bear Stearns’ direction (in the life of this universe or several like it).
The summer’s blow-ups were followed by truckloads, boatloads, and helicopter loads of rescue “liquidity” delivered through autumn by the Federal Reserve and other central banks in a continuing effort to allow investment houses, mortgage originators, reinsurance firms, and other companies trafficking in suspect paper to avoid declaring greater losses. Then the foreign sovereign wealth funds jumped in with five billion here, ten billion there, coming away with big chunks of ownership, but of what? Of companies with liabilities in excess of assets? Mostly, these desperation moves worked to paper over virtual bankruptcy through the crucial Christmas holiday, when yearly bonuses are doled out, which spared the boards of directors from having to explain why executives were lined up at the loading docks filling their Lincoln Navigators with stupid dope piles and knots of the shareholders’ loot.
On the ground out in the heartland, in the anxiety-drenched, over-valued beige subdivisions of California and the ennui-saturated pastel McHousing tracts of Florida (not to mention the pathetic vinyl outlands of Cleveland and Detroit) a mighty keening welled forth as mortgage rates adjusted upward, and loans stopped “performing,” and “for sale” signs failed to turn up buyers, and sheriff’s deputies showed up with the rolls of yellow foreclosure tape, and actual ownership of the re-poed collateral entered a legal twilight zone somewhere north of the Florida State Teacher’s Pension Fund and south of the Norwegian Municipal Councils’ investment portfolios. What a mighty mess was left out there by the boyz at the Wall Street genius desks, who engineered a magical system for eliminating risk from the capital markets – only to see it leak back in from a million holes and seams and collapse the greatest bubble ever blown.
In the background, the US dollar sank to record lows against the euro and the pound sterling, the price of oil jumped 56 percent across the year just grazing the $100-a-barrel mark, drought punished the American southeast and Australia’s grain belt, floods ravaged Texas and England, the polar ice shrank dramatically, but the US escaped any major hurricane action for a second year in a row.
Except for the murder of Mrs. Bhutto just a few days ago, the international scene was supernaturally quiet. Even Iraq fell into a torpor, variously attributed to utter exhaustion among the warring factions or to the US troop “surge” under general Petreus. Iran got a surprise clean bill-of-health on its nuclear bomb-making activity from America’s own investigators, to the consternation of Mr. Bush & Co. The non-human denizens of Planet Earth didn’t have such a good year. Honeybees, Yangtze river dolphins, and house sparrows took big hits, and Al Gore went up another suit size (as well as winning part of the Nobel Prize for his Powerpoint show). Which brings us finally to the heart of the matter: what’s coming down the pike in 2008?
I shudder to imagine how things will play out now as we turn the corner into 2008. Not to put too fine a point on it, but my little walnut brain can’t imagine any scenario in which the US economy doesn’t end up on a gurney in history’s emergency room. It’s not necessary to rehash the particulars of the Greenspan bubble-blowing disaster. The outcome is what concerns us. The web cables have been blazing for months with arguments as to what form the workout will take. There’s little disagreement about the fundamentals at the housing end of things.
The housing market is in a death spiral. Eventually, the median price of a house will have to fall back to the median income, and it has a very long way to go, perhaps 50 percent. Until that happens, houses will be generally unsellable. At the same time, of course, an anxious finance sector will be offering fewer mortgages and on much more rigorous terms, so there will be far fewer qualified buyers even for distress sales. And the median income itself may soon not be what it has been. The whole equation has changed. As the painful re-pricing process plays out, many owners/sellers will be upside-down and under water in what they owe on the mortgage in relation to the value of the house they occupy. Quite a few may have lost jobs and incomes along the way. Most of these unfortunates would be better off just mailing in the keys and walking away. But in so far as these awful liabilities are peoples’ homes, full of all their stuff and their childrens’ stuff, not to mention being the repository of all their previously-imagined wealth, as well as their hopes and dreams, walking away is psychologically more easily said than done.
Surely in this election year, schemes will be advanced to bail out these poor suckers. But the beneficiaries of such a putative bail out would be far outnumbered by the home-owners still making mortgage payments, plus property taxes jacked up during the recent orgy by greedy public officials, and I don’t think this majority would stand for the unfairness of seeing their neighbors simply let off the hook on their obligations. Perhaps the one thing that congress could do is change the insane law that treats foreclosures like some kind of bizzaro capital gain and piles additional huge tax demands on people who can no longer afford to buy their kids a frozen burrito. The issue of what to do about the dispossessed will be so politically red-hot that it could upset the election process –but I get a bit ahead of myself.
One thing the public doesn’t get about the housing debacle is that it is not just the low point in a regular cycle – it is the end of the suburban phase of US history. We won’t be building anymore of it, and those employed in its development will have to find something else to do. Now, unfortunately the whole point of the housing bubble was not really to put X-million people in so many vinyl and chipboard boxes, but rather to ramp up a suburban sprawl-building industry as a replacement for America’s dwindling manufacturing economy. This stratagem ran into the implacable force of Peak Oil, which not only puts the schnitz on America’s whole Happy Motoring/suburban nexus, but implies a pervasive trend for contraction in everything from the daily distances we can travel to the very core idea of regular economic growth per se – at least in the way we have understood it through the age of industrial capital.
But to return to my point, something like 40 percent of all new jobs after the year 2000 were created in the final burst of suburban expansion – everything from the excavators to the framers to the sheet-rockers, and then the providers of granite countertops, the sellers of appliances and furnishings, and cars to service the far-out new subdivisions, and so on. This is the end, therefore, not only of the production “home-builders,” but perhaps everything from Crate and Barrel to Wal-Mart, too, eventually.
By the way, the housing collapse was only one phase of a more generalized real estate debacle, because the commercial side of the business has also begun a nauseating slide into non-performance and equity destruction. In other words, we built way too many strip malls, power centers, and office parks. God knows what will happen to the owners of these white elephants, or the mortgage and lien holders of these things – but as one wag remarked to me some years ago as we both gazed upon a forlorn abandoned strip mall outside of Tulsa, “…we don’t need that many evangelical roller rinks….”
What happens out there on the housing market scene will certainly redound in banking and finance and whatever still constitutes the US economy generally. The fears and uncertainties surrounding all credit-backed tradable securities derive first from the millions of troubled home mortgages dangling slowly in the wind. These fears and uncertainties will multiply as defaults commence in commercial real estate, and desperate individuals next enter a wave of credit card default, all of it, too, securitized and sprinkled all over the world. None of this stuff has yet been priced into the public disclosures of the many troubled banks and bank-like companies holding it. Nor does anyone really know how this is affecting the hedge funds, and their staggering leveraged positions in things that are looking more and more like quicksand. I can’t imagine that quite a few major banks will not collapse in the first half of 2008. It is hard to escape the conclusion that many hedge funds will also blow up, given the unsoundness of their counter-parties’ positions, not to mention the frailty of the bond reinsurers. But the death of more than a few hedge funds could easily unwind the entire global finance system – meaning a period of destructive chaos followed by a set of severely different institutional arrangements, with untold loss of imagined capital wealth along the way and big changes in everyday life. The world has never really been in a situation like this before and it is impossible to say what it might lead to. But there is no doubt that the American public has enjoyed an artificially high standard of living in relation to the value of what we actually produce – fried chicken, hair extensions, and the Flava Flav Show – so the conclusion is pretty self-evident.
Others have said (and I concur) that 2008 will be the year that the issue of Peak Oil not only takes stage in the forefront of American politics, but pushes global warming aside as the most immediate threat to the “modern” way-of-life. There is every reason to believe that the world has arrived at its all-time oil production peak – and some statisticians would even pinpoint the exact moment as July 2006. Since then a few new and crucial story lines have emerged to allow us to understand what is happening out there on the world oil scene.
One story line is that only “demand destruction” among the world’s poorest nations has kept the oil markets functioning “normally” among the OECD nations and the rising Asian players. Even so, oil priced in US dollars more than doubled in 2007. It remains to be seen whether demand destruction in a wobbling US economy – with the suburban builders crippled – will keep oil prices from jumping into the uncharted territory beyond $100-a-barrel. But two other forces are in operation now.
One is the growing oil export problem, soon to be a crisis. It now appears that exports, in nations with surplus oil to sell, are going down at an even steeper rate than production declines. Why? They are using more of their own oil. The population is growing robustly. The Saudi Arabians are building the world’s largest aluminum smelter and many chemical factories. This takes a lot of oil. Russia, another big exporter, saw its car sales jump by 50 percent in 2007. Mexico is depleting so rapidly, and using so much more of its own oil, that it might be out of the export game altogether in three years. That will be bad news for the US, since Mexico is tied with Saudi Arabia as America’s number two leading source of oil imports. Remember, the United States now imports close to three-quarters of all the oil we use.
The second new factor on the Peak oil scene is “oil nationalism.” It is prompting countries like Norway and Russia to husband more of their own resources as the awareness hits that they are past peak and might want to keep their own motors humming further into the future. Oil surplus nations are also trending more toward selling their oil on the basis of long-term contracts with favored customers rather than just auctioning the stuff off on the futures market. This makes oil a much more important element in geopolitical power politics. Note that the US may not enjoy “favored customer” standing among many of these nations.
Matt Simmons, the leading investment banker to the oil industry, predicted at a major conference in October that the United States is much closer to encountering a problem with chronic spot shortages of oil (and gasoline, of course) than the public realizes, and Simmons says that this supply problem will be extremely disruptive in every imaginable way – economically, politically, and socially. Most of the commentators I take seriously see the price of oil oscillating in 2008 between $80 and $160-a-barrel. Simmons says Americans will keep sucking up the price increases, but they will probably freak out over spot shortages.
I have no idea how presidential election politics will play out in 2008. It must be obvious that so many nasty pitfalls lie out there in the months ahead that something’s got to shake up the current scripted mummery among the contenders. The current batch of candidates will soon find their story lines and pre-cooked messages out-of-date as the nation faces crises in finance and energy (at least). Given the uneventful geopolitical scene of the past 18 months (since the Hezbollah-Israel War and up to the murder of Mrs. Bhutto in Pakistan), odds are that the US will have more rather than less trouble from the rest of the world in 2008 – especially if our own financial recklessness trips up the global economy.
In the immortal words of TV’s erstwhile “Mr. T,” I pity da fool who gets elected into this mess. There will be a whole continent full of bankrupt, re-poed, and idle former Wal-Mart shoppers, many of them with half of their skin tattooed and many of that bunch all revved up to “roll heavy and gun up” against the folks who screwed them.
Which leads me to my penultimate observation of the moment: 2008 will be the year that celebrity wealth goes into hiding. A land full of people crying into their foreclosure notices will take a dim view of the Donald Trumps and P. Diddys luxuriating out there and may come looking for scalps — though in the case of Mr. Trump they’ll be sorry they woke up the wolverine that lives on his head. Basically, though, I’m not kidding. Conspicuous displays of wealth will be so “out” that Mr. Diddy might take to club-hopping in a 1999 Mazda. Lindsay Lohan and Paris Hilton may have to double-up living in a minuteman missile silo to keep the angry mobs of fans-turned-vengeful-berserkers away.
Okay, my final comment. After being chastised endlessly about mis-calling the DOW in 2006 (I said 4000), I have learned my lesson about making numerical predictions for the stock markets. So let’s just say there is no way that the DOW, the NASDAQ, and the S & P will not end the year 2008 absolutely on their backsides. The charade of permanent prosperity based on getting something for nothing is over. That sound you hear out there is reality knocking on the door. It has been standing out in the cold for a long time and it is not happy with us.
James Howard Kunstler
for The Daily Reckoning
January 2, 2008
Editor’s Note: James Kunstler has worked as a reporter and feature writer for a number of newspapers, and finally as a staff writer for Rolling Stone Magazine. In 1975, he dropped out to write books on a full-time basis.
His latest nonfiction book, The Long Emergency describes the changes that American society faces in the 21st century. Discerning an imminent future of protracted socioeconomic crisis, Kunstler foresees the progressive dilapidation of subdivisions and strip malls, the depopulation of the American Southwest, and, amid a world at war over oil, military invasions of the West Coast; when the convulsion subsides, Americans will live in smaller places and eat locally grown food.
You can get more from James Howard Kunstler – including his artwork, information about his other novels, and his blog – at his Web site.