The "Bubble" from hot air to helium...
Fleckenstein hit on something that I saw & am still privy to via business contacts...
The reckless credit expansion of Rubin & Greenspan built this bubble economy & still props up this market.
Something very fundamentally wrong occurred in the mid 1990's... the Mortgage Refinance Industry exploded. Companies that specialized in "re-fi's" along with the number of independant Mortgage brokers exploded. The birth of the subprime lending industry also occured.
Americans during the 1990's borrowed against their nest-egg's like never before in history. The took their home equity & spent it... fueled the fire of this bubble with it, played the market with it; spent it & then ran their credit cards to the limit on top of that...
That's why the Fed Cuts won't work this time... this time much of the re-fi boom from lower rates will be to pay off bills & hopefully keep them paid... it won't be to fuel the consumer spending cycle & it won't be to daytrade the market.
Fleckensteins comments & a link to the WSJ article about the very negative historical ramifications to American wealth, security & retirement - via this new Home Equity re-fi & spending mania are below:
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Collateral damage. . . Turning to the news, there is an article on the front page of The New York Times today entitled, "Equity Shrivels as Home Owners Borrow and Buy." It's absolutely mandatory reading for everyone, not that it will be surprising to Rap readers. I believe that vignettes like this are always important to help people connect the dots and understand viscerally what's been happening.
The article points out the perils and pitfalls of borrowing too much money, it illuminates living beyond one's means and also illustrates how the "long term" (everyone's favorite investment horizon) can be interrupted due to unforeseen problems. Said differently, it shows how life issues its margin calls at the wrong time. My apologies to whomever I may have stolen that phrase from along the way.
The article brings up a point I've been meaning to make in the last week or so, and for which I am indebted to Dr. Kirk Richebacher. From 1995, when Easy Al began his latest series of bailouts, much has been made of the "new era" and productivity. I think we have successfully debunked many of those myths in the Rap over the last couple of years. Nevertheless, one item that continually gets ignored is the level of debt buildup.
Owe say can you see. . . With all the hype and hyperbole about said new era, here are a few sobering facts. From the end of 1994 to 2000, gross domestic product was up $2.72 trillion, corporate and consumer indebtedness was up $4.75 trillion, indebtedness in the financial sector was up $4.15 trillion, therefore total credit and debt creation was up $8.9 trillion. We can see then that debt growth was three times faster than GDP growth. More like a good old-fashioned period of printing money and leveraging it up. Not exactly what one would expect to see in a period of miraculous productivity or in a "new era."
Over the same period, the personal savings rate, which is measured by percentage of disposable income, has declined from 8.7 percent into negative territory. Corporations have engineered themselves into a funding deficit as well. Of course, these figures are very rarely discussed, but nevertheless, they are real. This morning's article in The New York Times gives you a small taste of an immense problem. Just another reason why, regardless of what anyone's wishes are, the unwinding of this bubble will be an epic disaster.
A point of reference. . . I'd like to share a quote that captures the speculative mood we are in:
This is apparent that the public preference for stock is not only as marked as ever, but also the will to speculate is still a speculative fever not be overlooked. The prompt return of huge speculations in a liberal manner in which current earnings are again being discounted indicate that it will be difficult to quench the fires of stock market enthusiasm for long.
That quote is from the Barron's trader column of March 24, 1930. The high of the post-crash bounce was on April 17, 1930, from which the market collapsed nearly 90 percent. The moral of that story is that folks shouldn't confuse the bounce that is under way with a return to prosperity -- no matter how long it lasts -- nor should they think that because the market bounces, all fundamentals can be ignored indefinitely, nor should they assume that Easy Al is going to save the day.
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...another Fleck observation on the economy from "Main St.".... I posted my comments after talking with the head of commercial Air Cargo for a Major Airline @ O'Hare a couple of weeks ago... very rapid slow down & people are worried, layoffs coming etc.
from Fleck:
Dr. Weak, meet Dr. Thready. . . I got an interesting economic barometer reading from a friend's e-mail: "Just spoke with a very highly placed railroad man in Richmond, which is the headquarters of CSX. . . railcar loadings are dropping like a rock. . .a very sensitive economic sign."
So now we have Air Cargo, the Railroads... anyone have an ear to the Trucking Industry ?
"R-E-C-E-S-S-I-O-N" ... and it's not getting any "R-E-S-P-E-C-T" from the traders here of late.... I wouldn't hesitate to take profits on any techs anyone caught in Dec at the bottom...Q-1 reporting, if not sooner; the game's over imo... |
