Wednesday, June 20, 2012

There are a lot of successful religions out there that are not apocalyptic in nature. But what fun are they? There is nothing to look forward to in my opinion. Bring on the horseman! It is kind of like the major global do not want to look but you just keep staring. We are so intrigued by disaster. The bigger the better. 

September 11 was like that with a lot of people and news outlets. Never mind the historicity of the event. The actual event was replayed and replayed and replayed and replayed. Not to bring home the importance but to detail the gruesomeness of the whole thing. We just have to look at the wreckage on the highway. This is why I will take an apocalyptic religion over the hum drum "this is how you get to Nirvana" ones.

Well, I belong to an apocalyptic religion. We are always running around looking for the last days (heck, it is in our name, even!) and signs of the times. If I had lived in the early 40s, I would have been sure that that was it. Maybe the Great War would have been it. Or the Civil War. Or the dozens of depressions in between. Admit it, you are always looking into current events and think that you see it coming too.

Well, let me explain the latest evidence of I see it, mind you.

We have had a tough time in the US over the last several years. They call it the greatest economic downturn since the Great Depression. (I know a bit about the Great Depression and know that our current state for several reasons is nothing like that terrible period). While it is not horrendous right now, it seems to be just grinding us and grinding us. However I think I see something swirling in the mist ahead. It may not be so pleasant.

There are three major economic powerhouse zones in the world - China, the U.S., and the Eurozone. 

China is a big exporter with a deflated currency aimed at aiding this. They do not want to have all of their eggs in one basket anymore (remember it was not long ago that they had no eggs!). So they are trying to create a large middle class that will begin to consume - they want a service industry/tech industry based economy. Like ours! They began the change. But this takes some time to do. Before they could really get things cooking their export based economy hit a rough road. Exports are down roughly 20%.

The U.S. had the easy credit problem. This easy credit led to the great run on housing. I saw so many houses for sale, bought up, and for sale again. There we were, poor. Every time we saw a house for sale that we might be able to afford we looked into it to find that the price had increased to out of our range. This went on for a couple of years. We knew nothing about economic cycles and we thought it would go on forever. We would never get into a house. I had to sale my drums. Some kid younger than me had three houses and he had to put stuff in them for his kids. Ugghh. 

I wonder what happened to him now. Because it was not long afterwards that the bubble popped. But that is not all. The mortgages had been chopped up and bundled and resold (CDF) to various entities. Little did they know that these bundles were a known ticking time bomb and that the banks selling them had bought huge amounts of insurance to cover their loses and then some. They were going to make a profit when their product failed. They encouraged the bubble knowing that they would make an absolute fortune on the insurance. There was actually not enough money in the insurance companies to cover the losses! So the money dried up and losses were not covered. Everyone was out of money until the government stepped in. 

The bad thing about a service based industry is that there can be some negative feedback loops that can tear up an economy. When someone loses their job they can no longer afford to go out to dinner. Then the waiters are out of a job. They stop working on their homes and then the employees of Home Depot are out of business....and on and on.

Europe has done this horrible thing that has finally come home to roost. They are in trouble. Real trouble. It is not going to go away and it can not be fixed. You can not give a man who has worked for you for 30 years a retirement package wherein they get 80% of their annual pay for the remainder of their life. This just happens to be another 40 years! And the benefits! This could not keep going on. The second something upset the fragile system, it all falls apart. Easy credit destroyed everything. I guess the poor use of easy credit was the actual culprit.

Now put it together. We are super connected economically. When one of the giants go down we all go down a little bit. Here we go.

China - They way overspent on infrastructure during the good times thinking it would all continue for them. The banks lent so much money to land speculators and the construction industry that when the down turn came they are sca rewed. But it gets worse. Construction is one of the hugest industries in China. They way overbuilt. They have empty cities. But the housing bubble has yet to burst so they sit empty and no one can afford them. The banks are out of capital, so they will no longer lend money which is a great way to get your economy in general to slam to a screeching halt. Never mind that they have a huge housing bubble that will eventually pop. Never mind that they have a massive demographic catastrophe about to come up where in there are not enough young people to support the old people and not enough girls for the boys. (social experimentation is not a good idea) They have been valuing the Renminbi like crazy to help their just-forming middle class have some purchasing power but this has devastated their exporting. On top of that, their two biggest clients (the U.S. and the Eurozone) are no longer buying. Their exports have taken a one two punch. Now what good will this new purchasing power which has come at the expense of their exports do for the middle class when that housing bubble does pop and the middle class loses half of its money when the home they bought is devalued by 50%. One last thing about the Chinese government....when they turned their back on a government based on ideological philosophy and pinned their legitimacy on economic success, what do you think will happen to them when their GDP growth falls below 7% for the first time in over a decade? What about when it hits 5%? What about lower?

The U.S. is in pain too. We have already lost around 1/3 of our net worth from the housing bubble that has already popped. And the bottom has yet to come. There is still a huge shadow inventory that has not yet hit the market. Unemployment is over 8% (keep in mind this does not count a lot of people that were working, became unemployed and then gave up looking for a job or the people that found a job but it pays 1/2 of their last job). The banks were recapitalized at the expense of the Federal Reserve. They gave all of the banks hundreds of billions of dollars at basically 0% to help them recapitalize but that money is just sitting on the bank's balance sheets and not being lent out. We look at Europe and say we are glad it is not us. But it is. We laugh at their debt to GDP ratios. Guess what? Ours just hit 105% this year. Next year will be way higher. We do not just have unsustainable debt, we have catastrophic debt. This is on the federal level so we should be ok, right? I used to think it was ok to spend ourselves out of a recession. But now I think this just kicks the can further down the road. As two examples, look at cash for clunkers and the rebate for buying a new home. Both worked beautifully until they stopped. They were supposed to be jump starters to get things going. But when they ended things just went back to the new normal. So the billions spent on those programs did no good. They just kicked the can farther down the road and increased the bill. On top of the trillions we have spent on temporary band aids we have a hidden cliff coming. Municipalities are going to be going bankrupt in about four years. All of the money they have been borrowing is about to come due. Municipal bonds. This is how they borrowed money. They are about to have to pay back a lot of five year and ten year bonds. But they have lost so much money that they will not be able to cover it all and their commitments. (we are talking roughly 4 TRILLION DOLLARS!) It is almost a guarantee that they are going to have to start making some serious cuts. How bad? Ask Governor Chris Christie. He says his state is not in the worst condition and he would have to cut spending by 20%, increase taxes by 15% for 20 years and retirement packages will need to be cut by similar numbers just to get back to even. By the way, that is extremely draconian. New York is much worse. As are many others. But you will not hear about this for another couple of years (unless you read the secretly leaked JP Morgan assessment!). Our debt levels are projected to grow. When our credit rating is adjusted appropriately, the same thing that just happened to Spain will happen here...our bonds rates will skyrocket. 

Now there is Europe. They are just screwed. Their debt level is astonishing. They have several large economies with negative growth over several quarters. No one is going to get out of there alive. If they go to the Eurobond to facilitate bailing out the PIIGS then that will be the end. It really is like watching a slow motion train wreck. They called out Greece over a year ago that they would default on its loans. It still has not happened (almost happened yesterday!) but they are only 6 months away. By then Spain and Ireland will be where Greece is now. Remember when Greece got its first bailout about 6 months back? Spain just got their first one this last week) And then Italy will be where Spain is now. When they go to the Eurobond as a last ditch effort to spread the pain around, then they will all be basically tying themselves to the same stone that has just been thrown into the ocean. When a country hits 7% on their 10 year bond rate, that is generally considered an unbearable interest rate. You can not go on very long borrowing money at that rate before it catches up to you and it comes due and you can not pay. Well, Greece is in the mid 20s. Ireland is nearly 10%. Spain is over 7% now and Italy just popped over 6%. You can actually handle a high interest rate if your economy is humming along and you are making a lot of money on your investments. But these countries have shrinking GDPs. You can not give people extreme benefits (healthcare, 30 hr. work weeks, job security despite poor job performance, massive retirement packages) and expect everything to pay for itself. The piper has come to get paid.

They are so indebted it is horrifying. 

So what was my point? Oh yeah, apocalypse. So this is what is going to happen. The world economy is going to continue to nose dive. Someone will start a war. Pretty basic history lesson there. That is what happens. So let's see what the social fabric is made of. Let's see if it can hold up. I think we are too spoiled to hold up to anything much. 

Maybe this is how Babel will long singularity, it was never meant to be.

1 comment:

  1. Here is one more piece to the puzzle...

    And the euro zone just doubled down on saving the current system at their last meeting, the further they go down that road the longer it will take to come back.