The New Reality!

Back in February, before the market bottomed in March, before we knew there was a floor to our pain, I did a post that I still firmly believe is as accurate today, after a major recovery in the market, as it was then. And so I am posting it again. I said it then that it was one of the most important things I would ever tell you and these words are still true. We cannot, should not, return to where we were a few years ago and we need to adjust to the new reality of the future. So here it is:

"The article I am linking here compares our present economic demise to what happened in Japan in the 1990s. Japan suffered 15 years of real estate declines and over a decade of stock losses. It just started to recover a few years ago when the current recession hit it as well.
Here is one key paragraph in the article which comes early in the read:
Only in 2003 did the government finally take the actions that helped lead to a recovery: forcing major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail.

I hate beating this nationalization drum so much but at some point someone important may pay attention. The second paragraph of this article to get my attention is that the U.S. seems to be in a similar situation:

More alarming? Some students of the Japanese debacle say they see a similar train wreck heading for the United States.
And as big as you think the current plan is in the U.S., those who studied Japan think it is "timid." We cannot, however, afford anything else.
And here are a couple of key paragraphs. Japan tried what we are trying and it worked so (not) well. Oh well, go figure?

Instead, the Japanese first tried many of the same remedies that the Bush administration tried and the Obama administration is trying — ultra-low interest rates, fiscal stimulus and ineffective cash infusions, among other things. The Japanese even tried to tap private capital to buy some of the bad assets from banks, as Mr. Geithner proposed.

One reason Japan’s leaders were so ineffectual for so long was their fear of stoking public outrage. With each act of the bailout, anger grew, making politicians more reluctant to force real reform, which only delayed the day of reckoning and increased the ultimate price tag. Japanese taxpayers are estimated to have recouped less than half what it cost the government to bail out the banks.

Overall, what Japan tried and we are trying is too comparable for comfort.

Here folks I will say again what I have been saying for a long time: we are
in a very serious correction. I say correction as I truly believe we are righting ourselves. I say correction also because, as sure as hell, things were not right in 2007, so where we are going is a better place. We, as a people, were spending well beyond our means, and I mean WELL beyond our means. Our major financial institutions developed instruments that generate great wealth - for them - that allowed us to spend beyond our means. This period was doomed to failure and unfortunately got so severe that it is incredibly difficult for us to face.

My take is that we should do as little as reasonably possible and let the economy correct itself. I am not traditionally an extreme free market type of person. In a period of economic growth, especially great growth like we had leading up to 2007-2008, I am highly suspect that the market it operating properly. Moreover, I am a firm believer that capitalism and Karl Marx, in his Communist Manifesto, share the same delusion, which is believing in the ultimate good in human nature; some (many) people, including some in power, irrationally seek short term personal gain over long term rationality.

Despite not being the biggest fan of a "free" market economy (because some prudent level of government checks and balances is needed), I am a big fan of the economy correcting itself mostly on its own. We need backstops to help the victims of the correction, but in the end trying to stop it is foolish. Property and other assets will revert, and probably overshoot, the mean (the reality) on their values. We at best can prolong this happening but cannot prevent it, so in my book it is best just to let it happen, put it behind us and get on with it.

The same is true with other businesses. U.S. consumers for quite a while have been spending well more than they make and can afford. Their homes were their piggy-banks (I am among them) and their consumption seemed nearly limitless. American businesses added new retailers, outlets, malls, etc. to meet this increasing (false) demand. Now the demand is gone, so it is no surprise that so many businesses are closing down.

And here my friends is the most important thing I will ever tell you! Way too many people think the demand has just been reduced for a period of time. They believe this is a recession and things will eventually, if not soon, return to normal and the consumption will resume. Politicians are at the top of this list. What they fail to realize is that the last five to ten years were not normal. They were abnormal. Spending beyond our means is not the historic mean or sustainable. And so we face a new reality. A reality that is - hopefully - here to stay. It is in a way painful, but the sooner we realize it and embrace it the better.

We have house prices returning to reality. We have consumption returning to reality. We have many sectors returning to reality. Some would call it mean, but for this post I am calling it reality. And reality is undoubtedly an economy somewhat poorer and more deprived than we are used to. Less pay, fewer benefits, fewer jobs, fewer services and the like. We face a society with less and fewer on many fronts. What the government really needs to do is pare down and adjust for this and not try to artificially get us back to our foolish ways.

I posted a week or two ago on how families are coping in many respects for the better. Shopping trips, dinners out and movies are being replaced by dinners at home, game nights with neighbors and conservation. Buying is being replaced by barter. Families are moving in together. People are helping other people as best they can. The reality to which this recession/depression is forcing us is in some respects a better reality. This is not to say that my heart does not go out to those without jobs, benefits, food, heat or the like. It is upon those that I think the billions of government support needs to be spent; not the financial clueless that brought us here. I for one hope for a better, simpler tomorrow. My biggest fear at the moment is that the government will do so many stupid things in trying to stop a correction - stopping an adjustment to reality - that we will be totally screwed for a decade or two. Let's hope not.

Disclosures: None.

Obubblomics

Okay, I admit that it is hard to pronounce by I view the current "recovery" as Obubblomics, i.e. Obama stimulus causes improved numbers in the economy and builds a new bigger bubble destined to pop in incredible fashion. Even though it is a bit hard to pronounce at first, you have to admit that the word looks pretty cool. The truth is, however, that if you kick a dead dog it will move and if you kick harder it will move more, but that does not change the fact that the dog is dead. And so far I have seen nothing to suggest this dog ain't dead.

Debt, public and private, still a big issue. Unemployment, while perhaps reaching a bottom, is still a problem, especially when you consider the hundreds of thousands of jobs we need to create each year to simply support the growing job force. Housing may be at the bottom but there is plenty of fanthom inventory that will keep it down for long to come. And retail sales, though rebounding a bit this holiday season, are undoubtedly simply leading to more debt as the incomes are not there to support a climb. More debt, folks, is the last thing we need. I saw a post blaming it on "frugal fatigue." I like the term and think it may be right but guess what, get used to frugal as with our debt levels it will be with us a very very long time. I am expecting it to be part of our national economy dynamic the rest of my life time, and that is not necessarily a bad thing.

Still, frugal is fighting fiscal stimulus and its attempts to get everyone spending again. Frugal is fighting the new bubble the government is foolishly trying to build. Frugal will win out in time as this bubble will pop, but I am more concerned with the long term consequences of building a new bubble. This is not Lawrence Welk and we cannot keep pumping out bubble after bubble. This one could be our biggest and last.

Now I have to back track on some former doom-and-gloom predictions. I do not at this point think the bubble will necessarily pop in the next few months or, for that matter, the next few years. The ability of government dollars thrown at the situation to mask the issues is greater than I had ever imagined. So I am simply saying we need to hunker down for when it happens and I have given up for when that will be. I know this seems cheap as whenever the economy dumps in the future I can say I told you so, but call me to task on the reason for the future slump. If it is based on the underlying fundamentals I continually note here, I get to say I told you so. If it is based on Obubblomics, I get to say I told you so. So hold on to your seats, the next decade, in my view, will have even more economic problems than the last and the last had the most since the Great Depression.

From their lips to your ears.

A couple of people I respect have some words of advice. First, Paul Volcker. If you have followed me you will see that his involvement in Obama's economic team was one of the reasons I supported Obama. Little did I know that Obama and company would pay no attention to anything Paul had to say. Well, he is still speaking despite the Administration not listening and he still has plenty to say. Bottom line, he says the financial industry has added nothing (and has nothing to add) to the economy other that ATM machines. The elaborate financial products they have developed over the last decade or so add absolutely nothing to a productive economy. I agree!!!

http://www.nakedcapitalism.com/2009/12/volcker-little-evidence-financial-innovation-has-helped-economy.html

Another person deserving of some attention is Meredith Whitney. Now I have to say she turned somewhat bullish a few months ago with Nouriel Roubini and I think they were looking more to protect their reputations than to tell the painful truth, but it is good to see Meredith beginning to grow some bear hair again. She says in this link she was bearish all the past year but I know just a few months ago she was not quite as bearish as she is now, and she is definitely bearish now. Her linked video is well worth the listen and very telling. Some highlights:

• Consumer spending is 70% of GDP and it is still under pressure;
• State and local government spending is 12% of the GDP and it is under pressure;
• Small and medium sized businesses simply are getting no credit to run their businesses and consumers have had credit card debt availability shrink by over a trillion dollars.

She sees 2010 as the year when the "sand", as she says, hits the fan. Now Meredith thinks this turd will come home to roost in the first or second quarter 2010. I think that is certainly possible but I have learned not to underestimate the staying power of government stimulus, which Obama continues to promise is in the pipeline. We will see. Either way, be prepared for things to get worse. If you have equity positions, perhaps it is time to put some hedges in place.

http://www.nakedcapitalism.com/2009/12/meredith-whitney-the-government-is-out-of-bullets.html

Disclosures: None.