We Haven't Seen the Worst Yet

Forbes ^ | 10/22/2008 | A. Gary Shilling

[bruinbirdman]

~snip~

The heads of banks and insurance companies are taking writedown after writedown, almost comically declaring after each that they've removed all the cancer and no further trips to the operating room will be necessary. Investors are treating each bailout as the last that will be needed, oblivious to further problems that continue the market's sawtooth pattern along a steeply declining trend.

The deleveraging is occurring in four phases. The first, the collapse in housing, started early last year when the subprime slime, as I dubbed it, came out into the open. Phase two, Wall Street's woes, began in mid-2007, when the demise of two Bear Stearns hedge funds revealed that financial firms were hugely leveraged and invested in overpriced assets of unknown and probably unknowable value.

These two phases are continuing. Housing prices are down 18% and will drop 23% from where they are now to reach the 37% total peak-to-trough falloff I foresee (see chart). Excess inventory, the mortal enemy of prices, now amounts to 1.8 million homes, which is a huge number relative to the net demand (new families minus departures to death and nursing homes), which is only 1.5 million a year. Meanwhile, the shared confidence that glues financial markets together has deteriorated to the point where banks don't want to lend to one another, much less to anyone else. ~snip~

Phase three of the recession, the nosedive in consumer spending, will probably be the deepest since the 1930s. Consumers have relied on their home equity to fund spending well beyond their wages, salaries and other income, and that equity is fading fast, especially for those with mortgages (see chart). The collapse in house prices will, I expect, leave 25 million homeowners stuck with homes collectively worth $1 trillion less than their mortgages. Even including 24

[PerConPat]

Thanks for posting the article. There are, obviously, lots of possibilities- some better than others. Perhaps some reclusive genius is at this very moment putting the final touches on a process or machine that will lead us again into the "sunlit uplands" of economic well-being. Whatever, my thoughts are now centered around the rotting elements in this nation that sucked the marrow out of a housing industry- and perhaps a banking system as well- that was second to none on earth..

The aspect that terrifies me is the moral putrefaction that created this mess. We've bounced back from bouts with avarice and stupidity before. But I have to suspect that it's becoming more and more tenuous as the national fiber appears to be growing weaker.

[Huck]

Anybody in the market right now has a hole in their head, or is oblivious to the insane risk to every company out there.

I don't agree with that completely. There's also the risk of losing out on great opportunity. Granted, I pulled 20 grand out of the market, and only put 2500 back in, so that tells you how great I think the market is. But I think that certain companies like JNJ and KFT are good solid companies with products people will buy even in hard times. I plan on buying small little increments on the way down and I have reason to believe that even if it takes 10-20 yrs, I've got a chance to turn a nice profit. Buy some companies that pay dividends. Hell, TCLP's divided beats a 12 month CD. But hey, I'm just another Joe the Plummer, what do I know?

But I agree with you to a point. It's a very, very, very risky world right now. That's why I've still got a lot of money tucked away. In case of Armageddon, break glass. But if Armageddon does come, that small amount of money at risk in the market isn't really going to matter in the long run anyway. Just my take.

[spetznaz]

I remember ExTexan and his warnings. I also remember how he was mercilessly attacked by a couple of people (one in particular, who really seemed to be either totally blind or in the pocket of the mortgage industry). Well, it seems like ExTexan was right, and to be honest the people criticizing him were quite dumb (come on, there was no way flipping houses forever and perpetually climbing housing values were sustainable. It reminds me of that old adage ....when people say ‘this time it’s different .....’). I think there are people on FR who really owe ExTexan an apology.

[Pining_4_TX]

Yes, I agree. Not only do consumers need to curtail spending, but the government really needs to rein in spending. Unfortunately, I don’t see that happening.

As for housing prices coming down, a couple of years ago the whining and complaining was all about how fast prices were rising so that “nobdy” could afford to buy a house. Make up your mind, media people, because you can’t have it both ways. House prices cannot rise and fall at the same time. Sometimes it’s good for sellers and other times it’s good for buyers. I just wonder why I always seem to be on the wrong side of the deal. ;-)

[familyop]

"They are going to be paid back with greenbacks pegged to the yawn. Or is that vice versa? The commies are stuck. Eventually, the dollar has to be spent in America."

Now that's macro-macro-realism, my Guru. ;-)

[bruinbirdman]

Moral putrification will be handled by The Lord. He does not punish honest use of capital.

"Whatever, my thoughts are now centered around the rotting elements in this nation that sucked the marrow out of a housing industry- "

Much as I dislike quoting Bawney Fwank, a paraphrase can't hurt.

More or less he says this housing market will proceed as other subsidized housing has, to the profit of those with means and the temporary satisfaction of those without.

Old inner city housing units are neglected by a landlord. Government turns them into subsidized low cost housing. They get real cheap. New money finds them cheap, moves in, renovates causes property values and taxes to rise forcing out poorer tenants. We're talking many years.

Uncle Sam caused a huge housing bubble. Many got rich as prices rose. Many bought low interest units they couldn't afford. There is a glut of housing. Many will lose houses; many houses will be vacant; all houses will lose value.

Investors will buy cheap, formerly government subsidized houses and make money when prices rise.

It's a cycle. Those who have paid attention come out ahead in the end and profit off those who don't.

As for the bankers? The bankers running the government? The monied elite?

I can't complain where they have brought America since the revolution. John Hancock, Thomas Jefferson, George Washington were not poor.

yitbos

[familyop]

"With Greenspan throwing gas on the fire all along with his cheap money. The recent US economic model of exporting debt while importing actual goods is unsustainable."

We shouldn't be terribly surprised, and you are correct. The import paradigm using communist/fascist slavery is unsustainable.

[Ayn] Rand's Influence on Alan Greenspan

[PerConPat]

It's a cycle. Those who have paid attention come out ahead in the end and profit off those who don't.

Do you think that those now in the American majority will have the patience for the healing, but painful, correctives that stem from markets? I really don't know. But since we are on the subject of Bawney Fwank, I can certainly imagine that he and his Lefty friends- including at least one presidential candidate- are just itching to rev up the government to assist the losers.

You make some good points. Time will tell.

[bruinbirdman]

"Do you think that those now in the American majority will have the patience for the healing,"

Well, the miserable majority sure loved FDR, didn't they? But they rejected Clinton Democrats in '94. Yes, time will tell. We are watching history that I have not seen since 'Nam.

.yitbos

[PerConPat]

Another excellent set of points...Good talking with you, good night...

[Freedom_Is_Not_Free]

There are always exceptions and even I have to believe that there are good buys in stocks today. But you have to ask yourself, will the buys be better sometime deeper into this recession, yet well before the end of the recession? That is what I meant.

Yes there are a few good deals in stocks now, but there will be even better deals in 6 months, and I am talking about the same stocks today. Those deals today will be better deals in 6 months. We are only going down from here due to the unstoppable deleveraging, and we are going into a U-shaped recovery at best. There will be no soaring bull market to have to get into.

That is the common mistake. People sell too late then they see these false rallies and become complacent. By the time the bull market begins in earnest, they think it is another bear market rally and miss the biggest gains which come initially in the bull.

But we are in for a long, deep recession as the markets continue to slump, or plunge as the case may be, for a matter of months. Why rush in? IMHO, there is absolutely no reason to rush into this market and buy anything in this climate. Even the bargains today will only be bigger bargains at some point in the future.

This is very similar to housing. For a year now, people have said, “it’s time to buy bargains.” Yet housing has only gone down all year (unless you live in Boston or one of the states like Texas that rode the speculative energy boom that is now collapsing as hedge funds are forced to sell their positions). So while houses were at bargain prices 6 months ago, they are bigger bargains today and look to be bigger bargains still in one year.

Why rush in? That is half my point? The other half was, how can you stomach this volatile downtrend. Cash is king. The time to buy is soon but not yet.

[LS]

But, on the good side, “repatriation” will force employers to hire Americans. It’s a wash.

[Freedom_Is_Not_Free]

Ha! People on FreeRepublic never apologize, let alone admit when they are dead wrong — or any other anonymous electronic bulletin board. I have had debates with many here who after being proven wrong, disappear never to mention the subject again.

A good example is the long debate I had with Freeper “curiosity” (IIRC), who stated emphatically that $140/Bbl oil was priced correctly due ONLY to supply and demand pressure, that the era of cheap oil was over and dead PERIOD, and that there was NO speculation in oil. None. He claimed that to have speculation you have to have increasing inventories, and since no increasing inventories were evident, he said no speculation was possible.

Then oil collapsed to under $70 and where is he? Absolutely no mention of being wrong about oil never being cheap again, of being wrong about speculation pushing oil to $145/Bbl, or of being wrong about oil never come down well below $100/Bbl.

Few ever admit they are wrong here. Apologize? You have to be kidding. Hockey moms will be cheering their kids on in Hades before that happens.

The only one I know admitting they were wrong is me. I said we have been in a recession for this full 2008 year, and I still adamantly believe that but that it is being covered up by fraudulent government accounting. But I did predict we would last year that 2008 would see recession and to those who say “prove it” all I can say is “OK, I was wrong. There is no evidence, yet, we are in a recession.”

So I am eating crow on that prediction unless or until proven otherwise. I’m taking responsibility for my wrong prediction of recession in 2008. But most people here refuse to do that. They shoot their mouth off about oil will never go below $100 or there is no speculation in oil priced at $145/Bbl and are never heard from again.

Apologies to ex-Texan or Hydroshock or Travis McGee or any others? Don’t hold your breath. At least we no longer hear people calling them Liberal doom-and-gloomers talking down the economy to get Obama elected and telling them to leave and go post on DU.

[Huck]

Well, this morning I am pretty sure you are correct. Luckily so far I just took a little nibble in. Looks like the doomsday scenario is playing out. Key word: Patience. I was getting a bit ahead of myself is all. I was so excited when I realized that this is actually an opportunity, and that I'm positioned to capitalize on it, I got a wee bit ahead of events. The writing is on the wall, but apparantly it takes a lot of people a long time to read it. And I can't simply apply rational thought to an irrational market. So, lesson learned with little if any harm done. I'll keep my powder dry, keep my house in order, and be patient while this whole mess unfolds. I realize now even though it's pretty clear what's coming, I have to stay calm and let it happen. People are still in denial.

Beyond that, where's the market going to be when President Obama gets tested, and we get attacked? I hate to say that, but that's what I see coming. So yea, I'll cool my jets and wait for the real opportunties later on, when everyone comes to grips with reality. Hell, that probably won't be til next summer at the earliest.

[Freedom_Is_Not_Free]

You are making a lot of sense and you sound well positioned to exploit the recovery when it comes.

You did me a HUGE favor by saying the one word that has been eluding me... “Patience.”

I’ve been studying this crisis for 15-16 months and I am getting fatigued to the point that I want to invest my cash back in the markets just to be done with it and quit thinking about it. I’m just sick to death of this crisis, of the falling markets, the mounting bank closures and house repossessions, rising unemployment. I just want to get back to normal.

Yet I know this crisis has to unwind in it’s own relentless, unyielding timeframe. I am becoming impatient and that leads to mistakes. Patience, however long it takes, is going to have to be my keel, keeping me on course. This deleveraging will go on for months and I am stuck doing nothing but sitting on the sidelines in cash. I’m getting antsy, but you said the operative word that I need to repeat daily... “Patience”.

[Freedom_Is_Not_Free]

Of course, being patient doesn't mean I still don't feel like these guys do...

[Huck]

LOL! Love it. That’s me too. Thanks for the laugh. I needed it. Screw it though. We’re getting raped by the gubmint, scammed by the greedheads, and dragged down with the fools. We can at least get something out of it. I look at it as the reward for good behavior. Pass the carrion. I’m hungry!

[Huck]

Yup. Patience. Rugles4ever put that one on the table, and it’s true. Our problem is we’re getting ahead of ourselves. A lot of fools still have no idea what’s happening, or are in denial. Of course, Buffett said BUY. I’m still gonna buy on the way down, I’m just gonna wait a while before I buy anymore, and I’m looking for real craptastic prices. I think the doomsday scenario is playing out. Time to just chill out for a bit.

[Freedom_Is_Not_Free]

Of course Buffet said buy! If I could get Goldman Sach preferred shares below market paying a guaranteed 10% dividend, I would be buying all day as well. GS is one of the 9 banks anointed by the US government and therefore CANNOT go bankrupt and will be supported vigorously. Buffet’s deal was pure gravy. I take that deal all day and twice on Sunday. Sweetness. How do I get that deal?

[downwdims]

Buys Altria