|
Well folks, fasten your seatbelts as 2008 is going to be a tough year for the economy. If you haven’t already, I recommend reading Dr. Adibi’s (the renowned Iranian American economist at Chapman University) article which is published in this issue. The writing has been on the wall for a while as the job creation has hit a wall, while foreclosures, tight credit and sinking prices are roiling the housing market. The price of gas is up, but for many, wages are not. Investors are alarmed, consumers are anxious, and that discouraging word, recession, is being heard.
After reading all the news headlines of the past few months, first I was somewhat skeptical but then my true measure of “bad times ahead” came. Let me explain. I work for a large company in the consumer goods business. We make office supplies; you know, the kind you use at the office or school (mundane stuff). The company is financially very conservative and you might say somewhat recession proof. Then came last January when the division VP called everyone into a large room and gave us the news. You know the type- it kind of starts like this: “As you know, our business continues to experience pressure on a number of fronts. The overall softening of the American economy and resulting inventory reductions, etc, etc.” And then he gave us the punch line: “I’ve asked you here so I can announce a modest reduction in headcount.” What headcount reduction action tells me is this: if this kind of business is having a tough time, then it must really be bad out there.
So how bad is it? While no one knows for sure or wants to admit, even President George W. Bush - the economic optimist in chief - acknowledged that things aren't all that rosy.
We have been told that a major recession is coming soon and many indications tell me that we are in one now. We are now beginning to hear it from all sorts of politicians and experts. When it comes to the economy, I often say that it is better than the Democrats say it is; however, it is worse than the Republicans think it is. The truth is, there are now more economic indicators pointing to bad times ahead. Add to that the inflationary pressure that is out there due to higher oil prices which has affected the cost of everything we use.
Speaking of inflation, I have learned not to be fooled by the numbers published by the government. In many cases, their numbers exclude energy and other major costs. In their minds there is no inflation if you do not eat, drive, or get sick. Since I drive, get sick, and eat (thanks to my good friends at Super Irvine and Wholesome Choice for keeping their prices low), there is inflation out there and it is real.
How did we get into this mess and whose fault is it? Put simply, it’s all of us. But there are three distinct groups we can blame for this mess, including the Federal Reserve, financial institutions, and yes, US the consumers. Let’s start with the one and only famous Mr. Alan Greenspan, former Federal Reserve Chairman. After the awful event of 9/11, the Fed (rightly so) started cutting rates to jump start the ailing economy. Many now believe that it was overdone and it went on too long.
I could never figure this guy out and I don’t think many others could either. He had some strange way of talking. Take this quote for example “I know that you think you know what I said. But I'm not sure whether you understood that what you heard is what I meant.” Huh? Or, “How do we know when irrational exuberance has unduly escalated asset values?” Awhile back he revealed more about his thoughts on the housing crisis by saying “So far, prices have dropped only slightly. But it was enough to cause alarm around the world. Prices are going to fall much lower yet.” Furthermore he said “There is no doubt about the fact that low interest rates for long-term government bonds have caused the real estate bubble in the United States. The Federal Reserve began a series of interest rate increases in 2004. We were hoping to bring the speculative excesses in the real estate sector under control. We failed. We tried it again in 2005. Failure.” Fortunately, his successor, Chairman Ben Bernanke, has just indicated that he intends to do whatever he can to stimulate the economy without making the same mistakes as his predecessors. I have no idea how he will do this, but then again, I’m not expected to.
The other groups to blame are the financial institutions and all of their cronies, from mortgage brokers, to appraisers, builders, home insurers and all associated service providers. In the past few years if you could produce a name and address, you got a loan. We saw all sorts of gimmicks from interest only ARM 3/5/10, balloon mortgage, to even a 40 year mortgage. In short, money was easy to get and there were plenty of people to help you get it and make a profit along the way. Now that the housing market is in the pits, many are going belly up. Are we surprised? Not really. This has of course stuck a finger in the eye of a lot of dumb entities that loaned money to people who had more dreams than cash to pay for them. It suits me fine when large institutions are punished for greed and stupidity, and their leaders are forced to depart in ignominy. I am sure we will see more Enron type fiascos soon.
Finally, it is easy to sit back and blame all problems on "them" whoever they may be, but the reality is we have way too many people who also take no responsibility for their own situation and now they want to blame the business community for all the problems. Well, ultimately the business community will reside where it can thrive and compete effectively. There was this craze among the general public who treated the equity in their home as an ATM machine, got the cash out and spent it any way, shape or form they desired. Don’t get me wrong - I have nothing against getting a home equity to remodel or pay for some other investments, but when you see people refinancing to get a new car, pay for a vacation to some exotic places, or to simply have fun, you wonder what they were thinking. Remember the flippers? They were the folks who would buy and "flip" a property in a matter of weeks and make money. What was lost in all of these was the fact that many were borrowing beyond their means. They never thought that someday a loan has to be repaid.
So, as the race for the White House moves to the heartland and beyond, there are now signs that substance, fueled by job and money worries, is making a comeback. That's a good thing. If you recall, in Iowa the buzz was Barack Obama's charisma and Mike Huckabee's debut. In New Hampshire, it was Hillary Clinton's watershed moment and John McCain's surge. It was all great fun, and it launched a real race for both the Democratic and Republican presidential nominations. Now it's time to get serious. Hopefully all the candidates recognize that the getting-to-know-you phase of the campaign is over. The race for president should be more than a popularity contest. Issues matter.
One of those issues, perhaps the biggest issue, is going to be the economy. Jump-starting the economy in the short term is a problem for Bush and the current Congress. Those who want to be the next President need to take a longer view. They should talk more- and more specifically- about things such as free trade and globalization, controlling the soaring cost of medical care, freeing the nation from its dependence on oil, and securing Social Security and other entitlements for the future.
Of course, the economy isn't the only issue. The Iraq war, terrorism and illegal immigration are also pressing and important. Other unforeseen problems will no doubt bubble up in the months before November. With the nation sliding toward recession and voters worried about hanging onto their paychecks and paying their bills, it's time to talk dollars and sense. With the general election still over 9 months away, contenders should do themselves a favor and remember another contender back in the 1990s whose famous words have never rung more true, "It’s the economy, stupid." I am also seeing some positive signs. Young people are energized and enthused and voting their hearts and minds as never before. That’s terrific for our nation. Plus, for those with an eye on local economy, think about the millions of dollars of advertising coming into the marketplace as voters fight over the wisdom of casino gambling, for instance, as well as who should be the CEO of the world’s most powerful multi-national corporation. Better still, a depressed housing market means that people who DO have a little bit of cash can now afford to move into that dream home whose price was formerly jacked up to ridiculous heights by the idiotic inflation of the market by morons wielding cheap debt. I’ll bet they’re one step closer to people who might actually be able to purchase them with a little more equity.
Beyond that? Consider this: every downside has an upside for somebody. When stocks fall, Warren Buffet does a little dance. For him, because he’s so smart, the moderation of prices represents a chance to invest in companies who are suddenly unappreciated for what they do. We Iranians are typically conservative and save for hard times. Still it is worth telling you to make sure to protect yourself and your family from future financial turmoil by "tightening your belts," spending less money, and diversifying your investments. Let’s try to keep our heads about us. As a wise man once observed, there will be growth in the spring. Until then, bundle up and try to enjoy the cold. I hear it’s good for the circulation.
|
