An in-depth look at the long term, or just how bad things are looking

I will be taking a crack at boiling down some fantastic work posted  by one Barry Ritholz who is giving us an excerpt from A.G. Shillings mag INSIGHT  : Long Term Outlook: Slow Growth and Deflation

Of course this is US based stats but just as the political cartoon illustrated, Canada is the tugboat tied to the US Titanic. The article gives us some damned chilling charts even without the analysis. Not being an economist in any sense of the word im never going to be able to translate econo-speak and financialese very well  if at all but I will as part of this blog try my best to explain just what the hell is going on and how what is going on now compares to historical examples and in my opinion the closest example we have to the current crisis is the great depression. By closest example I mean that, as i will explain shortly, what is happening now is looking to be a lot worse than the last time.

To help demonstrate check out the second graph, it covers average house prices since the late 1800’s to the present. Throughout the past century the average prices have stayed below 120,ooo and the chart gives us the average price between 1946-98 as 110,000. Now consider just how high prices spiked in the last few years, going all the way above 200,000 before the housing crash we are now experiencing reducing the spike to somewhere nearing 140,000 and that is likely to continue to drop as things get worse. Already we see a housing spike that far exceeds anything seen in the last century, now consider that the many trillion dollar financial industry was built up around this extreme anomaly or rather it worked to create this housing bubble. Getting back to comparing our situation to the 30’s, they had no such spike but the depression knocked housing prices  down for decades. How the hell can we possibly even consider trying to recreate the unsustainable prices that the financial industry is dependent on for its trillion dollar market. Already the impossible and insane is required to return to “normal”, at least the normal that the financial industry wants.

Next the article goes into consumer spending in relation to consumer debt. the fourth chart gives us the percentage of consumer spending making up the US GDP.  At the moment it is in the high 60’s and will probably continue to plummet from the high of 71% in 08. Consumer spending has risen so much because consumers have been binging on the credit world, our “gotta have it now, damned the cost in the long run” mindset has left savings empty and consumers in massive debt. and for what? everything gained from this binge will disappear, the mc mansions, suvs, high tech gadgets all of useless crap we avoided saving money or took out massive loans to buy.

easy come easy go as they say

Just like the first great depression, the swinging twenties and boom that it was could not go on, but one of the differences this time is that the cliff we are falling from is a lot higher. the major economic activity of the  economy during that era was not dependent on our service and retail industries, industries entirely dependent on consumer spending(again spending that is falling off a cliff). What is left in our economy but the illusory wealth created by finance and our conspicuous spending on fast food and expensive crap? little to nothing, construction was supported by the housing bubble,  major industry in the factory sense has with exception of the arms industry been shipped off to exploit third world labor, technology wise the rest of the world has been rapidly catching up with many if not most new developments being made outside of north america(easily demonstrated by casually looking at telecommunications where japan and south korea offering far better services for far less, and the list goes on.

this helps sum it up from the article:

Now, however, consumers have run out of borrowing power. As of the third quarter 2008, homeowners with mortgages had on average 25% equity in their abodes after all mortgage debt was removed and that number will probably drop to the 10%-15% range with the further decline in house prices we are forecasting (Chart 3). At that bottom, after a 37% peak-to-trough collapse, almost 25 million homeowners, or nearly half the 51 million with mortgages, will be under water, with their mortgages bigger than their house values. In total, the gap will be about $1 trillion.

the rest of the article as mentioned is pretty good and looks at a lot of different angles to this mess including reactions in foreign markets and again more econospeak that I am never going to be able to explain let alone really understand myself but they have a good handle on it, so do give it a look.

Leaving today with some nasty stats and facts we are at the least facing years or even decades of slow recovery and never to the fraudulent and unsustainable levels of the past decades. This quotes helps sum up just how fucked the system is:

This reaction to big bonuses in firms that are taking huge writeoffs, losing big money and requiring massive government bailouts was predictable. From 2002 to 2008, the five largest Wall Street firms paid $190 billion in bonuses while earning $76 billion in profits. Last year, they had a combined net loss of $25 billion but paid bonuses of $26 billion.

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