The Crisis Continues

Morris Segall      2009 economy, crisis, economy

The current panic in worldwide equity markets beginning overseas and today hitting the U.S. reflects a new round of concern due to continuing bank losses starting with Asian and U.K. banks and extending to further losses being reported by U.S. banks. A year ago we wrote about the worsening credit crises in banking here and abroad, “Is Something Burning”, January 22, 2008. At that time, the equity markets were in severe decline and we warned about breaching cycle lows. A year later we are witnessing a repeat as the Dow falls again below 8000 and the S & P 500 Index approaches the lows of 2002-03. Despite all the efforts by governments and central banks to stabilize the banking system we face a new round of asset writedowns. We are struck by the difference in this credit downturn and the savings and loan debacle of 20 years ago. In our opinion this adverse credit cycle is being extended by the preponderance of paper backing and leveraging the asset bubbles in real estate and consumer lending. While hard assets will reach an defineable intrinsic value in a reasonable period of time after the asset pricing bubble bursts, paper asset valuations are more ephemeral. They are subject to the vagaries of investor psychology and risk appetites. The new round of bank losses have more to do with the re-pricing of market value of paper assets than a new decline in hard assets and this is more difficult to stabilize. Government and central bank “bailout” programs are fighting to stablilize assets that have no hard value and increasingly illiquid. The cost of saving the world’s banking system is becoming staggering and may result in the system essentially becoming nationalized at least for a period of time. We are entering uncharted territory in the post war economic period with governments and central banks becoming the buyers and market makers for privately held debt.

And Now Its India

Morris Segall     

The recent attack in Mumbai is a natural progression to the deteriorating terrorist situation enamanting from Pakistan that we warned about in our May 28, 2008 article, “Setback in War on Terror” and our December 23 and 27th articles on Pakistan.

President Obama will inherit a flammable Indian subcontinent with the Taliban resurging in Afghanistan and Pakistan sliding into instability as Islamic militants control key areas of the country and undermine the central government which is in disarray since the assassination of Benazir Bhutto. Saving Pakistan is one of the top foreign policy priorities of the Obama administration.

A loss of Pakistan to Islamic fundamentalists would force us out of Afghanistan as our position there would be untenable. It would put nuclear weapons in the hands of extremists and directly threaten India, which also has nuclear weapons.

The severe decline in the Indian economy in the current worldwide recession has made the situation more volatile. Increased unemployment and hardship on the Indian population are leading to popular unrest and resentment toward the Indian government. Further terrorist attacks by Muslim extremists coming from Pakistan will lead to nationalist fervor to respond militarily against Pakistan and lead to ethnic violence between Hindus and Muslims in India itself.

A loss of Afghanistan and Pakistan to Islamic fundamentalists would validate our previous concerns of an Islamic fundamentalist sphere from Iran to India with Iran’s hegemony extending to Syria and most likely Iraq after a U.S. withdrawal.  All of this is exacerbated by the worsening recession in Asia which is souring local populations on Western free market capitalism.

At a time when there are so many leaks in the dikes, President Obama and his foreign policy team need to keep the dam from breaking in the Indian subcontinent.

Economic Intelligence Report for 2009

Morris Segall      2009 economy, business landscape, economic intelligence report

Consumers Weaning Themselves Off Debt

Morris Segall      consumers, debt

Although it is premature to say with absolute certainty that American consumers are now looking at debt as a narcotic that got them hooked on a lifestyle they could not afford and ultimately resulted in financial ruin.

I believe American consumers who are paying their debt down now will be more circumspect about “running it back up” after they get financially healthy again. This would be an unprecedented change in consumer financial attitudes but I am already seeing it encouraged in advertisements from financial institutions that are emphasizing financial safety and security rather than taking on credit to “follow your dreams”.

I am sticking my neck out here because the credit industry has always pushed credit on the consumer and the consumer has always been happy to take it. But I think this cycle has been so destructive that many consumers are feeling, if I can get out of this mess, I will not let myself get in it again. But read the article. The debt reduction by consumers is historic.

Unemployment Numbers

Morris Segall      economy, government, investing, unemployment

The government needs to invest in new industries that actually will re-employ the increasing number of unemployed. That includes energy, biotech, and agriculture.  For example, there is a 25,000 person shortage in technicians for wind farms. We can cross-train unemployed factory workers, including unemployed auto workers, to be wind farm turbine technicians. Those jobs pay $25 per hour.

If the government is going to spend another trillion dollars they should do a massive consumer rebate program with the emphasis on consumers paying down debt and getting current on their financial obligations, including mortgage, credit card and auto loans. If the consumer gets current on his debts, the financial system won’t have to write down consumer debt obligations.

The recession and credit crisis cannot end until the consumer is made financially sound and creditworthy again. Pumping dollars into banks, credit card companies, insurance companies and auto companies will not solve the recession until the consumer starts spending and begins to move goods off retailers’ shelves.

Market Observations

Morris Segall      bailout, debt, government

In my next article on the website regarding the economy and the government bailout measures I will postulate the following.

1.    The recession and credit crisis cannot end until the consumer is made financially sound and creditworthy again. Pumping dollars into banks, credit card companies, insurance cos. and auto cos. will not solve the recession until the consumer starts spending and begins to move goods off retailers’ shelves.

2.    That can’t happen as long as the consumer is losing his job (this Friday’s unemployment numbers will be between 300,000-400,000 lost jobs largely from white collar positions and an unemployment rate approaching 7%).

3.    If the government is going to spend another trillion dollars they should do a massive consumer rebate program with the emphasis on consumers paying down debt and getting current on their financial obligations, including mortgage, credit card and auto loans. If the consumer gets current on his debts, the financial system won’t have to write down consumer debt obligations.

4.    The government needs to invest in new industries that actually will re-employ the increasing number of unemployed. That includes energy, biotech, agriculture. Please see our PowerPoint slide presentations that highlight industries that we believe offer growth opportunities. For example, there is a 25,000 person shortage in technicians for wind farms. We can cross train unemployed factory workers including unemployed auto workers to be wind farm turbine technicians. Those jobs pay $25 per hour.

5.    We need to go back to removing bad debts from the books of banks and other credit intermediaries AND giving those institutions capital infusions to essentially take them back whole to where they were almost 2 years ago. At that point they will be in a position to lend again and in conjunction with the previous steps 3 and 4, we can create the environment for renewed consumer spending and lending.

6.    The government steps so far have been uneven and have not gotten to the root of the problems. In addition, the recession has spread overseas so there is not outlet of demand coming from exports. Please re-review our articles on the website under the ECONOMY category. There are predictions in those articles going back to last January that are relevant to today’s circumstances, including the prediction of onset of the current recession and the failure of the government bailout proposals

The Real Cost Of The Bailout

Morris Segall      bailout, banking system, obama

I’ve said publicly in the past that that I thought the cost of rescuing the banking system and the economy would easily be $2 trillion. It now looks like the Obama administration has a $700 billion stimulus package in the works on top of the current bailout package and the cost of bailing out banks and Wall St. so far.

If the $700 billion price tag of the Obama program is true, we are there.

This will likely not be the end and we could be looking at more than $2 trillion before this is all over. The impact on the Federal budget deficits and national debt will be enormous.

It also appears a major public works/infrastructure program will be part of the stimulus program. I have also been quoted by the Philadelphia Inquirer that I did not believe such a program will have the desired effect the government assumes. In an economy where more unemployed are white collar workers and state and local governments are slashing transportation and infrastructure programs, it is dubious the federal public works spending will have the multiplier stimulus impact.

We really need to have a whole new approach to this economy that is nothing like the historic post-war economy we have grown up with. Look what is happening to auto dealerships as a result of the demise of the big 3 auto makers. Historic solutions to recessions have already not worked, i.e. lowering interest rates alone. Bailing out sick companies is not the answer. Uncapped public spending to bail out companies will cost us dearly down the road.

The government’s strategy must be to put consumers back on their feet.  If the government wants to help consumers get back on their feet, they need to find jobs publicly or in the private sector for all of the white collar workers from finance, trade, business services, etc. that are chronically unemployed and are not finding ready re-employment.

The Economy: Getting Through the Recession

Morris Segall      economy, recession

SPG Trend Advisors and its affiliate, Sage Policy Group, make presentations on local and regional economies, the national economy, international and geopolitical issues and capital market events. We offer these presentations for our readers to gain additional information from our commentaries and further explanation of our analyses and forecasts.

Below is the first in a series of presentations we plan to showcase here on the SPG Trend blog.  While this was given on November 21, 2008, the content is still highly prescient: