dow 6000

My prediction of six months ago just came through. But if you insist and stick to closing numbers only, I should say it is about to come through, a few hours from now. The Dow Jones is below 7,000 for the first time since late 1997. I believe it has a ways to go. I have said it many times, I am a dyed-in-the-wool optimist and 6,000 was too optimistic. 5,000 anyone?

Did you also notice that AIG has just reported the biggest quarterly corporate loss in American history? And that GM is among the walking dead? Or that California unemployment is in the double-digit range now? It is scary to see how quickly all these predictions are coming through. Given how early -yes, you read that right, early- we are in this crisis, that should just scare the hell out of us.

It seems unlikely that we will come out of this crisis in less than 10 years. That is my optimistic scenario. The damage will be widespread and it will be very serious. Better hold on to your seats.

Best is to buy gold. Never mind that the price will fluctuate. A few years from now it won't seem all that important anymore.

the implosion continues

Chinese exports dropped significantly in November. The magnitude shocked economists. Read about it in the New York Times today. See my other postings on China. This turned out to be an easy prediction.

It is also a further indication that the crisis is far from over. Seriously, the worst is yet to come. For those of you who think we reached bottom, think again. I also stick to my prediction of a Dow 6000. I don't see any improvement until at least mid-2010. Most economists believe things will turn around in mid-2009, but then again, they don't get paid to spread bad news. And economists have been wrong before. Recently, as a matter of fact.

we're going to six

The Dow went down in the 7,000 range today. Just as I predicted a while ago. And we are not done yet. I am sure we will go into the 6,000's before long. I also think the threat of deflation is now very real. The administration keeps on saying the chances are low, but they also said the American economy was fundamentally sound. I think it is fundamentally flawed.

They also said a lot of other things that make no sense, like housing prices always go up, and any housing market is local, and we may go into a recession -we already are-, and we should invade Iraq, and they have WMD's. Fortunately the administration is on its way out. The new one promised change and we will give it the benefit of the doubt, at least for now. Don't hold your breath though, you might suffocate.

Believe it or not, but what is happening in the market is good news. I say that even though my savings and retirement accounts are losing money like leaky sieves. I am somewhat worried too, but ultimately I see it as a sacrifice for the common good.

We are going to become more frugal and any sane environmentalist needs to applaud such a move. Unfortunately, in an economy that relies on consumer spending, that means great and widespread pain is inevitable. But the end result can be a good thing. It's a bit like giving birth. It hurts but in the end it is worth it. 

What we need now is for someone to step in and raise gas prices. I know many of you think I am crazy for saying this, but it is necessary. Like a cigarette tax, we need to get people away from gas and energy waste. The sooner we do so the better. I hope -but doubt- that Obama has the guts.

ticking time bombs

You may wonder why do people not spend? Why are American consumers capitulating? 

Let me first say that this may be bad news in the short to medium term, especially given the fact that our economy depends on consumer spending, but in the long run this is exactly what we need: less spending, less consumption, more savings.

Right now though, it is painful, and believe me, it will get much more painful soon enough.

The word on the street is that the American consumer has stopped spending because of the uncertain economic outlook and the uncertain labor market.  But we have been through recessions before and we have dealt with job losses and high unemployment before. But that did not stop consumers from spending. In some instances, we appear -appear is the right word- to have spent our way out of a recession. So what is different now?

What is happening is that there are a whole group of people who seem to be doing fine and who are making payments on their loans, but who can see foreclosure coming. Like deer in the headlights of an oncoming truck, these consumers are paralyzed. And as surely as the deer, they are about to get run over. The only difference is that they are not only paralyzed, they can't move even if they wanted to. They are sitting on a ticking time bomb.

We are talking about the households with interest-only, and pay-as-you-go ARMs. The folks whose mortgages are negatively amortized. The people who are in for a whopping reset. A reset that will start happening soon.

The vast majority of these folks live in Arizona, California, Florida, Nevada, and other states already hard hit by the current crisis. So far, they are still making payments because their loans haven't reset yet. They are the invisible problem. As time goes by, they are also increasingly underwater, meaning they owe more than their house is worth. 

There are two forces at work here. As prices drop, more of them go under, and as time goes by their principal grows -because they pay less than is needed. These folks are terrified and they stopped buying. They are hoping for a bail-out. They are holding on for as long as they can. They are selling assets to survive. They are further depressing prices.

We are entering a vicious circle. Actually we are already in, but there is still time for a fix. That time however is running out. Another time-bomb is waiting in the wings. It is called the Christmas shopping season. It is what retailers depend on for 25%-50% of their annual income. It promises to be a major disaster. Given how many people's livelihoods depend on retail that means a big jump in unemployment around New Year. More unpaid mortgages will result. Even people who have fixed rate loans and are able to make payments and who have good credit will now be affected.

The result is a third time-bomb to start ticking. It is the investor time bomb. At some point investors will capitulate too. They will panic, or they will need the money in their meager savings and 401k's to survive. That will cause the market to fall further. Previously I mentioned a Dow at 7000. Now I am projecting 6000. It seems all but inevitable.