deflation is happening right now

You know how it always takes a year or more before officials declare we are in a recession? No doubt they hope the recession will be over before they admit to it so they never have to acknowledge its existence, except in retrospect. While the country is suffering, everyone keeps on repeating, "we may be in a recession, if this keeps going, we will end up in a recession, the fears of recession run high, etc., etc."

Well, this time around there is no such quibbling. The current "recession"  has been confirmed. Furthermore, we have heard it has already lasted over a year. But does that mean officials are reverting to straight talk? Dream on.

First of all, we are NOT in a recession, we are in a depression. How long will it take before someone is willing to state that obvious fact? We are just reading the same evasive sentences with a different noun. "People fear the recession may give way to depression, there is a chance of depression, the likelihood of depression goes up, if the economy continues to slip, we may enter a depression, blah, blah."

Next, deflation is for real too. We are, right now and at this very time, experiencing deflation. We are not "in danger of, slipping into, fearful of, etc," deflation is here and it is here NOW. Everybody knows prices are going down instead of up. Everybody is expecting and waiting for them to drop further. Just try to sell something and you will see. 

Normally selling something around christmas is the easiest thing in the world. People are in buying mode at this time of year. You can sell ice to the eskimos at christmas. Not so in 2008. Not so unless you are willing to discount the hell out of things and give freebies on top of it.

Nobody in their right mind will pay full price for anything anymore. Nobody will buy items that are on sale if "on sale" means a meager 10-20% off. People expect prices to be AT LEAST 30% off and I won't buy anything unless it is 50% off. Neither should you, unless you are tired of your money.

That is deflation. Serious deflation!

Even the government's own figures show deflation is real. After extensive data massaging to make something look good, all officials can come up with is an inflation rate of 0.1% (0.2% for the optimists). But anything less than 1% inflation is de facto deflation. 

You heard it here. Look around, it is there for everyone to see. Prices are dropping like bricks from the sky.

Meanwhile, the Fed is expected to lower interest rates to 0.5%. Big deal. Last week they sold treasuries at 0%, a guaranteed loss after expenses. Investors are willing to lend Uncle Sam money for free. They are willing to pay Uncle Sam to lend money to him!

And guess what? The offering was FOUR TIMES oversubscribed. That, my dear friends, is called deflation !

the crisis explained-without equations or buzz words

The current economic crisis is easy enough to understand. There is no need for fancy (or at least fancy-looking) equations or buzz words such as "the liquidity trap." It is quite simple and also easy to see why it has not hit bottom yet and will continue for a long time to come.

It all started with housing. The bubble burst. Too many people had bought houses they could not afford, or houses they never intended to live in but were going to "flip" for a quick profit, or extra houses they did not need. More people had refinanced their existing homes to cash out equity and spend it on frivolous things that they did not need.

The whole financial system went along with this, happily making money. As time went on, the finance guys got bolder and bolder, inventing ever more creative ways to get commissions and reap benefits. They lured developers, builders, appraisers, land speculators and others into their game. Everyone was getting drunk with success, and the more drunk they got, the more risky and borderline their moves became. Quite a few stepped over the line too.

The financiers also snared local and foreign investors with complex financial arrangements. Soon enough the insurers found ways to participate as well.

Each step along the way, everyone added some leverage. More and more hot air entered the bubble. Eventually it burst. It burst with a loud pop, but because it was so large and convoluted and had some many compartments, it is still popping left and right and leaking excess as we speak. In fact there are many parts of it that are still hyperinflated and have not felt the inevitable pop yet.

Now we have many folks who lost their homes. A significant number of them counted on their home, not just to live in, but to fund their retirement and their children's education. On top of it all, many of these people also lost what meager savings they had in their retirement accounts.

Huge numbers are "underwater" with their mortgages. They owe more than their house is worth. Even if they stay put, they perceive a huge loss and many of them too counted on their home to pay for future expenses.

Everybody lost big in their retirement savings. With so many baby boomers close to retirement and therefore unable to recover easily, the trouble and the fear are widespread. 

With the loss of retirement people think they will need to work longer. But jobs are disappearing too. Even those with jobs today, face uncertainty. Those who lost their job are close to despair. Nearly everyone is without savings to fall back on so the fear of joblessness is truly paralyzing for many.

Meanwhile credit has dried up. Faced with huge losses, complicated financial instruments that are incomprehensible and likely worthless, widespread fraud, and a poor economy, nobody is willing to lend money anymore. All cash influxes are immediately earmarked to fill the black hole of losses or perceived losses and no amount of cash influx increases the appetite to lend or to spend. All the money the government doles out disappears in a black hole.

Consumers refrain from replacing items that work. They postpone expenditures, they forgo luxuries or anything that is not necessary. They cancel trips and vacations. Many make deep cuts that may even include seeking medical help. They are in survival mode. All cash provided to them is immediately sucked into their own personal black hole.

Meanwhile there is excess inventory. There are too many houses and more appear every day. Prices crater, causing more problems for those with mortgages trying to survive. There are no buyers. Nobody is in the mood to think long term. Few have money to spend, some want to wait because they think prices will fall further and a lot are cut out because there is no credit even for those with good scores.

There is also excess inventory in other goods, including non-durables. All these were produced and are produced based on projections that are now far too optimistic. Inventories grow and companies slash prices and start layoffs. That further reduces the buyer pool and leads to expectations of more price drops.

Consumers are no longer interested in discretionary spending. They are no longer into bargains. They are in survival mode. Other things are no longer in their minds. They are deaf to the siren call of advertisers. They are saving and looking to save more.

New investment is halted because nobody wants to consider it. There are no buyers, and even the dreamers have ceased to dream. Nobody wants to focus on the long haul when they fear near term disaster. People dying of thirst in the desert are immune to 80% discounts on clothing.

Additionally, bad memories linger much longer than good ones. So expect people to take a very long time to change their habits -even if they could, but most can't anyhow.

Welcome to the depression of 2008. I'll be surprised if it clears before 2015. As you can see, I am an optimist. It took over 10 years and a world war to resolve the 1930's depression. 

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.

global warming is not the problem..

and technology is not the answer.

Global warming is but one symptom of humans destroying their habitat. There are many other, equally disturbing conditions. Trash is building up, fisheries are disappearing, pollution is destroying water supplies, the list is endless. All these are due to one thing and one thing only, too many humans using too many resources too quickly. We are overgrowing our fish bowl.

The answer to these problems is quite simple: we need to cut back. We don't need new green technology, and we certainly don't need people trashing good stuff just to buy new energy efficient gadgets. We need people to stop buying new things all the time.

That will mean our economy will contract. But that is a positive thing. There will be some pain of course, but it will be much less than the pain we will inflict upon ourselves if we keep going the way we are now. Driven by out-of-control consumerism.

Consumerism has several origins. As any species, we are opportunistic. When we have plenty we quickly expand to use it all. We expand by generating more offspring, but also by increasing our individual consumption. That is all fine but we are setting ourselves up for massive losses at a later time. No species can keep growing at the rate we are.

Spending is also deeply ingrained in our brains. It is key to reproductive success. It is "sexy" as some might say. Males spend to impress females. Females choose males who have plenty as that will enhance the chances for their offspring. Both sexes are involved in a never ending quest to consume more. Nobody is keeping an eye on the future.

Unfortunately, we are on a runaway course. We have very few enemies and nothing significant to trim our numbers, other than massive disasters. And massive disasters are in our future if we keep going. 

What form those disasters will take is anyone's guess. But they will surely happen and they will be of enormous magnitude. Just like housing prices can't keep going up forever, or the Dow can't stay on its hockey stick curve, human populations will not be able to keep up their present expansion. Serious and devastating cutbacks will happen. 

Unless we use our brains and voluntarily cut back. Don't count on it though!

thainted

Mr. Thain wants his $10 million bonus. Merrill's board is not too happy but I am sure they will eventually cave. After all he has been on the job almost a year, and he "saved" Merrill Lynch by selling it to Bank of America. He also made sure BoA will give him a job and in doing so he will no doubt get his "full" bonus a year from now, when all is calm and close scrutiny is a thing of the past.

Just exactly what did Mr Thain do that he "deserves" such a premium? Well, he happened to be in the right place at the right time. Next to a large pot of money that is. In the overall scheme of these things, his mere $10 million looks small and puny. In the eyes of those losing their jobs it probably looks a bit different.

But the true touch of genius was to sell and make sure he got a good deal for himself at BoA. So you could argue, maybe he does deserve his exorbitant pay after all?

The trouble with excessive pay packages is that they only make people more greedy. They only encourage them to line their pockets even more. The pay, which is meant to encourage the executive to do the right thing is corrupting him or her. Just like absolute power absolutely corrupts, excessive pay leads to excessive greed and excessive self-interest.

Detroit green (and red)

Cadillac just introduced its version of a green car. The Escalade hybrid, a $72,865 monster with a 6.0 liter, V8 engine. Its gas mileage rating is 20/21 mpg. Even the Wall Street Journal thinks the monster is so overloaded with junk that its gas mileage suffers. That should tell you something.

Chrysler too, launched its solution to greenhouse gases. The 2009 Aspen Hybrid 4WD. At $45,570 it is a whole lot cheaper than the Cadillac shoebox, but energy wise, it is a serious competitor. It has a 5.7 liter V8, that gets an amazing 20/22 rating.

You should know that hybrid technology is really a hoax. See some of my earlier postings for more on that. Nevertheless, most hybrid makers do try to save gas in some ways and that is helpful. So hats off to Toyota!

Detroit on the other hand does not even try. And that is why we should let the go out of business. We, the taxpayers should say no to the whiners from Michigan.

Here is failure number one about to happen, for the Democrats and the Obama team. Most likely they will decide they need to save the car makers. Not because it makes any sense whatsoever, but because their constituents and donors at UAW will force their hand. Saving the "big three" is a dumb thing to do, even from a purely economic point of view.  But for Obama, who made energy policy and climate change a big campaign issue, it is a litmus test. Even in these dire economic times, he should stand firm. Especially now.

He should stand firm because climate change is real and it will cost real jobs. There are no two ways about it. It will cause pain and suffering, and if Obama or anyone else for that matter, can't do it in a situation were it makes economic sense, what can we expect in other situations?

The sad truth is that Obama raised a record $750 million to win this campaign. While this is universally praised and admired, it is a setback of unheard of proportions. Not to be too cynical and call it a shame.

So, get ready for step one in the grand dance of paybacks. Saving dinosaurs who day in and day out prove to us that they deserve to go under.

When Cadillac disappears from the face of the planet, it will be a great day for all.

adult(erated) living

There is an article in today's WSJ about "adult living communities." This crazy idea, thought up by a fellow called Del Webb, attracted many well-off baby boomers, who envisioned an "active" retirement life-style. Active but without noisy children or misbehaving teens. In short, an artificial consumer-oriented life-style that is foreign to the human condition.

These aging baby-boomers wanted to be safe and isolated in their gated communities. Ensconced in their fairway villas and green lawns. Far away from the nuisances of life, they would devote their golden years to playing dominoes and golf with like minded friends. Unfortunately the financial crisis caught up with them. Maybe they don't realize it is a good thing. Bring some new life in the game before their graveyard hideaway becomes just that.

Now they are forced to admit younger residents to help pay the bills. But with younger residents come children, teens, and young adults. Oh horror of horrors !

It is not just the aging adults in their protective cocoons who are complaining. Cities too are unhappy because now they will have to provide services like schools, etc. That cuts into their profits. In some cases, cities had granted tax breaks to the adult communities. Adding services that are unpaid for is not to their liking. However, it is not the profit and loss that strikes me as odd. Surely people will find a way to handle all that. 

It is the very (sick) notion that drives people away from one another into secluded hiding with like minded individuals. Sadly enough, for seniors such an idyllic hideaway slowly decays in synch with their aging bodies. Soon enough they won't leave their homes. With nothing to watch except other aging creatures stumbling around on artificially green links, life will seem desperate indeed. I am not sure it is that much better than looking at an abandoned construction site. 

Why these people want to depart the real world in order to cling to a virtual reality is beyond me. It is all part of consumerism I guess.