by Jerome a Paris
Thu Sep 14th, 2006 at 10:54:14 AM EST
Crossposted from DailyKos. Thanks for your support.
From <u>"the long and short"</u>, by Jesse Eisinger, a regular columnist in the Wall Street Journal (sorry, no link, my transcript from the paper version, p.22 of the European edition) comes the following scathing indictment of the performance of the economy since 2001.
The title, "The lagging effect of 9/11", appears to blame the terrorist attacks, but that's not quite what the column says...
Corporate profits are off the charts. (...) companies aren't investing as much as they should to create future earning streams, preferring to pay dividends and buy back shares.
"I don't think we have ever seen an expansion of corporate profits in a business cycle where such a large share can be attributed to economic policy makers' behavior rather than corporate behavior", says Doug Cliggot, chief investment officer of Race Point Asset Managment.
In a word: this is not wealth creation, this is wealth capture by corporates, thanks to hand outs by the Bush administration.
Cash was cheap. Now it's not
Speculation has been the order of the day. The housingmarket has exploded, as one bubble has been replaced with a larger bubble.
I have not written about this in a long time, but here's a reminder: this is the handywork of "Bubbles" Greenspan, who has flooded the world with cheap money. While a temporary boost after 9/11 was understandable and necessary, it was unconscionable to leave Fed rates as low as he did for so long. Now the oil bubble (i.e. dollars funded by debt used to pay for oil and recycled by oil producing countries in US Treasuries, effectively funding the oil purchases and thus allowing the trade balance to deteriorate further at no immediate cost to Americans) is hiding the deflating of the house bubble.
Debt is king
...total liabilities of US households represented 18.5% of total assets last year, a record.
"What's more remarkableis that the ratio is still going up, even though asset prices of real estate have been going up at a rapid rate. Tha means people are borrowing more and more." Paul Kastril, Northern Trust's head economist, says.
Households have long been providers of funds to businesses and countries. Now they are net borrowers. It's a radical change.(...)
Many of these asset gains will prove fleeting, of course; the debt won't go away. (...) Goldman Sachs economists now predict that home prices nationwide will fall next year on average.
"What we are investing in is 5000-square-foot homes. It's more of a consumption good than an investment that leaads to higher productivity and output"
The cheap credit did its job of pulling us out of the recession of 2001. But the juice was more like a shot of adrenaline than a free-weighty workout that made us genuinely stronger
Not to mention that McMansions aggravate the energy/sustanability issues of the US economy But you'd think you're reading one the extremist ecobloggers of DailyKos...
"We may now be in for a lenghthy period of weakness in consumer spending where lenghthy is measured in years rather than in quarters", says Goldman Sachs economist Jan Hatzius
Hey, it's okay. Dems, back in power, will be blamed...
So how have banks reacted to this changed landscape? They've gorged on real estate. - loans to folkwho might not be able to afford their homes, financing for commercial real-estate developments, and investments in mortgage-backed securities. According to Fed data, more than 62% ofU.S. banks' earning assets - that is their loans and investments - are real estate linked. So (...) they're more exposed to the now-obvious housing bubble.
Tha banks and the rest of the finance industry should heed the rule of holes: When in one, stop digging.
That's the most unpredictable element in this whole thing: what will be the impact on the financial sector of the deflating bubbles? Will it be passed on to the whole economy through the myriad hedgin instruments that have been used, or will the banks (or a few major banks) will be so severely weakened that a bailout becomes necessary? Will panic replace the frenzy of recent years?
"Cry Bubble" could be the story of the past few years, as the imbalances pointed out by the bears have yet to result in a serious correction. But what happens if and when it finally happens? The fair answer is that nobody knows. what's sure is that US households and banks seem particularly exposed.
What's equally clear is that the bearish view is no longer confined to a few crackpots.