What the TARP? Cutting Back to the Necessities: 3 Emerging Trends in this Economic Crisis. The Mighty are Falling, Consumers Forced to Save, and Job Protectionism.
In Los Angeles and other big cities many people get lost in the concrete jungle of urbanism. In fact, hundreds of people die alone each year without any human contact with the outside universe. It is as if they have disconnected from the actual grid of social interaction. Every year a service in Los Angeles is done with cremated remains of those who have passed away and city workers, with all their abilities try to find ties with potential family members. You would think that in a technologically advanced age that everyone would have at least one connection to another human in this world. That is not the case.
The reason I bring up this point is how disconnected we have gotten from one another and how this is simply one additional facet to this economic calamity. A few years ago I was getting a loan for an investment property. Nice little place that was out of the state and met my criteria for a good buy and hold rental. I shopped around for the best mortgage rate and found a place online in Arizona. The broker I worked with was a good salesman and all the paperwork was done via the phone and e-mail. Never met the guy. Got an excellent rate and didn’t even have to show one W-2 form. In fact, I could have gotten a loan 5 times as big if my heart desired and that was a scary prospect because it made me realize how little oversight was in the system.
I remember at the time that the broker was trying to push me into an option ARM but I had to explain to him that I strictly dealt with 30 year fixed mortgages. He was sincere in that he believed what he was trying to sell was truly the best product. It was more a case of ignorance and lack of future planning. I think of the $500 billion in option ARMs that will be striking down upon this nation in 2009 and 2010 during the worst economic crisis of our lives. The broker worked for a company that has long ago imploded. Not sure what he is doing today.
That is the ease in which a decentralized economy has allowed people to eliminate any face to face contact. Loans were made across the country to people who could have claimed anything on paper. No one really cared. Everything was front loaded and long-term planning didn’t matter. Like the person that passes away alone, usually the city workers find years and years of unpaid bills, QVC bought items that remain unopened, and observations that may seem incredible to the general public. Yet this is what we have on our hands at the moment. A decade of hidden bets, horrible investments, and toxic waste is now coming to the surface.
The Mighty are not Immune
Warren Buffet who once stated derivatives were “financial weapons of mass destruction” is now facing the wrath of the derivatives market. It is incredible that the cost to protect against Berkshire being unable to meet its debt payments based on credit-default swaps has more than tripled in two months. The swaps jumped over 475 basis points from 129 only two months ago. Berkshire is now down a stunning 43 percent for the year when the previous worst year in its 40 year record was a drop of 6.2 percent in 2001. Seeing this massive conglomerate take a near 50% hit is stunning and a blow to confidence. If the Oracle of Omaha can’t get it right in this market, who can?
Now, it isn’t that the [once] wealthiest man in the world is feeling the pain of the markets but what investments he made to feel the pain. He holds large stakes in American Express and Wells Fargo who haven’t done well in the current market. Berkshire’s income stream largely from insurance holdings is down 77%. His public buy of Goldman Sachs led many sheep to the slaughter thinking he saw value in the once Golden boy of Wall Street. Since that time, Goldman has been cut in half:
We also see the massive banking giant Citi taking a major pummeling in this current market. It is now trading well in the single digits even after announcing a major job cut of 52,000 for the upcoming months. It was the second biggest mass job layoff announcement in history. Take a look at Citi:
This market has no mercy for anyone. It would appear that the only safe place to be right now is in cash.
Consumers Forced to Save
There is a silent depression hitting the nation that is finally coming to the surface. That is the life of living on the edge of financial ruin with only one paycheck keeping you liquid. With unemployment sky rocketing, many people are being forced off that edge in a wave of insolvency. I think a story that highlights this is how a colleague thought that his home equity line and his credit cards were his “emergency savings” and this was his buffer. If he ever needed cash desperately, he had access to a $50,000 home equity line and $20,000 in credit cards. Well guess what? WaMu which was the home equity line provider closed his line down here in California since he was now in a negative equity position and his credit cards have been chopped down to $5,000. In his mind, he has had $65,000 in his savings wiped away. How many others are in this kind of mindset?
You also don’t want to count or trust the government completely. Remember that $700 billion TARP plan that was supposedly going to buy toxic assets? As it turns out, that never happened. Much of the funds went as capital injections to banks. This wasn’t the essence of the plan but these people are making it up as they go along. Ironically, since the bailout bill was passed the market has tanked even further:
A near 3,000 point drop in less than 2 months is a crash. Wasn’t the bailout suppose to stop a crash? Are you meaning to tell me that if the bailout didn’t go through the market would be 5,000 points down? Consumers unlike the government have to operate in a world of money reality. They have no access to bailouts. And people are actually focusing more on servicing current debts:
If you look at the above chart, this is the first significant decline since the early 90s recession. This may on the surface look like a good sign but all it is showing is the massive contraction in debt but also all the debt destruction via bankruptcies and foreclosures where debt is literally evaporating. Think of it this way. You lose your home and go bankrupt and that is all your debt. You technically have no debt at least on paper. But would you really claim this person is in good shape? Many Real Homes of Genius are hitting the market here in California, in fact every 30 seconds to 1 minute a home is being foreclosed on here in the state.
The few remaining doubters keep saying this won’t be that bad because we won’t see the Great Depression soup lines. Well what about job fair lines?
Someone sent me the above picture taken from a Monster job fair in New York on Wednesday November 12. Normally you would see a sizable line but this time the line curves around the entire avenue block. People are doing all they can to look for work. This is merely a reflection of the poor economic landscape. Maybe it isn’t as powerful as a soup line but you can rest assured many people in that line are distressed.
The climate is such where everyone is on pins and needles worrying about their jobs. Some rightfully so. October was horrible but just look at November. November is already on pace to being the worst month on record this year for the markets and we still have a few days left. What good news is going to come out? Unemployment insurance claims are at 16 year highs which only mean the next job report is going to be brutal.
In addition, many states are cutting budgets back with hiring freezes and also cutting pay for employees. They are not in good shape. California is currently in a special session which seems to be going nowhere. It also doesn’t solve next year’s budget which will be horrific. Things are grim.
Being protective of your job is a natural and human instinct. But even many places are seeing over qualified employees vying for retail jobs (those that are still open). Times are tough and all the data is pointing to tougher times. Gear up and now you know why people are saying, “what the TARP just happened?” What just happened is the crony capitalist on Wall Street with their idiotic politicians just suckered you for a nice chunk of change.
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