Sunday, October 5, 2008

Another tsunami approaching??

Normally housing downturns are preceded by downturns in the economy. This one wasn't because of the asset bubble. Houses became commodities rather than homes. Speculation, fraud and investor exuberance inflated the prices far beyond normal rational levels. Like all asset bubbles, it burst and prices are returning to normal levels. But what about the spillover to the rest of the economy?

Now that this has spread to the rest of the economy will there be a 2nd wave to this housing bust. The first wave is the deflation of the bubble prices currently hitting us. Once the prices return normal levels, will a 2nd wave drive them even lower? This second wave, driven by a severe US recession could take prices far lower than those normal levels. A severe US recession would put millions out of work. Many of those people are in homes they can easily afford right now, but they might lose them if they lost their jobs.

At this point a recession is all but a certainty. In California were in it, and have been for a while. The argument amongst the so called experts is now, how bad will it be. Goldman Sachs has just announced that they are now forecasting a much deeper recession that they expected earlier.

If you read the news all you know about the job losses. They are not just in housing and banking anymore. They have spread to manufacturing, service, government and just about every other sector of the job market. Auto makers, airlines and even Starbucks are laying off.

The talk now is about the coming wave of Prime and ALT A defaults. Will the talk next year be about the coming wave of defaults due to job losses. If you lose your job now, finding another will be difficult. The competition, even for menial jobs is fierce. They are getting thousands of applicants for jobs at Walmart.

Corona just announced it is eliminating 112 jobs due to budget shortfalls. The shortfalls are a result of lower property and sales tax revenues. Lake Elsinore also just had a round of layoffs. Remenber the good old days when a government job was a safe job? I'm not sure there are any safe jobs any more.

Sorry if this post is a little too "tin foil hat" for your taste. But the news these days does not fill me with optimism about the future. I think the government is far too optimistic about this crash. I don't know if they are just putting forth a brave happy face to calm people. Or if they really actually think this will be over in a year or two.

I think the US will be changed forever after this. Hopefully for the better. We have become the nation of the quick buck. A nation trying to keep up with the Jones's. And a nation of perpetual debtors. Maybe this is what we need to snap us back to reality.


Tyrone said...

C'mon golfer_X, stop sugar-coating it; we can take it. LOL

I posted a comment over at Paper Economy about the 'Elephant in the room'--the national debt, that is still growing.

Hope the best, prepare for the worst.

Richard said...

You mention that Corona just announced it is eliminating 112 jobs due to budget shortfalls. The shortfalls are a result of lower property and sales tax revenues.

Michael McDonald in October 2, 2008 Bloomberg article reports: "Massachusetts Governor Deval Patrick said he is seeking budget cuts amid financial market turmoil that forced the state this week to cancel plans to borrow money to fund operations. The governor, citing a $223 million shortfall in tax collections, ordered a spending reduction of 7%. The state this week canceled the sale of commercial paper as investors boycotted the markets."

This tells me that the municipal bond market has utterly broken down. This is a silent neutron bomb that is going to cause massive layoffs in state and local governments; these governmental units will basically have to go into shut down mode; except for some low level of law enforcement; there will be a swift shut off of services they once provided

dirtfarmer said...

We need major corrections in wages benefits and pricing all around except for dollar value menu's you would think "a" dollar is near worthless.
As far as cities and states, this is a great time for the legacy costs of pensions,benefits and other entitlements to be reset, please dont kill me because i'm only the messenger, but realistically do you know what some people on public payrolls make directly, and indirectly during their working years as well as the value of retirement benefits!!! look what has happenned to different cites even a city in the san diego area ran out of money to pay benefits for retirees and current employees!!
Im not talking about now i'm talking about a few years ago.

Again no hate mail please but i was behind the governator when he wanted to scale back some power from the unions a few years back, but we all know how that went. We were and still at the mercy of the unions, as well as the state and county employee groups, they wont stand by while compensation is scaled back but if thats the directionwe need to go in perhaps we should ...

Seth Dallob said...

Everyone thought the end of the world was coming in 1993/1994, too. This too shall pass. If anything, I'm more optimistic that we're getting closer to a bottom because Joe Sixpack is now trying to play economist.

Santa Ana River Rat said...

I'm writing this while wearing my "tin foil hat".

Budget shortfall will get resolved by passing some bogus bond measure. Watch out! They'll dump their current obligations into a new bond and buy some more time. Now the problem is because of the tightening credit market who is going to lend money to municipalities.

It's always better to be prepared for the worst than being optimistic when it comes to finance. I think people have been way TOO optimistic in the past and hence the over-spending and massive borrowing.

I have friends in the public sector as well and either their programs are being eliminated or are being reassigned with less pay and less hours.

Next step? I think the sales tax hike will come soon. State income tax will probably go up to offset any real fed tax cut (if any) so for us regular folks it's not going to matter one way or another. We just have to bend over and take it like we've been doing all these years.

Martin Burtin said...

There is a way out of all of this debt, that is waaay scary, but a real possibility. Hyperinflation. If we print a cr_p load of money and circulate it, we can raise wages, prices, income, taxes, etc. and pay all of this debt off in full, with dollars that are really worth pennies. Maybe that's been the plan for some time, have you noticed what your dollar can buy these days?

golfer_X said...

I'm seeing hyperinflation every where except in my paycheck!

Hyperinflation is fine with me as long as it's across the board. I don't care if everything costs 10% more as long as I make 10% more.

It could very well be their plan. It would solve a lot of problems for them.

It would probably lead to hyperinflation in Europe and Asia too as they appear to be in the same boat as us. Everything stays the same we just add a zero to the end.....

Jeff said...

Keep in mind that half of those positions cut in Corona were unfilled positions. So really the amount cut was 50 something. And of those 50 I think 10 or so were temps. Still a high number, though.

FairEconomist said...

River Rat: No bogus bond this time. They can't even borrow short-term. The silver lining to this very dark cloud is borrowing to cover up waste or just things they can't afford is going to get a lot more expensive and so the state will have to be somewhat more responsible.

Tax increases? Oh yeah, bet on it.

Oldtimer said...

I can't remember a time where there was so much doom and gloom about our economic prospects.

The problems as I see them are severely acute, but not widespread. The problem isn't that Americans are using credit - we've used credit for decades with little ill effects. The problem is that in recent years some Americans used enormous amounts of credit to finance homes at ridiculous prices and/or to keep up with the Joneses. Most of those families will need to start over, losing their homes but hopefully gaining a more sober approach to their financial affairs.

I spent yesterday touring Eastvale and other parts of the IE with a New Yorker. It is a bit hotter and smellier than I prefer, but there you can get a much bigger and nicer home for the money than you can at the "Beach Cities". Given the distance to employment centers, Eastvale seems sensible and at home prices similar to Santa Ana, not Irvine.

Unfortunately, most of the initial buyers there paid Irvine-like prices using enormous amounts of debt. Recent buyers, and buyers going forward will find a decent bargain.

Frank Jewett said...

Having spent their bailout money on three magic beans, Congress will resort to yet another minimum wage increase to regain their popularity. Taking a page from Paulson's book, they'll think big and hyperinflate the minimum wage to $50/hour to get ahead of this problem. Six figure incomes for everybody!!!

No need to raise taxes, because everybody who still has a job will already be in a higher tax bracket.

And if that doesn't work, expect a letter from Hank Paulson telling you that you've been pre-approved for a $50,000 credit limit with the Fed. Use the enclosed check to purchase a new car or boat, just like you did with your refi money. Happy days are here again!!!

golfer_X said...

Good grief, grab the women folks and the kids..... the Asian stock market is absolutely cratering tonight.

I wonder if that means the cost of a new Lexus will go down????