Well, it might be a good idea to tighten our belts.
It's been reported that consumers represent over two thirds of this country's Gross Domestic Product, and it's becoming increasingly apparent that these n'er-do-wells have gone AWOL.
The Reuters/University of Michigan Survey of Consumers reported that its preliminary index for April fell to a 26-year low, well below economists' median expectations.
And it's little wonder. The consumer is seeing his home equity falling, or disappearing altogether, at the same time that his cost of living is rising and his job security is getting increasingly shaky.
The L.A. Times reported on Wednesday that the median home price in Southern California has now fallen by $120,000 in the past eight months, and a flood of anticipated foreclosures is expected to only increase the downward pressure further.
Wachovia, the nation's fourth largest bank, is just one of the many major financial institutions shackled with bad loans. Meredith Whitney, an Oppenheimer & Co. analyst said this week that $18 billion worth of Wachovia's mortgages now exceed the value of the underlying homes.
And across the country, about 8.8 million borrowers have home mortgages that exceed the value of their property, as reported last week by Moody's Economy.com. That's one out of every ten homeowners.
As payments continue to increase under the terms of the adjustable rate mortgages, the situation can only deteriorate further. Analysts at Citigroup Inc. said this week that $460 billion of adjustable rate mortgages are scheduled to reset this year. And when they do, it will not be unusual for the payments to escalate by as much as $20,000 to $30,000 per annum.
Bloomberg reported this week that foreclosure filings jumped 57% and bank repossessions more than doubled in March from the same month in '07. RealtyTrac Inc. reports that 234,000 properties are currently in some stage of foreclosure and, according to analysts at Lehman Brothers Holdings, about 2.5 million foreclosed properties will be on the market this year and next.
Bloomberg also carried a report by PMI Group Inc. this week predicting that, by next year, home values will be falling at an annual average rate of 20% nationwide, with California, Florida, Arizona and Nevada leading the way.
In the face of this scenario which, from the standpoint of the real estate market, is the worst we've seen since the 1930's, consumers are struggling to be able to afford the higher prices they are seeing in the supermarkets and at the gas pumps.
So far, the so-called core rate of inflation, which excludes food and fuel costs, has remained fairly low, but the significance of eliminating two of the most needed categories is lost on most consumers.
Here in Southern California, the average price for regular gasoline is right now poised to pierce the $4.00 level, and with the recently recovered $114-per-barrel crude still on ships at sea, prices across the nation are sure to escalate further next week.
Understandably, the first area to feel the brunt of the consumer-led recession is the retail sector. March was the weakest for store sales in 13 years. Chains such as Gap, Inc., Old Navy and Banana Republic have reported declines of 18% to 27%. As a result, vacancies at the regional malls are increasing significantly and you will see many more empty store fronts in due course.
The only bright spot is that the low-cost chains of Wal-Mart and Costco are hanging onto small gains.
The stock market is trading within a range on the Dow between approximately 12,000 and 12,700. It has so far been unable to suppress its joy over falling interest rates as the economy continues to tank. Not the best leading indicator available, it's been said that the market has predicted 12 of the last four recoveries. Of course, it should also be kept in mind that Main Street and Wall Street do not necessarily run in the same direction.
So, I'll bet you're saying, at this point, "hey, there's nothing to worry about - the government is riding in, like the cavalry, to save the day."
Well, if the recent Senate version of the pending legislation is any indication, what they may be saving is the skins of a number of large corporate interests, all of whom have been lobbying hard to get on board the latest gravy train. The Senate's version of how to solve the housing crisis is to give billions of dollars in benefits to automakers, airlines, alternative energy producers and other struggling industries, as well as home builders.
Somehow, Congress will eventually come up with something to address the problem, but because of the extreme fiscal mismanagement by the Bush administration over the past seven years, rescue efforts must now be limited, and whatever our legislators devise will necessarily be much too little and far too late.
Of course, the candidates also have their own cures. The statements from Obama and Clinton are like a version of "Can You Top This?" And by the time any new president takes office and eventually gets some sort of program going Elvis will have long left the building.
It's of some interest, however that, as far as McCain is concerned, he's proposing a summer-time rescission of the 18 cent federal gas tax. That's approximately equivalent to the price increase we've seen in the past month, so it doesn't seem to be much of a stimulus.
McCain's plan also calls for keeping the Bush tax cuts, which he denounced as a giveaway to the rich when he originally voted against them. He's also proposing to double the dependent exemption and reduce the corporate income tax from 35% to 25%.
In this respect, it was reported in Parade Magazine last Sunday that 61% of American corporations, including 39% of large companies, paid no corporate income taxes between 1996 and 2000. Furthermore, the article said that "last year, corporations shouldered just 14.4% of the total U.S. tax burden, compared with 50% in 1940."
In summary, we are seemingly spinning out of control into a recession that looks more and more like a bottomless pit, with a government that is so beholden to the moneyed interests that it can't even effectively address the problems of ordinary people.
Kenneth Rosen, chairman of Rosen Real Estate Securities LLC, a hedge fund in Berkeley, California and chairman of the Fisher Center for Real Estate at the University of California at Berkeley put it this way: "At least 2 million jobs will be lost because of this recession, so we'll get a cumulative negative spiral.''
Maybe all we can do is tighten our belts.
Dave McGill, News Correspondent
Dave's column, "The Contrarian," generally published every Friday, to Gather Essentials: News will sometimes present a contrary view to various aspects of the news, or an alternate take on the conventional wisdom of the day, and will occasionally appear on other days of the week
Dave has been a senior officer of a large eastern insurance company, involved in economic projections and investment strategy, president of a Midwestern mortgage banking company, and a financial consultant in Southern California, serving clients in the field of commercial real estate development
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