I am not going to sugar coat this. I am scared out of my mind about what is going to happen to this country over the next decade. We are now in the process of making an incredibly painful transition from an economy built on credit to one built on cash. This will be a long drawn out process where you will see failure after failure in our banking system. If Citi can have issues so too can Bank of America and Wells Fargo. We are nowhere close to this being fixed and done. In the past couple of months, I have heard several of my friends optimistically and hopefully say that it will get better in late 2009. This is wishful thinking at best.
Imagine if you were the head of a foreign government that bought our bonds. Are you going to put your money into a country that has a trillion dollar deficit? Would you really buys bonds from a country where every one of their financial institutions is in trouble or has failed? Some think that America’s work ethic and resourcefulness will carry us out of this recession because it has in the past. I believe that but the hole we have dug for ourselves is deep and will require time to refill.
When I started in the money management business in 1985, I was always optimistic. You couldn’t find a more bullish person in America. It lasted for 20 years. In 2005, I told Christine that I was worried. I was worried about a collapse in home prices that what would put incredible pressure on our financial institutions and our citizens. We were clearly over built and over borrowed. One of the drivers for this was the Baby Boomers. The Baby Boomers are the largest demographic group to ever move through any society in the history of the world. They bought, they bought and then they bought some more. Then, they started turning 65 and they wanted to sell. But to who? Who was going to provide the demand? Which group had the numbers…and the money. I have a home on Cape Cod that is our summer place. We have been there for 15 years. I’d love to sell this home and lower my living expenses. The chances of selling my Cape house? Zero. The other side of the economic market was just as grim. For a long while, we were lending money to a laborer making $42,000 a year in order that he/she might buy a $750,000 home. This “new” math won’t work.
Peter Schiff, the President of Euro Pacific Capital has been saying many of the same things that I have been saying. Two years ago, Schiff was eviscerated by Fox News for making projections that at the time seemed outlandish. Today, Schiff is lauded for his insight. If you watch this video be prepared to be depressed. This is Schiff’s latest thoughts and they are not reassuring. Just remember: forewarned is forearmed.
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6 months from now the depths of this issue will be a bad memory. The problem i have with all of this is this – there are so many reflections and parallels to 1929 in all of this. Did we not learn our lesson then? Are we learning it now?
And another thing – We are setting ourselves up for a fall as long as the Rating agencies are for profit organizations. As long as the issuers of financial instruments can go out and shop a rating – we really have no factual way to assess the real value underlying any financial instrument. It’s like having the players in the NFL officiate their own games. It belongs in the hands of a non-profit (or perhaps governmental) agency whose sole purpose is the legitimate and accurate assessment of the ability of the bond issuer to retire the bond. Just that simpler. Restore trust in the system.
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Mike, I read it anyway, you knew I probably would. I worry about the economy and the pressure it will place on society and the rest of the financial world every day. I hope my family is as prepared for the ripple effect as it can be. Thanks for sharing all this.
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Sadly, I sit by and fret and fear, with my newly prescribed and filled Xanex in hand. And, I guess the only thing that makes me feel somewhat better is knowing we’re so far from retirement and that we have very little, so we have little to lose.
Mike, I’ve been away from your blog for a while, but always find it intriquing, thought provoking and sometimes fun. Since I met you at a financial gathering in 1994, I trusted your financial instincts. I still do. As a mortgage banker since 1982, my gut intuition reflects this blog as well. Although I’m almost hyper-prudent in my personal finances, I’m also prudent in my lending as well. What I’ve personally seen, in the grass roots trenches, so to speak, is that we have a serious greed problem in America. It became so obvious that folks wanted more than they needed. For instance, I had a car sales man and his visiting nurse wife who wanted to go from a $120,000 home to a $550,000 house (in Little Rock, Arkansas this affords a home from 1500 sq. ft to a new 4000 sq. ft. home with acreage), when I dissuaded them (they wanted the NINA loan, No Income, No Asset…based solely on a credit score and an appraisal), they went on to tell me “their story”, that of meeting in a half-way house after their felony drug convictions (oh great, and a nurse who’s employer didn’t know of the conviction which included prison time). The loan was denied, HOWEVER, they went somewhere else and got the loan, and now are calling me with their tales of woe. From this perspective, on a daily basis I hear “stories” and most of them are based on some kind of “me-ism”…the art of thinking only of one’s self…It’s at the top of the corporate structure and it’s at the heart of many everyday households. And everyone seems to be involved, including the government. There comes a time when we all must take control of our spending and center ourselves on something substantial, like common sense. Those raised in the depression can tell you that you don’t spend what you don’t have. As I said, I’m prudent. I live in a beautiful home overlooking a splendid valley and the mountains and hills, and even a view of down town, and I have no mortgage. My cars are free and clear and I have zero debt. How’d I do it….I SAVED (and worked my rear end off and wasn’t frivilous), and I paid cash, just as my parents taught me to do. And as you know, was single with three daughters and no child support. Okay, get out the violins!! And lucky me, I put my entire 401K in to cash in March of 2007. I am the perverbial, tortoise (as in the tortoise and the hare)…and I think it might serve us all well, to pull in the reins and think more conservatively…this includes the government who, if not careful, will turn a dollar bill in to 15 cents, and then even I will be broke. Excuse my verboisity (is that a word?) I could ramble for days…..My prediction, we have 3 more hard years, and if Obama makes it worse, 7 years of bad luck (the Italian coming out in me).