Why I Am Where I Am

[Guest yobob1]

A long, long time ago in a land before stoolville a medium-aged businessman had a revelation. Or more correctly perhaps a cathartic recognition. You see up to the point of recognition, he assumed tommorrow would be just like today because today was just like yesterday. He had joined the gold rush in equities several years before and marveled at how fast the money had grown. He saw the frenzied pace of all types of business activity and marveled at how fast things were expanding. He saw all the construction of industrial, retail, and residential buildings and marveled at how many people needed new buildings. And yet he looked inward at his own business, which also had all the same outward appearances of growth and prosperity, and wondered, why wasn't he getting rich like all the other people.

 

And so our business man began to tear apart the financials of his business and dig in those dusty corners looking for those extra percentage points of botom line that he was apparently missing. No matter how hard he dug, he couldn't seem to find those loose coins under the cushions. They simply weren't there. Where was all the money going? Well the banks took a large chunk to finance the outsized inventory that his suppliers demanded he carry. That inventory level demanded a large tribute be paid to the insurance company. In order to maintain and service the inventory as it sold demanded several extra employees beyond his core employees. And then at the end of the year all those paper profits were cut in half as the state and federal governments swooped in demanding to get their "fair" share. Yes the cash flow was impressive, in one door and out the other. But the paper profits weren't translating to spendable cash as the taxes used up most of what would have been cash to spend. So again he asked, "what in the hell am I doing wrong? Why don't I have all the trappings of prosperity?"

 

And then a little light bulb came on over his head in cartoon fashion. You see this business man had always had a debt phobia. He had always hated debt and would never incur a debt that he couldn't back up with solid asset value and which he couldn't quickly pay off. And yet, his cash flow would easily have supported enough debt to have the McMansion, the two new cars, the boat, heck maybe even a summer home which he didn't have to time to use since he was so busy running like a madman to stay in the same place. Was that really what was happening? Were pople cash flowing debt with no thought about net worth? The quest for the answer began.

 

In 1998 he stumbled upon this: Grandfather Economic Report ( I am going to add this to Stoolhoo for future reference for those just begining to recognize the neck deep doo-doo we're in)

This proved to be a turning point, as he saw how far things had gotten off track and began to understand that the "prosperity" was illusionary. He read and searched and read and searched and the more he read the more disturbed he became. As Y2K approached he was distracted by all the chatter of the end of the world approaching as chips expired worthless. So he busied himself updating and checking the machines and the software and also made the prudent moves personally for the "just in case" scenario, though he personally doubted that much would happen after midnight on Dec. 31, 1999. It didn't. But the process had taught him a lot of personal survivability and responsibility lessons that he has carried with him ever since.

 

Even though he had sold his stocks at the end of August in 1999 (originally part of the Y2K preparations) the markets began to garner his interest as part of the larger picture. He joined a stock message board and began lurking and listening. He was amazed at the single minded focus on instant wealth and all the glowing predictions of permanently rising stock prices. "Lucent at $40 is a steal", "Just Don't Sell Us would certainly be at $300 within a year"; there was no stock that wasn't going to the moon within the next 12 months. He saw that it was wrong and eventually braved his first tentative posts in early Feb of 2000, daring to challenge the all bull, all the time banter to question their reasoning. As it turns out the reasoning was in summary based on nothing else than the greater fool theory. By the end of February, he was urging people to take some profits and get off the merry-go-round before the music stopped. And then it did. A few did and a couple were even nice enough to thank him for sounding the alarm. Most however were actually trying to blame him for disturbing the animal spirits. And he saw for the first time the beginning of the end in their dogged determination that they had a right to get wealthy without working. He knew it was only a matter of time before the unraveling would begin in ernest and he knew instinctively that at the core of it all was the debt that had been taken on during the happy times and squandered on worthless assets that could only go down in value. Obviously he was me.

 

Today I am sounding the alarm again. Hyper's scenario of debt deflation is 100% correct. They cannot pull one out of their ass this time. All the Kings' printing presses will not hardly slow this thing down. The spiral has begun. Everything that has been done since Easy Al's first rate cut by "all the powers to be" have only served to reinforce and expand the bomb to it's maximum size. The cooperation of the sheeple in this final phase has been something to behold. They have refused to let go of their dreams and deal with reality up till now. The media shoulders a lot of the blame for this. The media is nothing but a bunch of lap dog yes lackies increasingly controlled by fewer and fewer people. But the dreams are fading as the real world is beginning to intrude in the sheeple's lives. You see all that had to happen was for the debt expansion to pause a little. It didn't have to go into reverse or even come to a standstill, just slow down to a point below equilibrium. That has happened. Consumer debt shrank through the holiday season. Commercial debt has been declining for a long time now.

 

Now Hyper is up in Calgary in an economy that is flourishing due to it's natural resource base, and even he can see what is happening. I however am right here on main street USA where the detonation is occurring. People think, how can you look out your window and extrapolate what you see to all of America? Well, I can't for all of America, but I can for the larger percentage. You see long ago this area was identified as being highly representative of America. It is widely used as a "test market". The economy is highly diversified; from resource bases to a substantial high tech component and everything in between we have it all in spades. We also happen to rank high on the quality of life issues which adds another "growth" factor in when people look at places to retire or to expand their businesses.

 

So what is it that I see that is making me ring the bell? At the beginning of the year I declared this year as the year of the retailer. I predicted that retailers would begin folding at an accelerating pace and sure enough it is happening. Just before Christmas the largest sporting goods store (3 stores) in the valley went bankrupt and was liquidated. A major regional store has declared bankruptcy and is closing all of it's stores. Little shops in the largest mall are having going out of business sales in rapid fire succession. The second largest mall is a virtual ghost town with less than 50% occupancy. And the spiral has begun. People have started to notice these things happening. They are talking about them openly. These things don't make the headlines and only a few jobs are lost at a time, but after a while the constant drip becomes a rivlet and then it turns to a stream and finally when the clouds open up you have a flood. We are in the rivlet stage now and not far off from becoming a stream.

 

Now I know most of the people who frequent IDS and Mark to Market will never read this. I would urge all that do to take few minutes and do an honest net worth evaluation, making sure to mark to market (no pun intended) all assets for their true wholesale net value (i.e. cash value not based on the greater fool theory). Now deduct 25% from anything that is not "cash", because that's where reality is if you need to turn something to cash quickly. Trust me you will over estimate values when it is your stuff involved. Try to pretend you are evaluating your neighbor's net worth on a cash basis. Not only try to determine what you are really worth in a less than ideal scenario, but look closely at what form your assets are in. How much is "cash"? How much of that cash is digital? How survivable is your "cash" should something happen that causes a tremendous upheaval? (Getting to be more and more likely every day) Have you protected 20% of your net worth in a manner consistent with wealth preservation? There is little time left for positioning, and for some it may be too late. Some will squander precious resources trying to gain, when they should be more concerned about preserving what they have. Sometimes the best way to win is to not play the game at all.

[Goldilocks]

Everyone knows the KMart story here in Michigan. Lots of them are closed or closing here.

 

I drove by the first closed Meijer store I have ever seen in my life the other day. I had to go to another to return my products and the lady had me waiting for 10 minutes for a manager. She told me how they were cutting shelf space and hours across the board while we were waiting. It seems I had to wait because the entire staff of the sporting section no longer had gainful employment. Thus, the need to wait for a manager in order to return the Gerber Gator and it's damaged case (The knife itself is awesome).

 

Now the problems are spreading to the grocers:Farmer Jack in a tailspin Grocery experts say losses may force sale of 109 Mich., Ohio stores

 

Never mind the slowing auto sales......

Never mind the massive amount of commercial real estate up for sale/lease/rent.....

Never mind the growing number of corner parked autos for sale by owner......

Never mind the cropping up of numerous retail real estate for rent and for sale signs in the middle of winter.......

[sniff]

I read, I believe... I had a small retail business ....closed it long ago.

 

I shudder when I see my friends still buying new cars, refinacing homes, spending money like drunken sailors. ( I was one, I know)....

 

Many think I am a real tight wad..... oh well......

[Goldilocks]

My wife and I live in the middle of a trendy little hotspot and only pay $585/month in rent. It's a great location and a fun time.

Yet all our friends look way down their noses at us for:

Not buying a house.

Not buying new cars.

Not going out and lightening our wallets by $100+ each weekend night.

Not shopping every other weekend for new clothes.

Not shopping at the correct stores.

Get the picture? Any time you save money in this society people are trained to look down on you. Every move that is not an effort to maximally spend every dollar and drop of credit you can touch is deemed 'poor' or in our case, 'poor white trash'. It is hilarious.

The institutionalization of insanity undertaken the last several decades boggles the mind. Articles in major media outlets now routinely speak of healthy consumers only being those increasing their spending every month when they know damn good and well it is almost entirely debt driven. Everyone just closes their eyes and slides the damn cards. hoping. Wishing. Praying that the dreamworld will never end. The problem with sleeping is that dreams so easily become nightmares.

[Goldilocks]

Almost forgot, my wife went shopping with one of her best friends. The dumb moron (Yes, they do exist - no they don't define all women)admonished my fantastic young lady for not spending enough and doing her patriotic duty for the economy.

Man, it's is a good thing I wasn't there to hear it. I'd have burned her ears off with a ranting tirade the likes of which has never been heard in public before.

[richmtn]

Yobob1 you da man.

[MaxxPain]

Being the insane loner that I am almost nobody knows how I spend my money. My house and car are paid for. I've had several people suggest that I move up to a bigger house in a better neighborhood. Once you experience having no house payment you don't want to go back to being a slave for the bank. If I move it will out to a rural area on 20 acres. If they knew I just spent $3000 on 10 oz of palladium bars I would be derided as a freak moron. If they only knew the truth they would freak out. I didn't tell anyone at work that I moved my 401k to bonds years ago, or that I have enough deep storage gold to buy a couple SUVs. They still think I'm a buy n hold believer dollar cost averaging into the market. I can't tell them the truth now. I would be a total outcast.

[HiHat]

Yobob1

 

Multitudes of the Lemmings, from all age brackets, are

like spoiled children. What is felt to be as a "entitled"

lifestyle is off the reality board.

 

I have long looked at this thing as a mirroring of the

stages of TERMINAL illness recognition. The stage where

ANGER kicks in is going to be a sight to behold

 

Too what lengths the Political leadership goes to alleviate

the calamity is the Joker, in an already marked deck.

 

I for one believe that the thug-scum, will take the low road.

[MaxxPain]

"Just Don't Sell Us would certainly be at $300 within a year";

 

[machinehead]

"The spiral has begun. People have started to notice these things happening. They are talking about them openly. These things don't make the headlines and only a few jobs are lost at a time." - yobob1

 

As you say, there's an asymmetry in the news. Large bankruptcies and layoffs make the news. Small ones don't. But by the same token, new jobs -- which overwhelmingly are created by small businesses -- don't get reported in the news either. Some of the people resigning from corporate jobs go into business for themselves. I was one of them in 1992.

 

I concur with much of what yobob says, but feel that one or two more artificially-generated business expansions can probably be manufactured by running up government debt. The way I explained it to my wife last night is that the government is going to eat up our retirement benefits to make it through this decade. Then they're going to hit the wall, when their mountain of post-dated fraudulent checks can't be honored. So we're partying on borrowed money.

 

In some ways, it doesn't matter which outlook is correct. Reducing debt, having some secure cash and precious metals is a good idea in any case. The reason I expect another business cycle is that due to a contrarian nature, I cannot resist betting against either excessive optimism or excessive pessimism.

 

The late Nineties were the wildest excessive optimism I'd ever seen, and I started saying so to family members in late 1996 (three years too early, as it turned out). The contemporary scene, with people actually buying plastic wrap and duct tape as a last defense against ghastly yellow clouds of death, seems like laughably, ludicrously morbid excess. If the economy doesn't bounce back from here, then presumably few of us will even be around to know about it. The main risk to my outlook is not that it won't bounce (I assure you, it will), but that I could be three years early again. :shocked

[GregFokker]

During the dotcomania, Fokker earned lots of money and was continually accused of tight wadism. Fokker's always believed in spending what's necessary, then a bit more in case of sudden death the next day, and saving the rest. His car is 11 years old, etc., etc. But he has only margin debt, and no one owns him. My family and friends... well, many of them actually call me "Fokker". They think I'm "suffering" for nothing. Well, it's not for nothing, and it ain't suffering. What a joy to know how to cook, to have cultivated simple tastes, simple pleasures. To have savings, to live well within one's means, to have no appearances to keep up whatsoever. To not even be on the radar of the club-going squash-playing golf-betting (pasture pool, Yobob?) aqua-velvas.

 

Why cultivate expensive, inaccessible fetishes? Why incur discretionary debts? Life's too short.

 

As Marc Faber put it (I assume I'm mangling it), if I had to live my life 1000 times, I'd choose the way that relied on no artificial boosts, no inflation... I'd rather experience exactly what there is for me, nothing more, and nothing less.

[Guest yobob1]

I'm not sure if I fear your scenario more than mine or not. In yours the exceses aren't allowed to purge, laying like a warm freezer full of rotted fish yet to be discovered. And at the same time we add a whole new level of excess on top. I might characterize this as the muddle through scenario?

 

I'm sorry I just can't put much faith in a status quo scenario. The problem is we have run out of borrowers that will match the tightening credit quality standards. The curves are crossing indicating a trend change. (Hah! and you thought I didn't do TA ) Businesses can't or won't borrow. Consumers are on the rope in increasing numbers as job losses mount and their cash flow system fails. Cap-Ex will fall at least another 10% this year and my guess since this is early in the year that number will grow to at least match this years 15% decline and could easily exceed it. R&D numbers are also going down. Those two things alone don't bode well for any future growth. That leaves cars abd housing and the spring market is soon upon us. We shall see if what I'm suspecting is set to occur. I can tell you that the home resale market in our area has not been good since last fall, and yes I'm aware of the national numbers, but I have a hard time rectifying that with the number of reduced prices I see in increasingly lower price brackets. Maybe the "free" interest rates combined with what might be viewed as a "rebate" are stimulating purchases? Cars only sell if their is a rebate and a zero interest deal. They move the programs around to various models to balance their production. Overall the numbers are declining and the lots look loaded again. Hot models without deals are sitting idle, The Nissan dealer has had four of the new Z cars sitting there December. The Honda dealer down the road is loaded with the Mini-vans that they supposedly can't supply enough of? And 3 of the the roadsters? Sooner or later these guys hit the wall when everybody has enough new cars. I think they're about ready to find out if the airbags work.

[Pretzel Logic]

Certainly some good advice in there, regardless of what happens. However...

 

Things get good, then they get bad, then they get good again, etc., ad infinitum. Certainly a "coming depression" as stated would be a new experience for the current generation, but it's not a new experience for the country as a whole. Why do you feel this time will be different? I have to say, all this "end of the world" talk sounds like nothing more than the flip side of the coin from the 90's, with its "New Economy." Not so long ago, all the bulls were saying: "This time will be different; this time it won't end." Now it's the bears turn, with the other extreme: "This time will be different; this time it's all over."

 

I think it's just human nature at work. People tend to take whatever the current trend is and extrapolate it to infinity. The bulls did it in the 90's, and the bears are doing it now. Life never works that way. Good times end... and bad times end, too.

 

That's my feeling, anyway.

[machinehead]

yobob, I'm thinking back to the 1974 and 1982 recession bottoms. Nominal interest rates were high. Very few capital projects could generate enough return to justify funding them at those high rates. Capacity utilization was down, and looked like it might just keep falling.

 

How did we get out of those jams? In 1974, it was the "hair of the dog" treatment ... another round of inflationary juice, which by 1980 had ginned up another oil crisis and a 21.5% prime rate. And yes, that's something like what I foresee now, through we're starting from a different place (higher debt, but lower CPI inflation).

 

The 1982 bottom is even stranger. Paul Volcker clamped down very hard on the monetary juice with drastic rate rises. I remember a full-page ad in the Wall Street Journal by Lone Star Industries. It had a skull and crossbones, and big black headline above saying "High Rates Kill." For a construction-related company, that was literally true.

 

How did we get out of the 1982 recession bottom? Some say that Volcker relented and flooded the economy with money in response to the Mexican crisis. Others point out a new product that emerged in 1981 ... the IBM PC, which spawned some other small businesses such as Microsoft, Compaq and Dell.

 

But in any case, would we have been able to foresee those turnarounds? There was a monetary clue in both cases (panicky slashing of short-term interest rates by the Federal Reserve). People doubted it would be effective at the time, since the problems looked so intractable (just as they do today). The contrarian view that too much gloom is self-correcting sounds awfully subjective, but I do take that seriously.

 

You are quite right to say that 'muddle through' means an even worse crack-up down the road. "Apocalypse Now" means a $40 trillion debt meltdown. 'Apocalypse Later' (next decade) probably means a $100 trillion debt meltdown. Take your pick. If there's gonna be a train wreck, I say let's top up the tanks with diesel first and make it unforgetable.

[wndysrf]

Yobob:

 

I don't know what goes on in the rest of the country, but nothing has changed here in Los Angeles.

 

We are still very much in an MTV Spring Break Economy here.

 

Everybody spending, everybody employed, everybody buying cars and real estate like mad.

 

Today, I must have seen 10 cars on the road with those new dealer paper license plates. All of these vehicles were $60,000+ price range.

 

Maybe everyone here is already rich, and have moved here by making it elsewhere.

 

Absolutely no signs of stress anywhere here.

 

No fear.

 

No worries.

 

No job stress.

 

In Tuesday's commentary, I am going to recommend that everyone start posting the current economic scenario in their neighborhood, both good and bad, in order to keep it objective.

 

We should post it here, moderated by you, Yobob.

 

If this the Credit Cycle turns, it will turn fast.

 

Keeping a real time documentary of how it unfolds will be useful to all of us, and those who haven't sold assets yet should start selling immediately once the liquidation commences.