I’ve been watching Fox News and CNN and have read the mainstream online news media for a good decade. Even back in the high school years I would watch these channels as I was always interested in politics, especially foreign affairs. As the economy began to weaken I shifted my focus from politics to economics and markets. There a new love affair began as I learned how to trade and became somewhat successful at it. What I’ve noticed, especially from a first generation Greek perspective, is the humbling on the presentation and image of America. The Bush years were especially bad with the pundits pounding their chests and bragging how the military was beating the crap out of lightly armed insurgents in Iraq and Afghanistan. Some classic statements from the Bush Administration concerning the occupation of Iraq such as “bring it on” or “dead enders, losers, regime elements.” Then there was Cheney with his “deficits don’t matter” statement, one which will remain in infamy as the country begins to falter under its incredible deficits.
Growing up in Southern California I lived firsthand through the housing mania. And let me tell you that those who were infected with the mania truly went mad. I saw numerous people leave decent respectable careers to become real estate brokers and get into the “loan” business. I saw these people upgrading from Honda Accords to S Class Mercedes Benz. Oh the arrogance that was floating in the air. Watching the Ford Expeditions cruise down the street with the 25 inch rims and the TV’s behind each head rest, with the $2,000.00 sound system blasting. One of my good friends began his career selling car stereo products such as amps and subwoofers, and let me tell you that business was booming. Of course, most of the purchases were made on credit. I wonder how many of these cars were repossessed by the banks.
Our beloved housing industry has crashed and has nowhere to go but down as prices in many areas are still in bubble territory. For a detailed look at Culver City, check out this excellent article from Dr. Housing Bubble:
This is a perfect example of a city in a major bubble. Take a look at the sales history for the home that is selling:
The place sold for $370,000 back in 2001. Keep in mind that over this decade household incomes have gone stagnant. So what justification is there for this home appreciating nearly $600,000 in 10 years?
I fully expect housing values to retrace back to 1997 to 1999 levels as incomes are flat and in real terms have probably fallen. Throw in $4 gasoline and a shitty job market and there is no reason why housing values can’t fall to these levels.
America was also humbled when two out of three of its largest auto manufacturers went bankrupt in 2009. General Motors, the oldest and largest auto maker in the country was forced to file for chapter 11 bankruptcy and absent a taxpayer bailout would have gone into chapter 7 liquidation. Surely you all know the saying, “as goes GM so goes the country.” For the time being auto sales languish at 11 million units annualized whereas pre-crisis levels had sales close to 17 million units annualized. A good 33% reduction in auto sales nationwide partially explains why things are so damn difficult.
The next portion of America that will be humbled is its vaulted education system. A growing number of mainstream articles are pointing out whether college is worth six figures in tuition, fees, books and housing costs. Awareness of the Law School Scam grows by the week and other graduate programs continue to be exposed as complex frauds designed to enrich the education industrial complex at the expense of naïve borrowers. Imagine that, highly esteemed American “law schools” now being referred to as third tier toilets. In the next few years, expect to see many educational institutions to be humbled and shamed as law suits fly and the public finally begins to scorn the idea of sending their kids to these overpriced diploma mills. Whereas before it was practically sacrosanct that an education was a path to success, now it is slowly being discovered as just one of many frauds taking place in the country.
Finally we turn to the most pressing issue facing the country: the debt crisis. I listen to the pundits utter the words “debt crisis” and “America” in the same sentence with awe. The same pundits that spoke of America as the greatest and most powerful country in the history of the world just a few years ago are now comparing us with bankrupt deadbeat Greece on a regular basis. Just right now I heard some Republican governor say that “we will have our Greek moment in a few years.” Obviously the national discussion has turned to the debt crisis because the debt ceiling has remained stuck at $14.3 trillion and if it isn’t raised by August 2nd Mr. Geithner won’t have enough money to pay the bills and will lead to a default event.
Wall Street sits back and laughs at this “non event” as they see this as Kabuki Theater and politics as usual with the parties trying to gain political points with this game of chicken. While I mostly agree with Wall Street’s assessment of the standoff, there is a bigger story coming out of this debate, the story being that the country is rapidly becoming insolvent. I fully expect the ceiling to be raised whether it happens next week or in early August. But what we should take home from this standoff is the recognition that many beliefs that we held in the past will not hold true in the future. For example, the discussion of Medicare and Social Security cuts being on the table were unthinkable just a few years ago. The $14.3 trillion debt level was a stickler to move as most other debt ceiling raises happened with ease in the past. Poor Timmy G was forced to raid federal retirement accounts just to keep the ponzi going. If this debt ceiling debate was so fierce and deadlocked, just imagine how much more difficult the next one will be. Assuming Congress raises the ceiling to $16.5 trillion, we will reach that level by the end of 2012. What a joke. More importantly, what happens then? How fierce will the debate be then as our debt will be larger than the economy? Also, interest rates, which have remained at 60 year lows, are always at risk of jumping higher. Even a normalization of interest rates would wipe out the “$4 trillion in cuts over the next decade” that Congress is debating now.
For shits and giggles, here is President Obama’s budget forecast. This is pure comedy.
2011 2012 2013 2014 2015 2016
Receipts 2.174 2.627 3.003 3.333 3.583 3.819
Outlays 3.819 3.729 3.771 3.977 4.190 4.468
Deficit 1.645 1.101 768 645 607 649
GDP 15.080 15.813 16.752 17.782 18.804 19.791
The above numbers indicate trillions. Per the White House, tax revenues are going to jump $453 billion next year and $829 billion from fiscal 2011 to 2013. Keep dreaming guys. The GDP numbers are even more comical as they project near $1 trillion dollar increases in economic growth in the years to come. Too bad that the last two months of job “increases” of 25k for May and 18k for June do not portend well for federal tax revenues. Bottom line, I fully expect this “forecast” to miss terribly to the downside with trillion dollar deficits to come year after year. Eventually, the national discussion will turn to austerity which will equate to hardship for millions of boomer Americans that failed to save throughout the duration of their peak earning years. For those of us in our 20’s and even 30’s, at least we will be given a grave demonstration of what happens when there is a failure to save. Take home message: save save save!
America threw itself a debt binged party over the last 20 years. As international competition increased and signs of economic weakness appeared, we covered up the cuts with the band-aid of debt. Now we have reached the point where debt no longer does its magic by creating wealth. This phenomenon is known as debt saturation. In addition, we have a wildly corrupt ruling class whereby a disproportionate percentage of income flows to the top 1% while many at the bottom languish.
I am beginning to see some positive signs out of all of this mess as Americans war tolerance has plummeted. Troop levels in Iraq remain at 50,000 and their departure is coming sooner rather than later. In addition, the public has completely soured on the war in Afghanistan and even Obama has gotten the message as troop withdrawals will begin in September. Woohoo! Also, it appears that the Greek situation has scared the crap out of many of our leaders as the reference continues to come up on a regular basis. Apparently, watching the police battle protesters with tear gas and rocks has given them the willies. And it should because a bankrupt country will have many angry citizens to deal with. Just yesterday while speaking with opposing counsel I told him that eventually there will be cuts to Social Security and Medicare as the math simply doesn’t support the expenditures. His eyes literally lit up in rage as he yelled ‘that’s so fucking unfair, it’s wrong, we paid into it!” And mind you this is a relatively wealthy partner of a small defense firm. If this guy got pissed imagine how angry all the poor saps that will be depending on Social Security as the primary source of income. As many of you know the excess revenues of Social Security taxes were spent leaving SS beneficiaries owning “nonmarketable” treasuries. This is what happens when government “saves” for its own people.
On balance, however we are still fortunate to live in a first world country as there are many places in the world that suck to live in. Whether it’s Pakistan, Indonesia, India, Egypt, Mexico, Iran, most of Africa, or many of the South American basket cases, there are just so many places that are truly fucked up. As difficult as things are and as difficult as things will become, at least we don’t have to worry about Malaria or Cholera outbreaks or even militias gunning people down in the streets. Look how quickly Libya and Syria descended into widespread violence. Basically, we still have many things to be thankful for as we were fortunate enough to be born into a first world country.
In the end, perhaps America needed a good humbling as our arrogance lead to our current predicament. Although it is probably temporary due to the debt ceiling debate, it feels good to hear the pundits and politicians actually discussing things of real importance as opposed to the culture wars which generally dominate the headline news stations. As our nation’s descent into fiscal hell continues in the next few years, it will be interesting to see if our leaders learn from the pain that is taking place from our European buddies across the pond.
Until next time.