We keep warning investors. But nothing bad happens.
Atop our worldwide headquarters, the Crash Alert flag… with its handsome skull and cross-bones design… keeps flapping in the wind. But no one pays the least attention. We might as well be a schoolteacher.
Why continue with this (now hoarse) voice of concern… when everything is clearly going so well? Isn’t it time to admit that we are wrong? Isn’t it time to look out the window… see the sun shining… and stop fretting about a downpour?
Well, of course, we wish to confess to a little weakness. We don’t know what is going on – except for the obvious thing. Obviously, the credit cycle is still in an expansion phase. We thought it came to an end in 2000… and then again last year. So far, we’ve been wrong – just when we think the party is over, someone rushes in with another armful of bottles. And, wheeee!
After the tech stocks began to crash and burn in January 2000, the whole globe held its breath. And then, in September of 2001, it shuddered. By then, the U.S. economy was already in recession – induced by the stock market correction and its knock-on effects.
Then, of course, George W. Bush and Alan Greenspan were taking no chances. They backed up the liquor truck and unloaded the biggest delivery of cash and credit ever delivered. The U.S. federal budget went from a phony surplus to a real deficit – a total swing of about $700 billion. And the Fed’s key lending rate went from 8% down to 1%; we’d never seen anything like it.
We doubted that even this would be enough to stop the credit contraction. Wages were not rising. So, consumers could only spend more money by borrowing it. Since they already owed a record amount, we doubted that they would be fool enough to go deeper into debt.
But they were. A boom in the property market suckered them into it. It gave them not only the will… but the way. Thanks to the innovations of the mortgage credit industry, they could ‘take out’ equity faster and easier than they could order a pizza. Party on!
By 2006, though, the revelers were getting a little tired. Lenders had lent too much money to too many people who couldn’t pay it back. And now the bad credits were beginning to make the headlines. All of a sudden, subprime mortgage lenders were missing their earnings targets. Then, a few of the big subprime mortgage companies actually went broke. And now, people with bad credit and no money are finding it hard to buy a house. Imagine that! Which means, the pressure from the bottom, pushing people into bigger and better houses… and higher and higher house prices… has eased off. Housing prices are no longer going up. They’re going down.
With no more equity to ‘take out,’ where will consumers get more money to spend? How will the economy continue to expand?
We don’t know. But it looks to us like the real economy is now not growing at all – but shrinking (that is to say, the sum of actual, productive labor is falling). The average worker is not really getting richer – but poorer.
Still, there’s no talk of recession – yet. Indeed, from the looks of the markets, things have never been jollier. The Dow is near an all-time record. There are so many mergers and acquisitions that the business journals can barely keep up with them. And other markets – notably China – are flying off the charts.
We see hyper financial activity… with desperate speculation all over the place. In fact, it looks to us like the final phase of a credit expansion… the final, loopy phase when investors lose their heads… and wallets… completely.
Could we be wrong? Yes, we could. But remember – the importance of any event is equal to the likelihood TIMES the consequences. There may not be a crash… but the effects of a crash could be so devastating… readers are urged to take precautions. Think about the risk factors in your portfolio and see what you can do to minimize that risk.
Markets and Money