Monday, November 24, 2008

Your Average Wall Street Professional and the Energy/Credit Crisis

Let us take the average, and I know there is no such thing, Wall Street professional (Broker, Banker, Salesman, Trader), and game his future career in the energy/credit crisis.

Same assumptions on U.S. Oil imports as my previous post (a decline of 8% per year) and GDP (decline of 3%+ per year for 5 consecutive years once the Oil import decline begins).

Our hero lives in Metro New York City.  He is 40, a bit younger than our professional from Boca Raton, married, one child and they are thinking about another, he works 60 hours per week (including internet research), commutes 12 hours per week, and bears a tax burden that would choke a boa constrictor. He is nearly broke - relatively.  He thinks he has assets of just over $1mm, down from $4mm.  He lost big when his company stock, Lehman Brothers, Bear Stearns, Merril Lynch, Citigroup, etc... fell out of bed.  Unfortunately, half of his net worth is the "equity" in his home, which he has deceived himself into believing still exists.

His income was $500k to $1.5 per year.  Yes, that is a big range, but that is the way it works for the well paid foot soldiers of Wall Street.  Remember, I am not talking about the "Master's of the Universe" here.  I am talking your average working stiff on the professional staff with 15 years experience.  The "Racoons" as they were known (while the big shot's were out at dinner parties we were back at the office doing the night garbage - hence "Racoon").  Anyway, I use the past tense to describe his income because that income level is gone, and it ain't coming back, to Wall Street's army of buttoned down BS artists.  

So what do 100,000 very well paid, highly educated financiers do for a living in a world in which the financial services industry is contracting like a nudist swimming in cold water?  What do their skill sets transfer to?  These guys are the equivalent of the Rust Belt worker in the 1970's and 1980's.  I can just see one of these highly testosteroned maniacs being "retrained" in a tech school classroom learning HVAC repair! Now there's a picture.

After all, what is their training?  Discounted cash flow analysis was never the rocket science that Wall Street's public relations firms convinced everybody it was.  Many of these guys invested $300k in an education that I could have taught them, and their dog, over a long weekend (provided they were sober).  This was one of the ways Wall Street could justify their outrageous compensation when compared to folks that actually do something productive for a living. Most of these guys couldn't change the Oil in their car. (It might seem that I am being a bit harsh, but it wasn't the Foot Soldiers that created this environment.  The Masters of the Universe from our establishment families and institutions pulled this set of wool over America's eyes.)

But I digress...

New York real estate values, are crashing, and are NEVER coming back.  They were artificially inflated by the money pipeline coming into the region and industry in the form of every mortgage underwritten across America, and that pipeline has been permanently shut off.  The Wall Street minions living out in the suburbs are going to have to make other arrangements with which to make a living.  The problem is that pesky mortgage payment and the OUTRAGEOUS property tax bill.  It does not take a rocket scientist to see how that is going to turn out.  Remember that Talking Heads song, "Life During Wartime"?  Just kidding.  A little drama never hurt a good story.

The defaults and foreclosures and homes lost in this group is going to stagger the region.  New York is/WAS the financial capital of the WORLD.  There is a worldwide financial crisis... ergo, New York is going to be synonymous with that crisis in every way.  All of the other industries feed off of the food chain brought in by Wall Street.  That food chain is no more.

So what does a 40 year old guy who is used to making too much money do when he is stranded in a region with hundreds of thousands of others that are in the same boat as he is?  How does he sell his $2mm home?  To WHO?  Where does he work? HOW LONG BEFORE HE COMES TO THE CONCLUSION THAT THIS IS A PERMANENT SHIFT IN HIS REALITY?

For the family living in a mobile home in a trailer park in Lebanon, Tennessee the adjustment just isn't going to be that bad.  For the Yuppie Wall Street professional living in his McMansion, driving his Range Rover to the club for a round of golf this weekend, and living the fast lane life, the REAL adjustment is going to be mental.  His very identity is going to be shaken to his core. 

Most of us tend to identify ourselves by what we do for a living.  We are "Investment Bankers" or "Bond Traders", not "Fathers" or "Boy Scout Leaders".  The identity crisis is going to be as big a problem as the financial crisis.  Again, I recommend my readers search out Dmitri Orlov's excellent white paper "Anatomy of a Collapse" on the web.

Good Luck!

Mentatt (at) yahoo (d0t) com


Anonymous said...

Great set of posts. We still haven't seen how this crisis will affect real people. You've given a window into the new (frightening) world.

bureaucrat said...

Hey! I'm 41!! I have worth!!!!

Since commenting is quiet, I'll refresh the Federal government spending numbers for future reference ....

In fiscal year 2008 (10/1/07 - 9/30/08), the U.S. govt. spent (in billions):

$615 for Social security
$607 for Defense
$396 for Medicare
$388 for Income security (Earned Income Tax Credit, Child care, Fed retirement, etc)
$284 for Medicaid and other health
$253 for Interest on the Debt

The above is 87% of Federal spending.

Some things that piss people off is usually pennies by comparison, like aid to Israel, benefits for illegal aliens, and pay raises for Feds. Pennies.

Rob said...

Thanks for the fine examples of profile storytelling--welcome supplements to Orlov's. He was a keynote speaker at our Community Solutions conference a few weeks back, and your readers might appreciate his presentation (slides online at cluborlov).

Anonymous said...

Take a look at Mish's latest post.

Greg T. Jeffers said...

I just read his post, and the bloomberg article he linked.

Yes, it MIGHT be better if those jobs disappear and do not come back, but if you just bought a McMansion in Northern Jersey and plunked down $60k to send your 2 kids to an over prices baby sitter service (private school) you might not feel that way.

Don't worry. This process is coming to an industry near you.

Anonymous said...

I have seen this situation happen in the US domestic oil industry in the 80s. Many of the highly-paid workers found themselves in a situation where work was scarce and their future uncertain.

Unfortunately, many chose to deplete their savings in maintaining their high life-style. They believed that it was just a matter of time until they would be re-employed at their old salary and position. Many went through everything in short period of time and ended up broke.

The USA seems to be doing something similar and will just end up collapsing with a bigger debt load.

Steve Wauk said...

I mailed this 4-minute utube to Peter Schiff as a thank you for his work. You also deserve the hoot. thanks for your thoughts and courage. Past this in your browser

Anonymous said...

Yeah big hoot for Peter Schiff.

I signed on with Euro-Pacific as part of a diversification plan. Unfortunately, their recommendations have lost me over 50% of my original funds. I lost all of Babcock & Brown investment without a single heads-up from my broker. He said "Sorry bad call".

I finally told the bozo broker at EuroPacific to sell all of Schiffs recommendations and buy GLD- SLV with the surviving funds in the account.

Wish I'd never heard of Euro Pacific or Peter Schiff.

Greg T. Jeffers said...

Regarding Schiff's recommendations:

NONE of us got this right. I held Gold, SIlver, and energy equities, all down... and this was after I hedged by selling short the calls.

Mish was right. Treasuries were the place to be. We all just missed it because we did not calculate correctly the deflationary forces that were overwhelming the printing presses.

In the end, we will ALL be much less wealthy in terms of financial assets.

What I am trying to get at in these blogs is the value of owning the "means of production" rather than paper. Keep reading, I am going as fast as I can.

Anonymous said...

Jeff- I have been following your arguments for a while. By "means of production" are you referring to natural resources, farmland, mining shares?

It seems that actual manufacturing investments are facing some tough sledding in an over-capacity world.

Greg T. Jeffers said...

I mean local small business. What I refer to as the Butcher, Baker, & candlestick maker.

Overcapacity exists for certain items. Finely skilled cabinet makers, organic farmers, bicycle shops, etc... not so much.

Economies are going to localize in every way over the next 5 - 10 years. Funny, that is the time frame that Wall Street tells you to look at (that way you never can judge their performance - tomorrow never comes). Your investments must become local, too.