Sunday, December 28, 2008

Remember When?

Remember when New York Real Estate only went up?  Well, that was then, this is now.  New York Real Estate, in REAL terms, will not be going up for the next decade or 2 (or 3).  Inventories of YEARS in the counties surrounding Manhattan, and a full year for Manhattan itself, are only going to grow longer and longer.  The data in this article only reflect the people who committed before the markets went off a cliff.  Wait till you see these numbers next year.  Wall Street is now Floor Street (as in flat on the FLOOR), and it ain't getting up again soon.  Who do you think was bidding up these properties?  City employees?  Say good night, Gracie... "Good night, Gracie".


I had this to say in my July 24, 2008 post, "Don't confuse brains with a bull market":
Home prices will continue to fall, defaults will continue to rise, and the banking system is technically insolvent. The Oil import volume into the U.S. will decline from this point forward, making the value of any property that is dependent upon cheap and abundant fuel for its egress, provisioning, and maintenance worth less and less and less, etc... This negative feedback loop will continue until all of the silly, worthless subdivisions that are standing on productive, VALUABLE farm land have been removed from the surface of the earth. The process might take 20 or 25 years to complete - but think about it: That means the "DEMAND DESTRUCTION" you hear tell about in the media regarding energy will apply to suburban and exurban housing at a rate of 4 to 5% per year.

Still think that Fannie Mae, Freddie Mac, Washington Mutual, Wachovia, Citi, and the rest of these miscreants will survive? Really?

What we are witnessing is mass denial, confusion, and desperation at the Federal level. For the past 2 years we have been bombarded with attempted manipulations from the Fed, U.S. Treasury, The National Association of Realtors, etc... and myriad smaller equally desperate interest groups (nothing special about them.) The housing crisis is "contained", then housing prices were bottoming. When this did not come to pass, the "bottom is in sight" became the mantra in the Mainstream Media. And just where does the MSM get their data? From the very folks that cannot, under any circumstance, vary from the script.

It is the improper response that will do most of the damage as business as usual is not an option. Government's refusal to cut their budgets. The Individual's insistence that "THEY" will do something.

I regularly receive comments and emails from folks that seem to believe that the "rate of change" will be a rapid one. While I think that is possible, as I have posted many, many, many times before, I believe it will be a slow, steady, grinding unfolding of events. If, as I believe the most likely outcome, that U.S. oil imports go from circa 13mm barrels per day in 2007 to circa 5mm barrels in 2020, it won't be the end of the world. But it will be the end of the U.S.$, suburbia, the bulk of the value of social programs, defaults by the Pension Benefit Guarantee Corp. and Fannie & Freddie, and a litany of other issues foreseen and unforeseen.
Fannie, Freddie, Wachovia, and Washington Mutual are gone.  The Pension Benefit Guarantee Corporation is on deck, and the big social programs will be gutted before the end of the next decade.

Fannie Mai & Freddie Mac, nearly down for the count last month, survived with the help of a "standing 8 count" engineered by the finance hair club for men. It did not work, and they cannot survive. Government manipulations in free markets NEVER work. EVER. Are you listening, Mr. President-elect to be?

The head fake from the U.S. $ really spooked the leveraged folks in the commodity's markets, but some of those markets had gotten WAY ahead of themselves and now it would appear have gotten WAY behind - again.

The race to ZERO by the major currencies is still on. The U.S. $ simply must give up much of its purchasing power, and American's much of their lifestyle, if the U.S. is to balance its budget & trade deficits. There will be more head fakes along the way. If I could call them with any accuracy, would not need my day job... but the long term structural issues are there for all to see.

Housing will not be "bottoming" in 2009. It may hit bottom in 2009, or 2010, 2011, or 2012 for that matter, and stay there for 10 or 20 years. Hitting bottom and "bottoming" are 2 different things, aren't they? "Bottoming" implies a return to an upward trend in prices, an outcome I would have serious doubts about.

Commercial property values are also about to be "marked to market" in a most unsettling way.


Commodities are all about Oil. Oil, in US$ terms, is all about interest rates in the U.S. If the Fed decided to bring Oil to $80 or less, they could do it. A 5% Fed Funds rate would do the trick nicely. On the other hand, a 5% Fed Funds rate would demolish the banking industry and slaughter the housing market and bring the the U.S. into a 1930's level recession. Hardly worth the price of "cheap" Oil, wouldn't you say?

If the Fed keeps the Fed Funds rate at 2% through 2009, Oil will likely head over $150 in 2009.

On the OTHER other hand, if Oil imports into the U.S. decline by another 7.5 % in 2009 from 2008 (as they have so far in 2008 from 2007), Oil prices will likely top $150 irrespective of the Fed Funds rate.

Keep your eye on the data. And then, question the data.

Well, I was close.  My fear then was that the Fed would actually carry out their silly threats to hike interest rate to "deal with inflation".   Turns out the problem was deflation and the collapse of the banking system.  I was trying to point out that there were inputs that could (and did) slam the price of Oil... my example was the Fed, but the credit crisis worked well enough.  And my point about a 1930's style recession a steep price to pay for cheap oil was exactly the point and exactly where we are.

Guys my age (I am pushing 50) will NEVER again see the economic environment of their 30's and 40's in their productive lifetime.  Making plans contrary to this is a waste of time at best, and perhaps a waste of a life.  Remember the "New Economy" of the late 1990's (LOLOLOLOLOL)?  Well, this time their really WILL be a "New Economy", and if your skill set is tied to the Finance, Insurance and Real Estate (FIRE) economy (an economy fast receding in the rear view mirror), and I epitomize this, you better get a new skill fast, or you will be spending the rest of what we used to call "your career" talking about your glory days.  Don't ask me what that might be, I am no career counselor, but I can tell what it won't be for over 50% of the folks who were employed in the FIRE sector.

Good Luck!

Mentatt (at) yahoo (d0t) com


Anonymous said...

FIRE sector minus AUTO sector minus HOUSING sector = NO ECONOMY.

Every drive thru any of the thousands of small towns in the US and take an informal poll of the businesses on the main drag. It goes like this-

1.Car dealership
2.Gas station
3.Muffler shop
4.Auto repair store
5.Gas Station
6.Car dealership
7.Auto repair shop
8.Auto parts store
9.Tire discounter
10.Car wash

Repeat many times adding in fast food restaurants, a few strip malls selling mainly imported clothing, and maybe one hardware store. But at least 1/2 of these businesses will be auto related in most small- medium towns.

Not to forget govt operations ie road maintenance and transfer payments which are funded by taxes from the FIRE, auto, and construction sectors.

Anonymous said...

You forgot banks and hardware stores. Of course we all know where banks are and hardware stores are really useful for people with homes.

That leaves electronics/appliance stores and grocery stores. These will be the only thing left.

Dan said...

If it doesn’t have a tractor dealer it isn’t a small town, and let’s not forget the machine shop though that is becoming a rarity.

The shops have gone under though if oil goes up for long enough they will come back, and the machinist can serve as a toolmaker and …

It’s bad but all is not lost, these things come around.

Anonymous said...

I could name 25 businesses in my 35k town that deal with autos. I could not tell you where the machine shop is. We do have a metals warehouse and recycler.

A Lowes and Home Depot are nice additions but may not survive. They are construction and home "improvement" of course.

Also, Walmart is the biggest business in town. It draws customers from as far as 100 miles away in order to sell us lots of Chinese imported goods.

Anonymous said...

>If it doesn’t have a tractor dealer it isn’t a small town, and let’s not forget the machine shop though that is becoming a rarity.<

I made the original post.

You are right on the tractor dealer, chainsaw dealer etc. Of course these are almost completely foreign imports ie Kubota, Stihl, Husqvarna. We do have an apple processing business of some size here etc which pays seasonal wages to illegals.

But the point is that the main economy is based around autos and suburban/retail construction. You will find these dozens and dozens of auto businesses in most small towns.

bureaucrat said...

The consumption of oil in the U.S. ain't dropping by much.

From the Kunstler blog today:

"The truth is that demand destruction for oil in the USA has been surprising mild compared to the drop in price. Jim Hansen's Master Resource Report says that gasoline consumption dropped from 9.29 million barrels a day in 2007 to 8.99 million barrels a day for 2008. That's not much of a fall-off, especially compared to the price drop."

Greg T. Jeffers said...

good thing you don't listen to Kuntsler for economic or investment advice. His track record is abismal in this regard.

I will have a future post regarding this

bureaucrat said...

Kunstler is the guy who wrote the first book I ever read in 2006 on the oil crisis ("The Long Emergency") and so far he's been on the mark. :) He is the ultimate pessimist, even more than I could ever be. He's hated "suburbia" for decades and this is his method of hurrying its destruction. My optimistic side did the S&P 500 100% from 1989 thru 2007, and my balance jumped to $330k. Now my more natural pessimistic side is off and running, partly because of Kunstler. :)