Monday, June 16, 2014

The economy: Amber lights flashing, red coming up?

The signs of something really, really nasty building up in the national and global economy are getting clearer all the time.  I strongly urge you to read the following reports in full - follow the links to reach them.

  • Charles Hugh Smith points out that 'Banks, Wall Street, Housing and Luxury Retail Are Doomed' in the medium to long term.  Money quote:  "... if Gen-Y cannot afford to buy Boomers' houses at bubble-level prices, then what will keep housing prices at these elevated levels? Answer: nothing. Without strong demand for housing at sky-high prices, valuations will drop to whatever level demand can support. That level can be far lower than conventional housing analysts believe possible because they are still extrapolating Baby Boomer preferences and earnings into a future which will be quite different from the housing bubble decades.  The second issue is a question: how much of the Boomers' housing wealth will trickle down to Gen-Y when they actually need housing, i.e. when they're starting families?  The answer may well be: very little."
  • Mish Shedlock notes that the current average cost of a new home in the USA is six times the median national income, where historically it was half that.  Furthermore, while the sales of the most expensive one per cent of homes are soaring, the bottom 99% of houses are struggling to find buyers.  Many of those who do buy them are paying cash - in other words, they're investors seeking to generate rental income from them, rather than families wanting to live in them.  This indicates a serious housing bubble has once again formed, just as it did prior to the 2007/08 correction in the market.
  • In his take on the US housing market, Karl Denninger puts it in a nutshell.  "Right now The Fed is running emergency level interest rates.  Either there is about to be another emergency, in which case employment (and wages) are about to go down the toilet or they are not.  If there is no emergency then the value of the house is going to fall -- strongly.  If there is an emergency who is going to buy -- at any price?"
  • The Rockefeller Institute is sounding a warning about state tax collections.  Money quote:  "Personal income tax collections declined in nominal terms by 0.4 percent. This is the first time since the first quarter of 2010 that states reported declines in income tax collections ... While the declines in income tax collections are not surprising, the softening in sales tax collections is less expected and more worrisome. Among 41 early reporting states, sales tax collections showed declines in 11 states, with Arizona and California reporting the largest declines at 16.7 and 9.9 percent, respectively."  This is happening because taxpayers are making and spending less money - so governments reliant on taxes to fund their operations will have to trim them, perhaps drastically.
  • Subprime auto loans are also showing signs of stress.  Zero Hedge remarks:  "... what interests us about this development is mainly this: it shows that the credit bubble is beginning to fray at the edges. Every downturn starts with a seemingly innocuous report about things 'suddenly' and 'unexpectedly' going wrong in a relatively obscure corner of the market. We find ourselves reminded of how sub-prime real estate credit troubles began to show up for the first time in February of 2007, leading to the often repeated mantra that this particular disturbance in the force was 'well contained'.  That is however never how it works – in the end, it is all one big interconnected market. When troubles begin to show up at one end of it, they soon tend to  begin to spread ... One should certainly keep both eyes open henceforth; more anecdotal evidence of this type is likely to emerge in coming months, especially if the Fed continues with its 'QE tapering' course. Once problems become visible in one obscure corner of the low grade credit markets, it is often a warning sign for the entire market and economy."

Folks, if you put all of these pieces of the puzzle together, and add to them the impact of the crisis in the Middle East (as we discussed yesterday), the picture that emerges is bleak and grim.  I don't think it can be long now before some sort of major economic crisis erupts, as all these influences combine to create havoc.

You need to have as much cash on hand as possible, at least a few weeks' reserve supplies of food, medication and essentials, and be prepared to hunker down and endure hard times.  We've spoken before about practical steps that can be taken to that end, so I won't repeat them here except to say that the best possible thing you can do is get yourself out of debt as far as possible.  Debts tie you down.  If you're debt-free, you can respond to changing trends and reposition yourself financially and/or geographically as circumstances dictate.  If you aren't, you're stuck.

Don't allow yourself to get stuck.


EDITED TO ADD:  I've written a brief follow-up post to this one with more evidence of our decline.  You'll find it here.  It has some useful additional information.


JaneofVirginia said...


This is one of the most insightful analyses I have seen, and this includes comparing your post to the throngs of doomer posts who have said something similar, but not half as eloquently or with proper detail. I will definitely have to link back to this post !
As for not getting stuck, even though I have had ample warning and known a collapse beyond imagining is coming, particularly those of us with families cannot completely plan in anticipation. I paid down housing debt, and bought emergency food, but with children in college could not pay off college loans and a small other unsecured loan. Even with advance knowledge and planning, I am afraid that most of us will still be "caught".
Thanks for the superb posting.

Old NFO said...

Well done, and I think dead on... Time to make another list...

c w swanson said...

Some scrap silver isn't a bad thing to have around.

Sunnybrook Farm said...

I heard today that inflation has double since the last report and it is unexpected(by the media I guess) and this is just the manipulated report that is obviously a joke to anyone who has gone shopping lately.
Trouble is building and it could only take some insignificant silly event to start something. Just like a horse fly biting one of the steers in the field, they all run.