We've been on this beat a long - since the fund was born, we've been saying this is the first consumer led recession we've had since the early 80s and many (most?) market participants who have entered post 1983 are not prepared for it. They are going by the wrong playbook - the "corporate led" recession. Remember back then (almost a year ago) we had just began our first credit dislocations, interest rates were over 5%, and everyone was telling us not to worry! After all stocks always go up over time - just be patient. How patient - is a decade enough? They lied (
Mar 26: Stocks Tarnished by Lost Decade) Houses have never gone down nationwide - don't listen to the hecklers! They lied (
Jan 24: They Said it Could Never Happen. Ever.) Need I go on? I won't - you get the picture.
Back to our friend the consumer... he is in big trouble. We are financially illiterate (if we were not, we would never allow our government to do the things it does - we'd be storming D.C. in outrage) On top of financially illiterate we are massively overextended.... as I wrote then, when everyone was focused on the narrow niche that was
subprime loans -
that's just the tip of the iceberg. The easy to see spot. We have a whole nation built on consuming. A nation whose wages have not kept up with (relatively low) inflation eras, not to mention what we've had the past half decade. So they turned to their homes - and withdrew from that ATM. Over. And over. And over. Once home prices began to fall, that spigot turned off because frankly, many in the 2005 and later era got a house for little to no down... so without home appreciation there is no "bank" to draw upon. ATM is off. But no, pundits told us - we will be fine - just a little problem this summer and we'll be fine by fall... after all the Federal Reserve (starting in mid August) is on our side. And the market took off like a scorched monkey - racing to new highs in September and October 2007. On
Kool Aid dreams.
Meanwhile I was typing to a much smaller audience: this is lunacy. The consumer is going to keep looking for spigots - personal loans, home equity loans, 8 year car loans, drain 401ks, and finally credit cards. Well that happened, the great "juggling act" of 2006-2007. And the bill is now coming due - the banks are beginning to
turn off this spigot as well per the NYTimes. As I've been writing this will lead to bankruptcies - just a trickle for now. But we should see the tidal wave begin in 2009. I'm early. Just be patient. You see, when you run out of places to hide your debt, and your creditors come knocking and you're out of
house equity to hide, you're out of 401k to hide, you're out of car loan to hide, you're out of credit card to hide - well you're doomed. And that's for those who remain employed. Sounds unreasonable right? Just as unreasonable as "stocks always go up over extended periods of time" and "housing will never fall nationwide".
We don't talk about this one much since it's a long term issue but we have whole series of posts so we have it on paper when it does start playing out (
series from Aug 07 to Jan 08 here) and from there...
