How Will the Economic Future Unfold?

[halbhh]

Sailer, the big question is for big companies with a lot of cash, which can retain workers a while if sales weaken, against the possibility that sales will pick back up. The low inventories and high cash levels have already had a dramatic effect imo. Jobless claims did not spike up. CEOs will think about prospects and use that to make decisions. They seem to have been sanguine generally for now (mortgage types excepted of course).

[Sailer]

Sailer, the big question is for big companies with a lot of cash, which can retain workers a while if sales weaken, against the possibility that sales will pick back up. The low inventories and high cash levels have already had a dramatic effect imo. Jobless claims did not spike up. CEOs will think about prospects and use that to make decisions. They seem to have been sanguine generally for now (mortgage types excepted of course).

I picked car companies for an example, as we already know what's happening in the housing market. As for the car companies and their cash saving, Ford has had bad sales for over a year now, and at the present rate of cash burn, they will be out of money in about two years. They are looking very much like AMD in that respect. Even with low inventories, they are having to buy out workers that have long term contracts and otherwise getting rid of everyone they can. Because of some of the terms of the contract buyouts, jobless claims are not affected, and at any rate the job loss has been small on a monthly basis, but large when observed in long term. There are several reasons for the losses at Ford, some of which the management so far refuses to acknowledge.

Of course, there are troubles over at GM and with Chrysler, though since Mercedes sold Chrysler, there have been several moves to cure the problems and go back to selling cars that people want to buy, rather than what Mercedes wanted to sell. The new Challenger is sold out before its even made its way to the car lots, for instance. Mercedes had decided not to produce the Challenger before it sold Chrysler, with one of its executives saying that its research showed that no one wanted a 2 door car. Many people believe that type of thinking, bad research, is what hurt Chrysler so bad. Another example of Mercedes mistakes is the Charger. Mercedes showed a Charger that looked good for years, promised a two door, and then produced a 4 door that hasn't sold well at all. Mercedes response to the criticism was "If people want a 68 Charger, then they should go buy a 68 Charger". I wonder what ever happened to the adage, "The customer is always right".

I can't speak for all companies, of course, and in some it makes a lot of sense not to build products that sit around and do nothing. A good example locally is seen in three of the housing contractors. Two of them built lots of houses during the last year which now sit empty. One bought up a lot of land and subdivided, but over a year ago decided to build only as people came in and put a down payment, therefore having no inventory of built houses. It doesn't take much of a guess to tell which company is in better financial condition at the moment. But even with that, there are still a lot of construction workers out of work, or doing pizza delivery.

[beerandcandy]

Home Foreclosure Rate Soars in 2007: Financial News - Yahoo! Finance
if it was 79% in 2007 i would imagine it will be even higher in 2008
this is going to hurt

[Sailer]

Home Foreclosure Rate Soars in 2007: Financial News - Yahoo! Finance
if it was 79% in 2007 i would imagine it will be even higher in 2008
this is going to hurt

That's 79% higher than the year before, not 79% total. 2008 will probably be worse, but look on the bright side, you might be able to pick up a foreclosed house pretty cheap, especially as the banks start to get desperate for cash. I've seen a few locally that the banks have advertized simply as "take over payments". I've told my son to hold out for a few months and he might get a house that a bank is willing to sell for less than is owed on it. I've seen that happen before.

[flasher702]

Sometimes it can be very difficult for the news reporters. Do they tell what's happening or not? Sometimes I think it would be better if they told what happened but didn't make any speculation at all about what will happen tomorrow.

Especially if they are also active traders. Not to mention they are so often wrong anyway, it ought to fall under journalistic integrity that they should just stop.

[beerandcandy]

ya im holding out for a few months and low balling some offers.
i need to figure out what bank owns what forclosed property so i can send offers directly to the bank instead of the real estate agents

[BaldEagle]

I picked car companies for an example, as we already know what's happening in the housing market. As for the car companies and their cash saving, Ford has had bad sales for over a year now, and at the present rate of cash burn, they will be out of money in about two years. They are looking very much like AMD in that respect. Even with low inventories, they are having to buy out workers that have long term contracts and otherwise getting rid of everyone they can. Because of some of the terms of the contract buyouts, jobless claims are not affected, and at any rate the job loss has been small on a monthly basis, but large when observed in long term. There are several reasons for the losses at Ford, some of which the management so far refuses to acknowledge.

Of course, there are troubles over at GM and with Chrysler, though since Mercedes sold Chrysler, there have been several moves to cure the problems and go back to selling cars that people want to buy, rather than what Mercedes wanted to sell. The new Challenger is sold out before its even made its way to the car lots, for instance. Mercedes had decided not to produce the Challenger before it sold Chrysler, with one of its executives saying that its research showed that no one wanted a 2 door car. Many people believe that type of thinking, bad research, is what hurt Chrysler so bad. Another example of Mercedes mistakes is the Charger. Mercedes showed a Charger that looked good for years, promised a two door, and then produced a 4 door that hasn't sold well at all. Mercedes response to the criticism was "If people want a 68 Charger, then they should go buy a 68 Charger". I wonder what ever happened to the adage, "The customer is always right".

I can't speak for all companies, of course, and in some it makes a lot of sense not to build products that sit around and do nothing. A good example locally is seen in three of the housing contractors. Two of them built lots of houses during the last year which now sit empty. One bought up a lot of land and subdivided, but over a year ago decided to build only as people came in and put a down payment, therefore having no inventory of built houses. It doesn't take much of a guess to tell which company is in better financial condition at the moment. But even with that, there are still a lot of construction workers out of work, or doing pizza delivery.

You've never worked with the Germans??? I worked at Siemens years ago and they are first and foremost right and any facts that may seem to contradict that are irrelevant.

Mercedes response to the criticism was "If people want a 68 Charger, then they should go buy a 68 Charger".

Sounds exactly like a German we'll tell you what you want....

[BaldEagle]

And in subprime today the Feds are going after a few of those subprime lenders.

Feds open subprime mortgage probe in 14 companies: report - MarketWatch

This should proceed at an almost glacial pace and in 2010 or so there may be some actual charges but I actually expect nothing happens. We are talking about bankers here and if a fed nails one the rest are your likely to make sure they never get credit the rest of their life.

[Sailer]

You've never worked with the Germans??? I worked at Siemens years ago and they are first and foremost right and any facts that may seem to contradict that are irrelevant.



Sounds exactly like a German we'll tell you what you want....

My experience with the Germans was back in the 1960s, when I raced a Formula V car before going into the Air Force. Volkswagon was interested in anything and everything that could improve the quality of their cars. They weren't sure about the racing at first, but they seemed to get very interested when we started finding some problems in the engines and transmissions. Suddenly they wanted to know everything so they could improve the product.

When I got out of the Air Force and talked to the local VW dealer, it seemed like the attitude had changed. The bug was being built to lessor standards, the fuel injection had problems, and no one seemed to care. It was like they thought the customers should be more understanding about the problems. From my obsevation, VW has been on a downward spiral ever since and that last one I had was a 1974. My neighbor bought one of the new bugs and she's said she doesn't want to buy another when her present one finally dies.

Yeah, the "We'll tell you what you want" attitude over at Chrysler. You can have black or gray upholstery, which do you want. I want red leather upholstery. Salesman stares back and says, you can have black or gray uphostery. I'll buy a car from the dealer down the street. What does he have that we doesn't, says the salesman. Red leather uphostery, I reply.

[flasher702]

Eh, but if people want a 68 charger they really should just buy one... And if you really want red leather upholstery just do it... they're just seats, you have them re-upholstered. I helped my mom re-upholster the seats in our (guess!) baha-ed VW Bug. We rebuilt the engine on it too. Customization FTW.

I think it's a bit more complicated than "the customer is always right". Sometimes the customer is just whiny and wasn't really going to buy the car anyway :P You don't pick a car by it's upholstery lol.

As for assuming no one wanted a 2door car: I dunno what's up with that. Why are manufacturers so afraid to bring variety to the US car market? And the stuff we do get *puke* Hummer, PT Cruiser, Aztek... I think it's getting better but they had years and years of cheap gas and soaring incomes that they totally squandered. They could have sold almost ANYTHING, but now they're going to be limited by much tighter budgets, emissions standards, and gas mileage concerns.

[Sailer]

I think it's a bit more complicated than "the customer is always right". Sometimes the customer is just whiny and wasn't really going to buy the car anyway :P You don't pick a car by it's upholstery lol.

Sure its more complicated, but dealerships and car companies should still listen to what the customers want. There were half a dozen cars on my list to look at before buying, one of which was a Chrysler product. I ended up buying a Mustang Cobra, because Ford offered things that I wanted. I had also looked at a Firebird (this was a few years ago), but the salesman at that dealership shrugged me off and didn't want to bother. I knew the service manager at that dealership and showed him my Cobra. He asked why I didn't get a Firebird or Camero. I told him him about the salesman who wouldn't listen to me. Guess who lost a job? As far as uphostery goes, it is important to me.

[halbhh]

This remarkable post in Real Time Economics at WSJ.com by 2 former FED economists lays out a good FED strategy, imo.

The stakes are higher than many people realize, and the recommendations appropriate I think.

Economics Blog : In the Shadow of Fiscal Policy

..

[Sailer]

I suspect that I'm far more conservative in my thinking. Basically, I believe that the more the Fed tries to steer around the problem, the worse the problem becomes. The problem doesn't get solved. Using housing for the example, too many houses were built, using credit that was too easy and cheap to get. When the bill comes due on those houses, instead of facing the realities of too many houses and too many people who bought what they couldn't afford, the Fed gives a band-aid in the form of cheap credit. This helps people refinace and keep the houses that they foolishly bought. That sounds fine, as far as it goes. But it also encourages the housing sector to build even more houses, hoping that even more people will buy them with the now cheaper credit. If there were too many houses in the first place, how will more houses yet solve the problem? If the people who bought the new houses on the cheaper credit start defaulting, what new bailout will occur for them? The elephant in the room didn't go away, it just got bigger, and hungrier. And it left a bigger pile of manure in the corner that someone, someday, will have to clean up.

[beerandcandy]

yes the cheaper rates look like they make it worse but its not true.
most people are not getting the low financing rates
i just applied for a loan
i have 3k in debt on 2 credit cards and make 60k a year
just 3k in debt 80 a month (soon will be 2k in debt 64 a month)
since im a first time home buyer my net worth is low
so
my rate is 6.75
doesnt seem so low
my credit should not be so low i have only 3k at most in debt
the market is so f'd up

[halbhh]

The FED strategy outlined in the blog post just above isn't about supporting house prices (which it can have only a modest effect on). Instead it's about preventing a general deflationary spiral for the entire economy (aka "depression" instead of recession). Don't let housing distract you from the big picture here. The question at hand is whether a credit contraction combined with recession leads to a downward spiral in prices and jobs.

I'm optimistic that this very real possibility of more than small odds to happen can be prevented, since Ben knows. He knows how the Great Depression happened, and what didn't work in 1930s, or in 1990s Japan. He's the right man for the job, imo.

Randall Forsyth gives a good summary I see also yesterday:

"If so, another 50-basis-point cut Wednesday would result in a dramatic 125-basis-point reduction in a little over a week. But it would still leave the funds rate a ways from its final destination.

Still, critics contend such ease would reignite inflation in consumer prices. That concern, it should be noted, was shared by the Bank of Japan in the 1990s and the Fed of the 1930s. Both faced asset deflations and resulting credit crises, not soaring CPIs.

Ben Bernanke is well aware of that history, and seems determined not to repeat it. "

Up and Down Wall Street Daily - Barron's Online

[halbhh]

"Fourth-quarter growth was weaker than expected, but not as weak as the headline suggested. Real gross domestic product grew at a 0.6% annual rate, well below the 1.2% consensus. But almost all the surprise was in inventories, which actually declined. " REal Time Econ Blog WSJ.com

Anticipating a decline in demand, inventories have been trimmed further, but demand has remained flat (not declining) for now, which will necessitate an increase in production at some point if it continues.

-->

"What does this mean for the first quarter? Inventory liquidation can be seen in two ways. Either it’s a sign that businesses are so gloomy about sales that they don’t want anything in their warehouses at all right now. Alternatively, it could be a sign that they have been so efficient at keeping production in line with sales that they might be pleasantly surprised in coming months. Of course, both things could be true. –Greg Ip"

Economics Blog

[halbhh]

I would disagree about the amount of help that low inventories really provide. A low inventory helps the company in that is doesn't have to pay as much inventory tax and, using car companies as an example, if there is a slowdown of buying, the company isn't stuck with a lot of unsold cars. But the effect on the worker is the same. To the normal worker, it doesn't matter if he builds a bunch of cars that feed a large inventory or he builds a bunch of cars that are sold as need needs. He still builds a bunch of cars.

If there is a slowdown in car sales, with a large inventory, the car company has to sit on the unsold cars or sell them at discounted prices and the company suffers. The worker gets laid off until he's needed to build more cars. If the inventory is small and there's a slowdown in sales, but the car company is not stuck with a lot of cars on its lot, so the company doesn't suffer until the bank accounts get low, but in the meantime, the worker gets laid off. In both cases the worker gets laid off. Only the company (and its executives) gets relief from low inventory.

If the slowdown in car sales is short term, no real damage is done to the company, but the worker may suffer a lot, depending on how much money he put aside in a savings account for such slowdowns. But if the slowdown is for a longer term, the company's savings are lost and it starts to suffer anyway, along with the worker. In a long term slowdown, the end effect is the same no matter if a large inventory is in place, or only a small inventory. No cars built, no cars sold, lots of people out of work. Oh yes, when people are out of work from the car companies, they don't have money to buy anything other then the necessities, so all other companies get affected, with more people bing put out of work, affecting still more companies, and on down the spiral.

Confidence in the economy is vital, and that is indeed affected by the TV news and such. Psycology studies have proven that time and again. Tell a group of people that there's a temporary slowdown in car sakes, but everything else is fine and car sales should go up again next month and the people will feel good and keep spending money, therefore keeping the rest of the economy going fine. Tell another group of people that car sales are down, everything else is being hurt by the slowdown of car sales, and the people will feel stop spending their money and will hide it under the matress, therefore the rest of the economy will also experience a slowdown, resulting in more people out of work, etc, and we go back down the rathole.

Sometimes it can be very difficult for the news reporters. Do they tell what's happening or not? Sometimes I think it would be better if they told what happened but didn't make any speculation at all about what will happen tomorrow.

Simply put, less inventory means more flexibility of course, and so the reaction to a slowdown in sales can be less draconian.

In the quarter just ended, most of the downside surprise in inventory liquidation took place in the motor vehicle sector, evidence of how sober manufacturers have been about future sales. It could also be a quirk that may be reversed in the current quarter.

Economics Blog

All in all, perhaps you'll end up agreeing with me at some point if you read up on a deflationary spiral that it's better for the FED and congress to work to support the economy for now. It's about whether banks will have lost enough capital so that they are forced to cut back lending too much. That's an important part, but in general:

DEFLATIONARY SPIRALS

Re the 2 former FED economists I posted above, the idea: let the FED move faster, down for now, and back up later when it needs to.

It's like someone is on top of a weakening ladder that is about to break. You say "you shouldn't have gone up so high". But do you reinforce the ladder a bit for the moment to allow them to climb down?

[BaldEagle]

It's like someone is on top of a weakening ladder that is about to break. You say "you shouldn't have gone up so high". But do you reinforce the ladder a
bit for the moment to allow them to climb down?

Don't think the ladder is quite the right analogy because if you reinforce the ladder they are actually more likely to then climb higher to reach what they wanted the ladder for in the first place. This then leads to a collapse from even greater heights.

What really needs to be done is putting an end to the means of the subprime mess and eliminate ARM's for housing (and thus eliminate that pot of gold they got the ladder for). The entire reason for ARM's was the sky high lending rates of the early 80's used to curb inflation at the time and their time has passed into history. Speculators used the ARM's to flip properties for profit and shady lenders used the ARM's in predatory lending practices neither of which we ever needed. There is no real reason for ARM's so just be done with them for home loans.

T minus 30 to Ben's announcement and the wall street rats are running for cover looks like there isn't going to be a .5% cut today...

[BaldEagle]

Interesting article yesterday.

In America, the land of bubbles, the next pop will be the biggest - MarketWatch

Better late than never guy's the alternative energy wave started in 2006 though. Just hop on board with the alternative energy I have been doing soooo well riding the wave just make sure you bail early (actually really early) as you may have noted with the dot com's and subprime the wreck at the end is really nasty it's better to leave 10% on the table than go down with the ship.

[flasher702]

my rate is 6.75
doesnt seem so low
my credit should not be so low i have only 3k at most in debt
the market is so f'd up

Did you check all your credit reports for errors? Are any of your revolving credit accounts (ie CCs) above 30% utilization? Do you have lots of unused available credit lines?
1. Make sure your credit report is clean.
2. Get all of your credit cards to <30% utilization (simply spreading it out among more CCs is fine if you need to keep cash on hand for downpayment, to avoid balance transer fees you can simply charge all of your living expenses to a new card and use your income to pay down existing cards or find an offer for free balance transfers) but some utilization is still better than a zero balance.
3. Requests that your CCs have their limits lowered to reduce your available credit.
4. Do not cancel any credit cards. Do not open any new credit accounts. Try to get rid of fees on them and have the limits lowered if you really don't use them anymore but never cancel an account just because you aren't using it as length of account boosts your credit profile and don't open a new credit account while shopping for a mortgage.

That rate is crap. Check your credit reports first, juggle some things, wait a few months then reapply somewhere else. Go ahead and sign up for a nice credit monitoring service (the one I got through Wells Fargo seems decent, turns out I had an erroneous bill on my credit report). If you're serious about buying a house it's a small expense to try and make sure you get a good rate.