Clouding up for Consumer Recession

A consumer driven recession is arriving in conjunction with broad based price increases, a weakening dollar, job-losses, stock and property price declines, a lack of credit from banks, and high consumer debt levels. Like an attack from multiple angles, this will take out of the box navigating. GE, a bellwether for the world economy missed its earnings. Semi-conductor manufacturers have begun large layoffs in a year they are supposed to begin investing –worrisome. The only sectors in the US economy that added jobs were health-care and education. Also, corporate defaulted debt sales increase, suggesting banking problems have spread to companies at large, and it was with good reason companies stopped trading debt six months ago. UK home prices recorded their largest drop since 1992, showing housing trouble on the shores of Europe. The UK consumer, like the US consumer, has a lot of debt, which means UK may follow US more closely than other nations. Both the US and the UK are cutting FED rates. The Euro, meanwhile will not cut rates because of record inflation, however inflation now is a global event, especially food inflation. Slowing down Europe may not help this. Commodities are at all time high prices. And the US dollar is diluted adding to inflation and weakening any action the US government could take. So house prices and stocks will go down while everything else gets more expensive. People have less cash as prices go up. So people will stop spending, and ultimately, the economy is based on people. So a consumer recession is the worst even if it is a pride filled slow progression.

2QBank earnings are still not all in, but no one has had good news. Some suggested we will be in a downturn for the next year. Many announced still more large sales of debt to prove they are at the federally mandated level of loan/loss. It seems as though nvestors feel that they will not go bankrupt. Morgan Stanley reported that the financial downturn will last well into 2009, but they also claimed to be making record profits on trading. I believe a sell-off should be evident shortly simply because the situation is getting worse, not better. The new lows to come, however, will be a time to buy, but it might be a protracted struggling affair.

But what to buy? Most industries finally tie into consumer spending, so getting out of highs like YUM are a no brainer. If a consumer driven recession sets in everything from clothing to electronics, from airplanes to commodities will go down too, however. The US government doesn't have much money left to spend on defense. Maybe health: medical expenses are mostly covered by insurance, and they are not always what one needs, but often health is least related to pleasure. Adding to health-care's upside potential, stocks here have been depressed since the dot-com bubble. Especially if Hillary does not get the nomination, health-care stocks could become a safe repository for cash. And they could be hit with speculative inflows. Especially in the rich world, a large swath of baby-boomers are retiring now.

Leading the banks' earnings reports, one becomes insolvent and vanishes

Financial instruments have become liabilities such that the fifth largest US bank was sold for $250 million. I’m not sure the sale was even legal (especially as China owned 10% of the stock, and the FED set the price at 2% of its already depressed market capital the last day of trading, March 14^th, 2008). JP Morgan claims to have not wanted to buy the bank. That Bear Stearns could carry such liabilities to sell for a quarter the cost of its New York headquarters alone shows the degree to which nobody no one would lend it money. I mentioned before that no corporations would buy others debt obligations for the last few months. Now people are asking if other big banks are also bankrupt? One of the most connected private finance groups, Carlyle, has just had its hedge fund foreclosed on by investors. So the mortgage crisis spread to a credit crisis and now has become a financial instrument crisis as people take their money out of all investments, willing only to invest in treasuries returning below inflation. All financial instruments, derivatives, papers, and stocks are declining in value as the fundamentals of the complex financial sector are being questioned, as they should be: from housing alone, Standard & Poor's has now admitted to $285 billion in losses among financial institutions, but the total collateral damages may be more than the iraq war (AEI, Nouriel Roubini). How big is america's economy, 9 trillion? The losses could be over $ 6 trillion. This will spread everywhere. $100's of billions of the initially and now worthless sub-prime mortgage related investments may still be unaccounted for, and everyone wants cash.

So as the FED puts billions of extra dollars into the system, but people only buy commodities, the over-leveraged dollar continues to dilute and sinks to record lows. Food and energy inflation has picked up, while salaries go down for US consumers who have been spending 130% of income, while also property prices continue to sink and new credit is not available, and China’s costs rise, pushing world product prices higher. These trends indicate consumer spending is approaching a cliff. Foreign governments and developing nations still have spending power, but they are already seeing international trade drop off, and the degree of the American plummet may be unprecidented.

One international indicator, the semi-conductor industry which should be beginning an upcycle, is now seen slowing. Many companies are putting off investment spending, as they did in 2001, but this time consumer spending is also drying up and with it government funds. This three way pinch is beginning to show in the greater economy as Gold is over $1000 and Oil over $100. Whether or not global growth slows, all time high commodity prices could also retreat, and oil with it – the next bubble to deflate? Medical stocks still hold their own, but healthcare debate could destabilize them if Hillary wins the nomination. Elsewhere, wherever, get ready for a downhill ride. There is bad news to come. The secrecy surrounding first the insolvency of Citigroup in August 2007 and now the inside sale of Bear Stern only increases investor fears as it shows any company could vanish over the weekend, its stock along with it. How America's recession will affect China and South America and India remains to be seen, but it cannot be good to lose your best customer.