Times are a-changing

Some mixed signals lately in the economy. The saving rate has risen from almost zero in fact we had a few months of a negative saving rate to 5%. That seems like a phenomenal change. Retail sales were better than expected in February, although negative if you take out the impact of home sales there was actually growth. The government says that January retail was better than originally estimated. GM reported an increase in cash due to cost cutting that means they will not be taking a $2 Billion loan from the government they originally thought they would. The stock market had four "up" days in a row. One major bank reported the possibility of a profitable quarter in the first quarter of this year.

Is not the time to dump some money into the stock market? Hmmm!!! Is the economy really as bad as all the pundits say it is or are they over stating their argument to make sure necessary steps to reinvigorate the economy are being taken? Will we simply ignore the bank disaster and skirt the issue? I do not doubt that there must be a major shift in the housing market. I believe that in many areas property values are based on perception and not actual value. For those of us who do not live in California it is hard for me to see why a 3 bedroom home on a city lot with a bath and a half should be worth $500K. I realize that location makes a difference, but with the improvements in communication and the move to working from remote locations does that not spell a decline in property values for those areas now viewed as central to conducting one's business? I hope there is a readjustment. The values our society seems to be willing to pay are too high in my mind and contribute to the larger view that money has value beyond the purchase of subsistence.

Creative Destruction

Economists talk about a concept they call "creative destruction." Essentially it says that cyclical movement in the economy does not lend itself well to evolution. As a society (race) we seem to like to maintain a comfort zone and resist change, yet forces far beyond our control force change upon us. The greater the change, the greater the upheaval. The NY Times recently published an article that talks about the severe and sudden job loss as being a harbinger of a fundamental economic shift in the U.S. Perhaps not only in the U.S. but the world. I graduated with a BA in Economics. I am not an economist, I do not pretend to know the models used by economists in trying to understand market forces. However one thing I do remember is that all of the economic models I studied did not function well in extreme conditions. There was always a tendency that moderation seemed to work best. The current economy is due an adjustment. The extremes in this economy generated by an overheated housing market, lack of restraint in money creation, and our focus on technology moved our economy to an extreme edge that is simply not sustainable.

Now comes creative destruction. The old will be destroyed. The automotive market in the U.S. must under go fundamental change. If another plant opens to produce SUV', large vans, or these tricked out pick'em up trucks we have not learned our lesson. GM is facing bankruptcy and frankly I think it should be allowed to go bankrupt. It will generate huge "creative destruction" forces in the U.S. as parts suppliers are suddenly put into severe production under capacity situations. The market will have to adjust. People will be hurt, those who husband their resources and are capable of doing for themselves will survive. Others who rode the wave without a foundation will founder. So it is with the nature of things.

I say bring it on. I'm excited to see what happens. I hope I live long enough to see a fundamental shift away from gadget technology, away from over priced homes and under supported lending institutions, I hope to see a strong move toward alternate forms of energy. I do not like governement interference because the fundamental purpose of government is to preserve the status quo. I do not believe the government will be able to stem the tidal forces about to over take us because the world is involved and there is now a player in the world with more economic clout than the U.S., namely China. We cannot act solely in our best interests, and perhaps this is a step that will start us down the road to world peace. Otherwise it will end in world war and the destruction of mankind will result in either case, from the consumption of all of our resources or we will blow ourselves to smitherens.

Market Theory Works

Economics is tough. Recently it has been broadcast that 1.2 million jobs have been lost this year. A large number of those jobs have been in construction and industry. However I do not know the statistics but I would venture the largest number of layoffs are in the service sector. Banks and financial institutions have laid of tens of thousands, insurance companies are shedding workers, real estate agencies and other mortgage brokers have to be losing people. I cannot help but wonder how many of those jobs were created with poor supporting structure.

What do I mean by that? Stop and think about it, here were these huge financial institutions putting together investment instruments containing thousands of mortgage and reselling them to investors for large fees, yet in their technological sophistication they cannot tell you what instruments lie bundled in these portfolios. as a result when the value of the bundles comes into question they have no way of sorting out the bad so the entire bundle of mortgages is devalued, perhaps way below market value.

Home prices are falling in many parts of the country. Why, because greedy people bought homes paying premium prices with little regard for real market value creating an artificial market value not supported by sound credit terms and traditional methods of measuring property value. Instead it became similar to a pyramid scheme and as long as no one asked any questions people were getting rich. However, they were also pricing the properties beyond the range of the average person thereby narrowing the number of participants in the market until it became unsustainable.

What we are seeing now is a period of adjustment, and quite frankly we need these downturn to put rationale back into the markets. Unfortunately some innocent people are going to get burned, and some shortsighted greedy people rewarded. But then, who said life was fair?