Peak Earnings

One of the implications of Peak Credit is that financial earnings have peaked. And because of reduced leverage, earnings in the financial sector are not coming back for decades. Those earnings were all a mirage in the first place.

Next consider homebuilders given that lending standards have dramatically tightened at banks. Those profits are never coming back. What happenes to profits at major pharmaceuticals if and when the Obama administration allows drug imports from Canada and other places?

One must also factor into the earnings equation boomers facing retirement in the wake of falling home prices and retirement accounts taking a cliff dive. Trillions in potential spending power has been wiped off the books.

Expect boomers to travel less than expected, buy fewer toys (boats, cars etc) than expected, gamble less than expected, and downsize much more than expected in every aspect. This in turn will reduce the earnings potential of non-financial corporations for decades to come. Thus expectations that a new rip roaring bull market will commence once the market bottoms is sadly misplaced.

In the meantime, remember that rising unemployment, rising credit card defaults, rising foreclosures, rising numbers of walk aways, and declining earnings of non-financials means we have not even bottomed yet.

This secular bear market will last a lot longer and be much deeper than anyone thinks. Sadly, very few are prepared for it.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Morris Berman Speaks

25% of all the world’s prisoners are incarcerated in American jails (1% of the entire US adult population); that two-thirds of the world’s consumption of antidepressants occurs in the United States; that 24% of the American population say that it’s OK to use violence in the pursuit of one’s goals, 44% support the torture of alleged or suspected terrorists, and 39% want Muslims in the US to be required to carry a religious ID on them at all times (why not just make it a yellow star, and be done with it?); that the country has the greatest percentage of single-person dwellings in the world, the highest homicide rate, the largest military budget (by several orders of magnitude), and the greatest number of square feet of shopping malls on the surface of the planet. The data on ignorance, which I have documented elsewhere, are breathtaking, and Robert Putnam’s description (in Bowling Alone) of the collapse of community, trust, and friendship is one of the saddest things I have ever read. Dialectically, and ironically, American “success” became American ruin; the crash of October 2008 was merely the tip of the iceberg.

Can the Fed Reserve rescue us?

I am amazed at the near universal belief that everyone seems to have in the Fed and the Government. The arguments proposed and the comments made seem to imply that the Fed can pull off some sort of miracle bailing out consumers by causing wages to rise, property values to rise, the stock market to rise, and to create enough jobs so that everyone can live happily ever after.

Financial and asset speculations of this magnitude throughout history have never ended well. There were deflationary crashes in Japan, the Great Depression, the South Seas bubble, the John Law Mississippi Bubble, Tulip Mania, etc. In each case the bubble collapsed after sentiment changed towards speculation. Once sentiment changed it was never again revived.

Mish’s Take on Deflation Japan vs US

When Japan faced deflation it had an internet boom and US consumer demand (exports) to cushion the blow. Japan also had savings to fall back on. The US has no such cushion, no savings, no source of jobs, and an extremely high level of consumer debt. I have been saying for years those factors make the deflationary pressures in the US far worse than anything Japan faced.

Pudding is served. That pudding is called deflation. And unlike Japan, the US threatens to take much of the world down in a deflationary spiral right along with it.

Eventually this had to happen given that nearly every country in the world, in some fashion or other, became hugely dependent on the US shopping center economic model that is now history.

Consumer Shopping

“U.S. retailers will face a Darwinian fight for survival next year as they run out of cash as early as January and competition forces thousands of store closings, according to private-equity buyers and restructuring experts.

Probably 50,000 stores could close without any effect on consumer choice, Gregory Segall, a managing partner at buyout firm Versa Capital Management Inc., said yesterday during a panel discussion held at Bloomberg LP’s New York offices.

“The United States is massively over-stored in all categories,” Segall said. He said his firm is in “a wait mode” and he expects banks to squeeze retailers after Jan. 1.”

Real estate woes just keep getting worse…

If you think the housing slump can’t get much worse, Martin Feldstein thinks that both home prices and the broader economy can — and very likely will — get a whole lot worse.

“There are now 12 million homes in the United States with a loan-to-value ratio greater than 100 percent. That’s one mortgage in four. The aggregate amount of that is some $2 trillion,” said Feldstein. “If you look at the median (midpoint) loan-to-value ratio in that 12 million group of underwater mortgages — mortgages with negative equity — the median loan-to-value ratio is 120 percent.”

That means about 25 percent of all U.S. mortgages are exceed the value of the homes the mortgages are financing. In the case of half the homes that are underwater, homeowners are paying a mortgage that’s now 20 percent higher than the value of the home.

That’s bad — but it’s likely to get worse.

A recent report by First American Core Logic, a real-estate data firm in Santa Ana, Calif., estimated that as of Sept. 30, 7.5 million mortgages, or 18 percent of all properties with a mortgage, had negative equity. The group thinks there are another 2.1 million mortgages that are within 5 percent of going underwater.

The implications for many homeowners are staggering. Before the recent housing boom of 2000 to 2006, homes increased in value at a historical annual rate of about 2.3 percent when adjusted for inflation.

That means that for homeowners who owe 35 percent more than their homes’ value, it would take, at historical averages, about 15 years just to break even on their home investment. They won’t build equity. It would be a huge incentive for millions to hand the keys back to the lender and seek cheaper housing.

Oil Tanks

Tom Friedman points out in his new book that many oil countries’ people lose freedoms as oil prices go higher and these countries’ leaders tend to get very cocky. Lower prices like we are experiencing now should reverse that, taking a little pressure of the USA and the world.

The recent sharp decline in the price of oil is now starting to hit the fiscal bottom line of key oil exporting economies, meaning some of them could run fiscal deficits next year, if oil prices remain at yesterday’s ($55) level. On average, Middle Eastern oil exporters require a $50-55 a barrel oil price to balance their budgets – and countries like Russia, Iran, Iraq and Venezuela require a higher price. As a result, to maintain current spending (a likely political necessity) several oil exporters might have to issue more domestic debt or spend their accumulated savings. Oil output cuts only raise the break-even price, a fact of which OPEC members are no doubt very aware, as they prepare for yet another meeting later this month. Further production cuts seem (again) to be almost a foregone conclusion though. Meanwhile, with current oil prices, oil exporters may no longer be a surplus region next year. The erosion of their current account surpluses, sparked in part by the pressure to spend more at home to support domesticasset markets, should reduce their purchases of foreign assets. It may be no surprise that GCC oil exporters have been lukewarm in their support of Gordon Brown’s IMF fundraising.

Owners abandon boats…

SAN FRANCISCO — From Southern California to Maine, the foundering economy, high fuel prices and poor fishing have driven boat owners to abandon perhaps thousands of vessels on the waterfront, where they are beginning to break up and sink, leaking oil and other pollutants.

Boats have long been a barometer of consumer confidence, disposable income and the overall state of the economy. Now, marina and harbor officials are reporting a sudden increase in the past year in the number of deserted pleasure boats and working vessels.

Unlike cars, wooden and fiberglass boats have virtually no scrap value. So rather than pay the high cost of hauling their boats to the dump, people ditch them or sell them for as little as $1 to anyone who will take them. The boats often break up and go under, or pass into the underground economy of nighttime scuttlers_ who, for a fee, remove traceable identification numbers, strip out salvageable items and sink the vessels.

“Oil, gasoline and sewage from these boat leaks into the aquatic environment,” said Sejal Choksi, program director at San Francisco Baykeeper, an environmental organization. Boat paint often contains chromium, lead, mercury and other toxic chemicals, and as a vessel deteriorates, the coating flakes off and settles on the sea floor or river bottom, where fish swallow it, Choksi said.

High fuel prices and several disastrous years in the nation’s fishing industry have led fishermen to desert salmon boats in Washington state, crab boats in Maryland, trawlers in Oregon and lobster boats in Florida.

In Georgia, Charles “Buck” Bennett, a natural-resources enforcement manager for the state, regularly finds wooden shrimp boats run aground and left to break apart in the Atlantic Ocean swells. ”I’m not an economist, but when putting 500 gallons of fuel in a shrimp boat costs more than the boat is worth, that is a sad thing,” Bennett said.

In recent months, an increasing number of powerboat and sailboat owners have been failing to pay their slip fees, according to Randy Short, chief executive of Almar Management Inc., a company with 16 luxury marinas in California and Hawaii. When the payments are 40 days delinquent, the marina chains the boat to the dock. Recently, a boat owner in one of Short’s Southern California marinas disappeared, leaving behind a $200,000 boat and no contact information. ”People get financially upside-down and ditch their boats,” Short said, “and you can just forget trying to sell a power boat right now. No one is buying.”

Russia’s past mistake (and now repeating it)

“…It was $70-a-barrel oil followed by $10-a-barrel oil that killed the Soviet Union. It was (Professor Mau continued) the sharp rise in oil prices in the 1970s, due to the Arab oil embargo and the Iranian revolution, that deluded  the Kremlin into propping up inefficient industries by overextending economic subsidies at home, into postponing real economic reforms and into invading Afghanistan abroad–and then it was the collapse of prices in the 1980s and early 1990s that brought down the overextended, petrified empire.”

“There is al obvious parallel between the Soviet Union at the height of its oil folly and today’s Iran, argues Mau. If we were now able to ring the price of oil down sharply, the ayatollahs would face the same impossible choices that the Soviet leadership faced and that led to the collapse of Communism. 

In 2005 Iran’s government earned $44.6 billion from oil experts and spent $25 billion on subsidies–four husing, jobs, food, and 34-cent-a-gallon gasoline–to buy off interest groups”

Hot, Flat and Crowded, page 108

Tom Friedman

Mish on Peak Earnings

Peak Earnings 

One of the implications of Peak Credit is that financial earnings have peaked. And because of reduced leverage, earnings in the financial sector are not coming back for decades. Those earnings were all a mirage in the first place.
Next consider homebuilders given that lending standards have dramatically tightened at banks. Those profits are never coming back. What happenes to profits at major pharmaceuticals if and when the Obama administration allows drug imports from Canada and other places?
One must also factor into the earnings equation boomers facing retirement in the wake of falling home prices and retirement accounts taking a cliff dive. Trillions in potential spending power has been wiped off the books.
Expect boomers to travel less than expected, buy fewer toys (boats, cars etc) than expected, gamble less than expected, and downsize much more than expected in every aspect. This in turn will reduce the earnings potential of non-financial corporations for decades to come. Thus expectations that a new rip roaring bull market will commence once the market bottoms is sadly misplaced.
In the meantime, remember that rising unemployment, rising credit card defaults, rising foreclosures, rising numbers of walk aways, and declining earnings of non-financials means we have not even bottomed yet.