We Have Crossed The Rubicon

by BILL WADDELL

It is interesting to read all of the so-called experts predict when and how the economy will recover.  The Obama folks are, on the one hand, saying "be patient"; while assuring us that "all of the pillars are in place for recovery" this year.  Warren Buffet seems confused by it all.  The Boston Globe, with a complete void of innovative thinking, believes that "innovation" will get us back to where we were and the recovery will happen as soon as we start innovating.  The financial experts the Chicago Tribune rounded up think that it will come roaring back ... soon, for the very well thought out reason that it has always come back in the past. 

(Note that I don't really expect anyone to actually click on all those links and read all of the drivel I cited - the links are only there as proof that I don't make this stuff up.)

I'll tell you what I think about the economy's recovery - it's never coming back.  And that is good news.  I think that we have crossed a credit Rubicon - passed a point of no return, as it were.

For the economy to return to its old levels, credit has to get as loose as its old levels - and if God is smiling down on us that ain't gonna happen.  While all of the noise has been about the housing market, credit for people who don't deserve credit has dried up everywhere.  And that is a very good thing in the long haul.

There are something north of 20 million kids going to college in the US these days, and the credit card vultures who have been waiting for them at the campus gates - and often paying kickbacks to the colleges - have folded up their card tables and gone home.  They never should have been offering credit to kids living off of mommy and daddy's money and the mother's milk of government in the first place.  But at an average of about 2 grand per kid on credit cards that weren't paid off for a very long time - if ever - times about half of those kids falling for the easy money sales pitch offered by the credit card companies ... well you do the math.  That's a few billion worth of Ipods, Hollister gear, music downloads and beer pong supplies that aren't going to be bought until the credit cards come back.  And the credit cards won't come back until Wall Street can line up more fools to pool their money and buy that high interest, high risk debt from the credit card companies.

An important fact to keep in mind is that, when the economy tanked like this in the early '80's, total credit card debt in the US was about $71 billion.  Now it is north of a trillion bucks.  14 times more credit card debt today is hardly a reflection of a fourteen-fold increase in American thrift and self discipline - the keys to handling credit.  That 14X increase is largely a reflection of the fact that you could borrow money - and never pay it back.  Just keep rolling it over to another card with a higher limit; and when that ran out, get a second mortgage on a house you bought with nothing down and pay it off with that.

Same with cars and houses.  The US and Europe have collectively been living off of far more credit than most of us deserve. If this economy is going to return to its old levels, then someone has to re-open the credit purse and give car loans again for 100% of ridiculously inflated blue book values to people with credit scores of something less than 600.  I don't see that many rich idiots out there willing to go down that path again.  And without the rich idiots to back the deal, there will not be 16 million new cars sold every year like the good old days.  Some of those lousy credit risk folks are going to have to settle for Nikes instead of Chevrolets while they save up for a down payment.

In order to buy things in a credit environment with a touch more sanity than we have seen in the last few decades, people will actually have to have jobs ... and enough money in the bank to make a down payment ... and a track record of paying their bills.

Instead of measuring himself on the percentage of Americans who were home owners, Mr. Bush would have served us better by shooting for a higher percentage of people who deserved to be home owners. 

Tune in tomorrow for how this gloomy scenario is actually great news for lean companies, and the death knell for those that are silly enough to think that the world will ever be the same.

Comments

[Bryan Lund]

Hi Kevin,

Thank you for clearing the air on this. We are clearly overextended. The newspapers in Vermont were practically bragging that housing prices more or less survived the recession - as if it were practically over. I can say with little doubt that my family cannot afford to better our living situation by shopping for a better house in the near term. This is due primarily to the overinflated prices resulting from the past 10 years of ridiculous housing surges and the free flowing credit to practically anyone who was able to scribble on the dotted line.

I agree with you 100% - the economy isn't coming back anytime soon. I hope I'm wrong but on the other hand, none of us will be able to afford it if it does come back given the massive debt we are all in and the high level of risk we will carry into a recovery. It is simply time to live within our means and grow our nations wealth at a prudent and sustainable (not the 'green' sustainable, just something that won't leave us penniless) pace. This is a concept "good" lean companies already embrace and should leverage to better their competitive position.

[MPC]

Hi Bill,
Great blog. Mutual fund manager Robert Rodriguez expressed exactly these ideas here, http://www.fpafunds.com/news_04022008_rubicon.asp.
MPC

[Mark Graban]

Request for you Kevin and Bill-

It's good to know when you start reading who is talking and the byline is at the bottom of the post. Can you add a "by so and so" at the top?

I keep scrolling down to the bottom and then back to the top to read... waste of motion.

[Tony]

Yes, the economy will come back -- as in eventually it will start growing again (although the Obama folks are trying to put that time farther into the future).

But there will be a shift. A lot of the demand for specific items will not be coming back -- basically, the frivolous, nice to have items. An iPod? Maybe. A new one every year? No. A new TV? Maybe. But a new 50" LCD? No. A new car? Maybe (although California is working hard to reduce new car sales), but not a Lexus or BMW.

In semiconductors, I expect the demand for certain market segments to never come back (basically stay where it is today), just like optical/telecom never has grown fast again after the dot-bomb bust. Yes, the semiconductor market will grow again, but in different directions.

Most people in California expect house prices to start going up again at ~20% a year soon (by 2010). It's not going to happen - for one, in places people want to live house prices are still out of whack with income and rents.

[Tom Palmitesta]

I agree 100% with you. Just something is bothering me. You have used the word "deserve" a few times. I just hope the people who will define and set the criteria for "deserve" will not screw again this time!

[Betty Blue]

You had me agreeing in principle until you blamed it on Bush. The democrats (the party of the people) were the ones who pushed for equal housing (look at the history for Fannie Mae and Freddie Mac). Sorry, not interested in your opinion any more. (And just so you understand - I'm a registered democrat who held my nose when I voted for Obama)

[kathleen]

Good suggestion Mark, I also waste motion scrolling altho I'm purty sure who's authored what altho it's harder to tell these days, is it just me or is Bill more moderate? How many miss those heady days of bile and spittle when Bill told us what he really thought? :).

[Eric H]

"Instead of measuring himself on the percentage of Americans who were home owners, Mr. Bush"

"The democrats (the party of the people) were the ones who pushed for equal housing"

Huh. I coulda swore that it was W telling us about the rates of home ownership in one or two of his campaign/state of the union/inauguration speeches (they're all pretty much the same tripe, no matter which party holds the office).

About 5 years ago, we were going through some open houses and were just amazed at the size and tastelessness of those McMansions. Where was the money coming from? All I could figure was that it was Californians who were selling their $750k 1800 sq ft houses on 1/8 acre and coming here to buy a $450 k 2500 sq ft house on 1/2 acre. But then a co-worker told me he had done the same thing (gone to open houses) and talked to a real estate agent who pointed out several other houses he had sold. He said that most of them had gotten a 125% mortgage, blown the extra on the Hummer, boat, and jet skis, and didn't have a stick of furniture in the house. So even back then, we were scratching our heads at the insanity of people who don't understand "balloon payment", "living within your means", and other quaint finance terminology.

Today, we are scratching our heads at the idea people seem to have that we are all owed a job. No matter how little we contribute, no matter how little enthusiasm we bring, no matter how atrophied our sense of craftsmanship or pride in getting the details right -- even the details nobody will ever see -- someone owes us a job. And not just a job: a well-paying, comfortable job with benefits and days off and not much responsibility. Like it's a God-given right, no matter how much I screw it up.

I think they're both sides of the same coin: I deserve the standard of living I have chosen. If I have to beg, borrow, or steal it (not earn it), I am going to get it. And someone else owes it to me. If I don't have it, it's someone else's fault. If I have to fudge some numbers on the mortgage application, or get a job and hold onto it despite my complete incompetence, well, that's their problem not mine. If I subsequently lose the job or default on the loan, someone else owes me a new job and a loan bailout. If we can wrap those together in a bailout for my failed employer (for whom I refuse to do actual productive labor), all the better. This attitude is prevalent all the way from the guys on the shop floors (I assume y'all have seen this -- http://www.regularfolksunited.com/index.php?tab=article_view&article_id=561?) to the top offices on Wall Street. And the guys in Washington? H. L. Mencken said that "Democracy is the theory that the common people know what they want, and deserve to get it good and hard," and the guys in Washington intend to do just that.