I TOLD YOU SO

1/16/08

As our economic problems reach crisis proportions, now would be a good time to review my musings in the Insightful Pontificator since the inception in February, 2007 of this bastion of clear thought. Virtually everything that I have been predicting is coming to pass. What is truly frightening, and hence profitable, or essential, for you to anticipate is that several of the events, market phenomenon, and economic developments that I have been predicting have not yet come true, but they will. Ignore these warnings at your peril, as some of you already know.

What was derided as the ranting of an alarmist who was clearly (Heaven forbid!) out of the mainstream are now accepted as matters of fact. Despite what the Echo Chamber on Wall Street assured us, house prices don’t just stop going up, they really do go down. In many cases, the concept of “no bid,” familiar to many of us who got our start in the junk bond market 25 or so years ago, has become alarmingly relevant to homeowners. This will increasingly be the case as the housing situation gets worse. Contrary to the assurances of the cognoscenti, the “sub-prime” problem is not a “sub-prime” problem at all. Alt-A mortgages, prime mortgages, revolving lines of personal credit (a.k.a. credit cards), car loans, commercial real estate loans, junk bonds, investment grade bonds, and even investment grade commercial paper are encountering problems, in many cases critical problems. The implications for consumer spending, which is what makes our economy go, are obvious. The implications for our credit markets, and our broader markets, have been more immediate and will get more profound. Despite what the experts told us, the “credit problem” was not a problem that was or is limited to lower income and lower middle income people. Supposedly “deep-pocketed” people are defaulting on their home loans, car loans, and credit cards. And, no, experts, those businesses that cater to the “upscale” customers have not been, and will not be, immune to the problems that the credit plague has inflicted on our economy. Earlier this week, we learned that the end of last year was, and the predictions for next year are, gloomy for European luxury car manufacturers. Just yesterday, Burberry and Williams-Sonoma, two favorites of the upscale set, joined a long line of “luxury” retailers in issuing gloomy forecasts and warnings. Why? Because many people who appeared rich were enjoying, and now are merely displaying, a Potemkin prosperity built on loose credit and a gnawing compulsion to prove to themselves that they had actually achieved something. Why were the experts unable to see this? Probably because they were perhaps the most salient examples of the faux rich I have just described.

The Fed’s desperate efforts to ingratiate itself with Wall Street by coming to the aid of the tough guy free marketeers who ply their trade on that Street, literally and figuratively, whenever they suffer so much as hangnail or a slight bout of ennui, have proven ineffective. Soon, we will see how such obsequious Fed action has been not only ineffective but seriously counterproductive. Why? Because what we are witnessing is not a liquidity problem but a solvency problem. We are awash in liquidity but have a shortage of solvent borrowers. Providing more liquidity is like putting an infected bandage on a dirty, festering open wound.

Economic signals continue to be distorted, and class warfare continues to be stoked, by a corporocracy that insists on rewarding with pay packages that would have made J.P. Morgan (the man, not the organization) blush people who achieve their positions not by anything resembling talent but, rather, by connections, sycophancy toward their former superiors and ruthlessness toward their underlings and then predictably run their organizations into the ground, with the attendant predictable human suffering. Such economic distortion also arises from the politicians of both parties, most aggressively by the Democrats but most hypocritically by the Republicans, who insist on forcing the few fiscally prudent to bail out the legions of fiscally frivolous and clueless. Almost as destructively, the “remedies” for a situation that had its genesis in overspending involve encouraging people to spend more.

The Echo Chamber on Wall Street has evolved from dismissing my predictions of recession as foolhardy scare-mongering to acknowledging the possibility of recession to “realistically” assessing the probability of recession. What comes next? The Echo Chamber will (slowly, if the last few years are any indication) come around to discussing the likelihood of a financial and economic depression. I’m serious. The generations before mine were not stupid. Their wisdom was grounded in centuries (at least) of common sense; we simply cannot spend money we don’t have and consume when we haven’t produced. My generation, of Americans and the two (Yes, many, if not most, of the masters of the universe who run hedge funds or who work on Wall Street and aspire to run hedge funds are in their 30s; some are even younger.) that follow it, most distinguishable only by their hubris, insisted that their parents were crazy, that they could indeed spend more while actually producing less by figuring out a way to get everyone else to pay their bills, calling this endeavor “financial services,” and making it America’s major, quickly approaching our only, contribution to the world economy. That title, “financial services,” is especially apt; since the world has been doing the real work, paying our bills, and piling up IOUs, it will increasingly demand service from us in return. It is difficult to survive, let alone prosper and lead the world, when one is on one’s knees servicing one’s creditors.

So far, there has been, to modify an expression, purgatory to pay for our utter abandonment of the most basic financial and economic principles. Soon, to directly apply that expression, there will be hell to pay. You heard it, as you have heard many things that have come to (rotten) fruition, here first. The highly paid volume stokers of the Echo Chamber on Wall Street will eventually catch up, but why wait? Read the Insightful Pontificator regularly, tell your friends, and take the appropriate action.