Tuesday, August 09, 2005

Practical Paranoia, part 5

I find I'm disappointed in what I've written in earlier sections, particularly part 4. Looking at it after another brief hiatus, I realized I've jumped to vague handwaves. Darnit, that isn't going to do the one certain reader of this blog - ME - any good. [heh- yes, I write this for myself more than anyone else. In some respects it's thinking out loud.]

Actually, one flaw of part 4 is that I fail to make clear preparing for inflationary economic doldrums is different from preparing for deflationary ones. Well, no, not really. Some of the basics for surviving both are the same. But it's been noted by many that if you successfully prepare for disaster you can actually gain from it -- almost all disasters include opportunities.

So with that, let's quit being general and try to generally forecast what I think is going to happen. After all, I kicked this off with the fact that I'm actually one of the folk thinking the bad stuff is coming - money, it's mouth time.

I think the earliest problem we're facing is a housing slump - a collapse of the housing bubble. Basically, we're going to see two things occur roughly simultaneously. We're going to see folk unable to purchase a house "a bit higher", with the result that the houses remain on the market for longer windows. We're also going to see the current gradual increase in interest rates continue - probably about 2% higher - over the next 6-9 months. This is going to be compounded by oil prices climbing some more - no, not peak, not yet, though I'll revisit that in a bit. No, it's just the fact that demand is so tight against supply that there's no slack, and there will be inevitable events that make supply slip for short periods. Basically, a repeat of last year's increases. All this - the interest rates, the fact that other things (especially oil) take bigger chunks out of the wallet - mean we're going to start seeing people unable to manage the mortgages they've already obtained. Bottom line here is an increase in foreclosures.

The result is a glut of housing, of which some (the foreclosures) start selling at what is presently below market value - as a commenter noted elsewhere, banks don't want to hold, they want to minimize their losses, so selling now for half beats selling in 3 months for full. [Yes, I exaggerate, but not so much as it appears at first glance.] With a glut of houses, new construction slows down. It has to - contractors can't build the next few houses till the last ones are sold (allowing for some overlap, but the overlap only goes so far). If they're not building, builders aren't working. Which means the construction industry - one of two industries that have made up the largest proportion of the recent employment gains - reverses its growth. How bad will this be? Well, that's tricky.

First, the bulk of this expectation overlaps the winter holidays. And that same window is the slow period for such workers. A large number of them expect to be out of work for a couple-three months anyway. Call it as much as 20% that fall into this boat - the rest take inside jobs and alternate employment during this window and ride out the storm. What I'm expecting, however, is a 25-30% decline. And it'll be obvious after the holidays when the workers can't find anything after what they think is a normal dropoff.

Of course there are other businesses associated with real estate that'll take hits as well - obviously real estate agents, but more subtly many of the mortgage specialty industries that have sprung up over the past few years. Sigh - I'm getting large view again.

The result of the housing slump - pop, hiss, hold, or whatever - will be a hit to the economy. Allegedly there are a lot of folk over-leveraging their houses. So they'll find themselves hurting for money - hurting hard, I suspect. My guess as to what is going to happen out of this is an economic doldrum that hits us in Spring of 2006.

I think the S&L collapse and the subsequent recession of 1990-1991 provide the best model of anticipation. A major financial industry is going to be left holding a bag and not carrying sufficiently deep pockets. Covering that industry's bets will require in turn deep and painful digging in taxpayer's pockets. One variant from that is that while the S&L "caused" the 1990-91 real estate slump, this time the cause and effect are reversed. Yet I think the end result will be sufficiently similar for my purposes. Subsequent, I think we have to use the current administration's history in regard to the 2001 slump for anticipating the recovery. Thus my anticipation is:

About 2% decline in real GDP over three quarters. A sluggish (12 month) recovery just to recover the 2%. Employment takes double that - almost two years - to recover.

In more detail, let's examine states. If your state was one of the majority that suffered from the declining revenues of 2001-3, expect a repeat. Except, if your state is one of those with the greatest gains in real estate, expect it to be worse. California is obvious. Colorado (the "monument gap" development from Denver toward Colorado Springs primarily), Washington State (Seattle), much of the northeastern seaboard (aka the NYNY to Newport Urban Corridor aka BosWash plus), Georgia (Atlanta) and Florida (Miami), Arizona (Phoenix) - that, I think, is the list of the big targets.

Crap. I'm in government - here, sorta state, sorta local - a librarian. We saw many, many cuts in our jobs over the past half-decade, cuts which have not been recovered. One of my plans, therefore, has to be preparing for alternative employment. To the good, I'm senior. To the bad, I'm "only" a librarian, and there's a tendency to consider a library a frill. (Given that in EVERY depression library attendence rates spike hugely, this implies otherwise. But reality is that libraries are early on the cuts list.) Yep, time to take a good hard look at what else I can do around here.

That's two - housing bubble fizzle which precipitates a recession/depression. But as I said, there's the oil situation.

Remember last year? The hurricanes that ripped through the gulf? Remember what oil did for about a month after that - or rather, what gasoline did after that? Yep, it surged. Guess what - we're already busier in that region than we were last year. Current forecasts say we're going to have almost 50% more activity than last year. 50%. Ouch. Add to this a recent report by the DOE that notes gasoline stocks have declined. (The report's weekly. The decline's been consistent, however, for the past month. The DOE thinks that barring extraordinary events (such as the hurricanes) we won't see August spikes, but the agency does think prices are going to be nasty come winter.

hmmm. Which means the price of oil/gas is going to cut into the wallet BEFORE the housing bubble. Two possible reactions I see to that: people start bunkering, or people further leverage. Since I think we're in a bubble, I expect more leveraging - more stretching of credit. Which in turn means that the housing slump will have a greater impact than I originally expected.

Bleah. We're on the edge of a perfect storm - the 1-2 of oil-housing is going to push the economic doldrums hard. If it's hard enough it could cause distrust of US moneys - all those overseas holders of US trust funds exchanging them for other currencies. FWIW I don't think it's going to be that bad, but it'll not be pleasant.

OK, final swag.

4-5% inflation. 3.5% decline in real GDP over 9 months, 3 months lingering in the trough, 18 month sluggish recovery. Nasty, nasty unemployment levels - for the US these days, that is - exceeding 6 or 7% at the peak. Indicators appearing in about 2 months, much of it hidden in the normal holiday turbulence, the GDP decline in February/March of next year.

OK, the normal way to handle this is two apparently contradictory actions. First, make sure that you can pay for things when the prices rise while waiting for your wages to catch up. Second, as limited by the first, grab low interest non-adjustable loans before they go up. Be cautious buying anything that's "hot" as the prices will suffer in the near term, but don't hesitate to take a loan for a major item that you need or really want subject to that. In other words, a vehicle purchase is probably going to break your way. Buying real estate is a bad idea. A FIXED rent/lease agreement for the next year or two is probably a real good idea if you don't own your house, but avoid variables rates. Clearing credit cards with adjustable rates is GOOD, but don't get rid of them. (That is, unless you've more than two that you use. Heck, if you can keep it at one that's even better, and only use it in lieu of an ATM card - payoff that month before the climbing interest grabs you.) For the record, I have one active card. I have three more cards that were used for things that I want, good price, taking advantage of "12 months same as cash" offers. Funny, that. They pay the lenders because apparently over half the people using them run past the 12 months and owe the huge back-calculated interest load. My wife's a fanatic about paying them off - we've never paid the interest.

huh. Thinking out loud is fun. I've got my "probable future" set. It works well if things don't crash - which would be good. It copes well if things go the way I think, and to some extent past that. If things go beserk, well...

If we attack Iran, things go way out of hand. If the Peak is reached, things go nuts fiscally. If our financial difficulties cause a devaluation due to international loss of trust in our fisc, things get absurd. These fall into the "unlikely" range, I think - yes, even Iran.

I'll probably visit this again. I'd like to be set to not only get through the anticipated difficulties, but to successfully take advantage such that I come out ahead. But for now, I've gotten VERY longwinded. Enough.


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