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Op-Ed: The Illusion of Wealth


The last eight years were a fantasy, created by massive debt, manipulation and deceit.


Commercial bank exposure via the total amount of credit card loans outstanding has risen more in the last 10 weeks than it did in the previous 10 months cobined. Moreover, the growth in the last 10 weeks -- $32.3 billion, or roughly $600 million per shopping day -- represents nominal growth of 9.3%, or 48.3% annualized over the last 10 weeks. According to American Express, delinquencies on credit payments rose to 4.1% of all credit outstanding in the third quarter, up from 2.5% in 2007, with Bank of America's rate rising even more steeply - to 5.9% for the period. Moreover, the pool of loans deemed uncollectable rose to a high 6.7% in the third quarter, soaring from 3.6% last September. What consumer spending there is has been fueled in part by credit card: The second-largest merchant-vendor for credit card use is now McDonalds. This suggests that many consumers are in serious distress if they need to get their $4 Big Mac and fries with a credit card.

The unemployment rate is currently 6.5%, according to U-3 government figures. The broadest U-6 measure, which includes discouraged and marginally attached workers, is 11.8%. If you're still discouraged and jobless after 1 year, the government ignores you in its calculation. How convenient. If these workers were to be included, the unemployment rate is currently 16%. When someone tells you our current situation isn't close to the Great Depression because unemployment was 25% in the 30s, keep this chart in mind. We've lost 1.2 million jobs in 10 months. The U-3 rate will reach 9% by late 2009. That would be another 3.6 million job losses. These are the kind of numbers that could lead to social unrest. Our social services system and food banks will be pushed to the breaking point.

The S&P 500 has declined by 44% in 2008. It provided an average real return of -17.65% over the last 10 years and an average real return of 83.6% over the last 15 years. These aren't the returns that the Wall Street PR machine has been promising you. They have convinced people that stocks always go up over the long run. I guess it depends on your definition of "long run." Pension funds, endowment funds and financial advisors use annual returns of 8% to 10% in their models and assumptions. This shortfall in return will have devastating impacts on states, counties and companies with traditional pension plans, along with the average 401(k) investor.

So far, 2008 is shaping up to be the worst year for the stock market in history. When someone had $10 million and now has $5 million, it's a shame. When a 64-year-old guy who worked hard his whole life and followed the rules loses half the value of his 401(k)months before his planned retirement, it's a tragedy. People who thought they could retire will now have to work for many more years. Millions are losing their jobs just as their home value declines and their mutual fund holdings are cut in half. This is the negative wealth effect in full bloom. People are scared to death and won't spend anywhere near the level they did over the last 20 years. Forced frugality is here. Embrace it. Young people should be happy with the dramatic pullback in the stock market and housing market. Many valuation and sentiment measures now point to solid long-term returns from this point onwards.

Click to enlarge

Source: Barry Ritholtz

Creeping Corporate Fascism

For the last 2 weeks I've heard the normal fear mongering and rhetoric about imminent disaster if the incompetent leaders of US automakers don't get a bailout. I've heard that if the Big 3 were to fail, 1 in 10 workers in America would lose their jobs. According to the Bureau of Labor Statistics, there were 145 million employed Americans in October 2008. According to their own information, the US carmakers employ the following number of workers worldwide:

General Motors 266,000
Ford Motor 87,700
Chrysler 132,130

Total Workers 485,830

Approximately 377,000 of these jobs are in the US - that's 1 in every 385 American jobs. The Center for Automotive Research, which is financed by the Big 3, issued a report just before General Motors, Ford and Chrysler's CEOs went before Congress that said 2.95 million direct and indirect jobs would be lost if the Big 3 ceased operation. Even this exceedingly broad interpretation of lost jobs comes to only 1 in 49 jobs.

This is a far cry from the 1 in 10 figure many Democratic congressmen have been spouting But the bigger the lie, the more likely people will believe it.

General Motors will burn through its remaining cash is less than two months. Ford has a little longer. Many politicians warn of the imminent collapse of society if these automakers declare bankruptcy. Again, the big lie is more likely to be believed by the masses.

Chapter 11 bankruptcy will allow these companies to close unprofitable plants, shutter dealerships, rid itself of awful management and renegotiate union contracts. They will come out of bankruptcy with a leaner cost structure that will allow them to compete with Honda, Nissan and Toyota. If Congress bails them out with taxpayer funds, they will continue to pay workers $70 per hour versus the $42 per hour paid by the Japanese automakers.

We are heading down a path toward corporatism, where government merges with corporate interests. It's already taken root within the defense and healthcare industries. It's also taking place at the state government level. In Pennsylvania, a poorly run retailer named Boscov's should be liquidating and getting ready to join Montgomery Ward on the scrap heap of retail history. Instead, Governor Ed Rendell is using taxpayer money to prop up it up.

No Easy Way Out

The incoming Obama administration is now floating the idea of a $500 billion to $700 billion stimulus package. The story which will be sold to the American public by his well- oiled PR machine is that we must do this to save the country. Haven't we heard this story before? The country's going through a necessary deleveraging that will take years to complete. There's no stimulus package that will stop this process. There's no easy way out.

Obama will convince the American people that once we save the country with the stimulus program, he'll then address our long-term fiscal problems. He'll convince the Republicans to support the stimulus package by delaying the tax increases on the rich. Democrats have never seen a spending plan they wouldn't support. Republicans have never seen a tax that they didn't want to cut. This is the kind of cooperation that will quickly lead to a $13 trillion national debt.

Tax cuts for the middle class sound great, except that a tax cut today is just a tax increase on our grandchildren. Former comptroller of the US, David Walker, describes the use of debt in the America thusly:

"Individuals go into debt, and when they pass away, the debts go with them. But government debts stay, and they have to be assumed by our children and grandchildren. That's not only fiscally irresponsible; it's morally reprehensible."

There are no easy answers to a problem that built up over a 25-year period. Americans will need to spend less, save more and live within their means. The next 25 years will not be as fun and carefree as the past 25 years. Government must address the $53 trillion of unfunded liabilities, develop a cohesive and ealistic energy policy, enact a simpler tax policy, create a plan to repair our crumbling infrastructure and encourage ideas that work for improving our educational system.

Many problems confront the US. They need to be met promptly and unflinchingly. Otherwise, the great American Republic will surely enter a period of long, slow decline. Next Tuesday has arrived.

No positions in stocks mentioned.

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