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When The Rich Suffer, So Do You

Take note all you player-haters. When the rich suffer— so do you. At least that’s the argument put forth in an Associated Press piece yesterday. AP’s Mark Jewell wrote:

It may have taken longer and it may not be as acute, but there are early hints that the economic slump is crimping the lifestyles of the wealthy.

They are investing more conservatively, spending less on luxury goods and are being more thrifty with their credit cards. Many are asking their personal shoppers and private-jet travel providers to seek the best deals rather than over-the-top extravagances.

That news may produce a shrug from many people who have lost their jobs or homes in this economy. The problem is that when the wealthy get stingy, it trickles down to the rest of us.

Jewell went on to explain how a pullback in spending by rich Americans tends to affect Main Street. He wrote:

The 10 percent of households with the highest incomes account for nearly a quarter of all spending, according to data compiled by research firm Moody’s Economy.com from a 2006 federal survey…

Other government data show households in the top one-fifth of the U.S. population ranked by income earn about half of all total personal income before taxes — an imbalance that gives the wealthy immense economic clout, said Sara Johnson, an economist at the research firm Global Insight.

“Consumer spending makes up 70 percent of gross domestic product, and when one group accounts for a very substantial share of consumer spending, they also account for a large share of the economic activity that creates jobs,” Johnson said.

The outlook for spending by wealthy Americans doesn’t look too good. Jewell noted:

Unity Marketing, a Stevens, Pa.-based firm whose clients include retailers in the more than $322 billion U.S. luxury goods market, said its latest poll of affluent people nationwide found a 20 percent decline in spending on luxury goods in this year’s second quarter, and the lowest luxury consumer confidence level in the nearly five years the survey has been conducted.

Just over half of the 1,024 respondents earning an average income of $204,800 predicted they would spend less on luxury in the coming 12 months than they did a year ago.

Sometimes, it just doesn’t pay to hate the players. Really.

Source:

“Rich begin feeling the pain in down economy”
Mark Jewell
Associated Press, August 3, 2008

Washington’s Bear Hunt

From all the action coming out of the nation’s capital today, you’d almost think the various government entities in Washington coordinated efforts against the oil, dollar, and housing bears. Almost.

First, it was crude oil. Senate Democrats, led by Senators Byron Dorgan and Harry Reid, rolled out the “Stop Excessive Speculation Act” to scare off oil speculators, who they blame for high prices.

Crude for August delivery, scheduled to expire Tuesday, dropped $3.09, or 2.3%, to settle at $127.95 a barrel on the New York Mercantile Exchange, the lowest close since June 5.

Ironically, later in the day a task force chaired by the Commodities Futures Trading Commission (the agency assigned with investigating/punishing speculators in the bill) found that fundamental supply-and-demand factors, rather than speculators (as the politicians claimed), were most likely to blame for the high prices. Doh!

Next, dollar bears were targeted. Reuters reported:

The dollar rallied Tuesday, after a Federal Reserve official suggested that U.S. rates may have to rise to stem inflation and a top Treasury official repeated that a strong currency is in the interest of the country.

Treasury Secretary Henry Paulson reiterated on Tuesday that a strong dollar is important to U.S. interests and the underlying strength of the economy, as well as policies aimed at shoring up confidence, would be reflected in currency markets. At the same time, Philadelphia Fed President Charles Plosser said rising inflation could force the Fed to start raising interest rates even before labor and financial markets recover.

Gold for August delivery dropped $15.20 to end at $948.50 an ounce on the New York Mercantile Exchange.

Rising interest rates? Strong dollar policy? Looks a lot like jawboning to me. But don’t take my word for it. On July 15, Reuters ran a piece about legendary investor George Soros. From the interview:

All told, Soros said Ben Bernanke, chairman of the Federal Reserve, is in a bind.

“When he recognized the seriousness of the credit crisis, he acted very radically lowering interest rates and he used the tools that are at his disposal,” Soros said. However, now the “armory” is depleted, he said adding that Bernanke can’t lower interest rates because of the effect it would have on the dollar and he can’t raise interest rates because of the looming recession. Soros said.

“Therefore, his options are limited — he is boxed in.”

And how many times have we heard about this supposed “strong dollar policy” of ours? Actions speak louder than words, right? Back on March 17, Soros’ former partner, Jim Rogers, said during a Bloomberg Television interview:

Now, please, do we even bother reporting that anymore? Poor Hank Paulson, had a reasonable education, and a reasonably-good career, head of Goldman Sachs, now he goes around the world making a fool out of himself. Goes around saying we want a strong dollar, the next day he goes to China and says we want a weak dollar, and then he goes to Japan and says we want a weak dollar. I mean, you have to feel sorry for the guy. At least, I do.

Finally, it was housing naysayers who fell under the gun. From the CNBC website this afternoon:

Treasury Secretary Henry Paulson said America’s housing market could turn a corner and begin recovering within months, but it will take longer to resolve all housing-related problems.

“Obviously, it will go on beyond months with some of the issues in the housing market, but I believe we can get to the point within months where we turn the corner on housing,” Paulson said in a televised interview with Fox Business Network.

Sound familiar to anyone? From my post “Paulson Weighs In On Housing” from July 2, 2007:

Today, U.S. Treasury Secretary Henry Paulson spoke to Reuters about a number of economic issues, including housing. Paulson said the U.S. economy is healthy, despite problems with the subprime mortgage sector. The former chairman of Goldman Sachs stated that the downturn in the housing market is “at or near the bottom. It’s had a significant impact on the economy. No one is forecasting when, with any degree of clarity, that the upturn is going to come other than it’s at or near the bottom.” Beyond subprime mortgage woes, Paulson declared that the financial markets looked sound. He said, “Markets are volatile. I haven’t seen a single thing that surprises me – it’s hard to surprise me.”

DJIA down 1,933 points since then, S&P 500 down 243 points, global credit crunch, $453 billion of write-downs, Bear Stearns, IndyMac, Fannie Mae, Freddie Mac… surprise!

Sources:

“Dollar Jumps on Paulson, Plosser Comments”
Reuters, July 22, 2008

“Soros says Fannie, Freddie crisis not the last”
Jennifer Ablan
Reuters, July 15, 2008

Jim Rogers Interview
Bloomberg News Video
Bloomberg, March 17, 2008

“Paulson: Housing Market Could Turn Corner Soon”
CNBC, July 22, 2008

Wall Street, Housing Woes Hit The Hamptons

There goes the neighborhood. I first talked about the Hamptons, the playground for America’s rich on the East Coast, back on June 5 due to a little foreclosure problem they were having. Now, I understand that the east end of Long Island, New York, is having a bigger problem related to home sales and prices. Bloomberg’s Sharon L. Lynch and Laura Marcinek wrote yesterday:

The Hamptons housing market is feeling the heat of Wall Street’s meltdown.

Second-quarter sales volume dropped 29 percent and the median price fell 11 percent to $735,000 from a year earlier in the resort communities on the East End of New York’s Long Island, Suffolk Research Service Inc. said in a report today…

Bloomberg attributes the decline in sales and prices to tough times on Wall Street. According to Wednesday’s piece:

Transactions are dropping as financial firms have cut more than 93,000 jobs and taken more than $416 billion in mortgage- related losses and writedowns. The retreat in global stock markets, waning consumer confidence and the deepening housing recession are also keeping prospective buyers at bay.

Source: L Nichols Woodcarving

Looking at the individual towns, Lynch and Marcinek noted:

In Southampton, the median price dropped 8.6 percent to $891,000. Sales volume fell 35 percent to 257 homes. In East Hampton, prices fell 11 percent to a median of $1,000,000, Suffolk Research said. Volume there fell 40 percent to 120 homes…

In Southold, prices fell 8 percent to $507,500 and sales dropped 19 percent. On Shelter Island, the median price rose 34 percent to $1.13 million, while sales fell 26 percent to 17. The cost to buy in Riverhead also rose, up 9.6 percent to a median of $411,100, while transactions gained 3 percent to 103 properties.

Source:

“Hamptons House Prices Fall Amid Wall Street’s Decline (Update4)”
Sharon L. Lynch, Laura Marcinek
Bloomberg, July 16, 2008

Treasury Secretary: U.S. Economy Has ‘Turned Down Sharply’

Earlier today, U.S. Treasury Secretary Henry Paulson said the U.S. economy has “turned down sharply.” This follows the comment on April 2 by Fed Chairman Ben Bernanke, who said, “Recession is possible.” MarketWatch’s Greg Robb wrote:

These comments are his most downbeat description of the economy to date. Paulson has avoided saying the word “recession,” fearing that it could further weaken investor and consumer confidence.

The former head of Goldman Sachs said in a speech to pension fund and endowment managers at a meeting of the Council of Institutional Investors that the White House is focusing on “things that can be done quickly” to counter the housing downturn. He told the audience that the $150 billion economic “stimulus” package “will make a real difference.”

Source:

“Paulson says U.S. economy has ‘turned down sharply’”
Greg Robb
MarketWatch, April 10, 2008

Consumer Sentiment: Half-Full Or Half-Empty?

One event. Two different interpretations. Is consumer sentiment improving, or getting worse? I’ll let you decide…

“US late Feb Reuters/Michigan consumer sentiment rises to 70.8 UPDATE”
Forbes, February 29, 2008

Consumer sentiment, as measured by the Reuters/University of Michigan index, rose more than expected to 70.8 in late February from a reading of 69.6 in early February.

Economists polled by Thomson’s IFR Markets had expected sentiment to rise slightly to 70.0 in late February…

Source: Sur La Table

“Consumer Sentiment Drops to 16-Year Low in February”
Reuters, February 29, 2008

U.S. consumer sentiment dropped to a 16-year low in February, hitting levels that usually sound the alarm bells of recession, on worries about declining incomes and rising unemployment, a survey showed Friday.

Adding to the grim view, consumers’ expectations for the future also hit a 16-year low while worries about their ability to makes ends meet and the overall economy were as bad as they have been in decades, the Reuters/University of Michigan Surveys of Consumers said.

The Reuters/University of Michigan Surveys of Consumers said its main index of consumer sentiment fell to a 16-year low of 70.8 in February from 78.4 in January.

This was the final reading for February and was the lowest since February 1992. It was up slightly from the preliminary February result reported earlier in the month of 69.6, which also would have been the lowest reading since February 1992.

“Consumer confidence remained at the same low level that was recorded during the recession periods of the mid-1970s, the early 1980s and the early 1990s,” the Reuters/University of Michigan Surveys of Consumers said in a statement.

“The minuscule gain from the mid-month reading did not alter the basic fact that the extent of the recent decline has consistently been associated with a subsequent recession period,” it added…

Rise Of The Underwater People

Back on February 12, I wrote about underwater mortgages (owing more that the house is worth) in the post “Turning Japanese.” I said:

Earlier today, Reuters reported that more than 30% of U.S. homeowners who bought in the last two years owe more on their mortgage than their house is currently worth, according to housing market research company Zillow. Chris Sanders wrote in “Third of recent buyers owe more than home’s value: report” that 39% of homebuyers from 2006, who placed a median 10% down payment on the property, are now underwater (owing more than the house is worth). 30% of those who purchased homes in 2007 also have negative home equity, Zillow said in its quarterly home value report. Overall, less than 1% of all American homes are underwater at this point in time.

The next day, I came across a Bloomberg piece by Kathleen Howley entitled “Americans Selling Homes See Prices Go Below Mortgage.” She wrote:

By the end of this year as many as 15 million U.S. households may owe more on their mortgages than their homes are worth, according to an estimate from Jan Hatzius, chief U.S. economist of New York-based Goldman Sachs Group Inc. That may fuel an increase in foreclosures, erode prices, and increase mortgage bond losses, he said in a Feb. 1 report.

Today, Reuters reporters Julie Haviv and Jennifer Ablan said in “One in 10 home loans is under water: Economy.com” that nearly 8.8 million homeowners, or 10.3% of American homeowners, are underwater, according to Moody’s Economy.com. As a result, they said, millions of U.S. homeowners have an incentive to abandon their properties.

“Jingle Mail”
© 2008 Christopher E. Hill

Edmund L. Andrews and Louis Uchitelle wrote about the rise of the underwater people in the New York Times today. In “Rescues for Homeowners in Debt Weighed,” they said:

Not since the Depression has a larger share of Americans owed more on their homes than they are worth. With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater. That is more than double the percentage just a year ago, according to a new estimate of the damage by Moody’s Economy.com…

Andrews and Uchitelle added:

For Americans caught in a mortgage trap and owing more on a home than it would sell for, consumer spending and confidence are the most immediate casualties, Mr. Curtin reports. But the damage goes deeper.

People cannot move easily to jobs in other cities if they have to sell their homes at a loss. The $168 billion federal stimulus package is likely to be less effective than intended because many homeowners may simply use their government checks to pay down their debts.

Even worse, Mark Zandi, chief economist at Moody’s Economy.com, predicted home values will continue to slide in the near future. This past Wednesday, Reuter’s Haviv and Ablan said in “Economy.com sees home prices down 20 percent” that the “rapidly deteriorating U.S. economy will cause home prices to drop by 20 percent peak-to-trough,” according to Zandi. In addition, the co-founder of Moody’s Economy.com is also predicting a recession in the first half of this year. According to Reuters:

Zandi, speaking at the Reuters Housing Summit in New York, said this is a “significant” change from the Moody’s Economy.com outlook published in December, which called for a 13 percent drop.

On the outlook for recession, Zandi said:

Three months ago, I expected the economy to skirt a recession. Now, I expect it to suffer a recession (in the) first half of 2008. To be more precise, the economy is contracting. It’s been contracting for December, January and probably February. Another three, four, five months of contraction and that would be a recession.

Hold The Boob Job, Please

On Valentine’s Day, Reuters’ Debra Sherman wrote in “Weak U.S. economy cutting into vanity business” that a weakening economy is affecting the American vanity industry, where vision correction procedures are down, as well as other cosmetic treatments and surgeries. Industry analysts believe that while an economic downturn would have to be severe before Americans forgo cosmetic procedures, especially the less expensive ones, there are signs of distress. Jefferies & Company analyst Peter Bye told Reuters that, “We’ve already seen some. It depends how deep and how long the recession is.” Economic problems are already affecting some cosmetic procedures, especially higher-priced surgeries. While injectables, like dermal fillers and Botulinum Toxin, typically cost less than $1,000 and are less affected by the economy at the present time, Lasik surgery ($3,000 to $4,000) and breast implants ($10,000) are particularly vulnerable due to their higher cost. Sherman noted that Advanced Medical Optics Inc, which specializes in eye-care products and lasers used to correct vision, said elective procedures are becoming negatively-impacted by the state of the economy. Chairman and Chief Executive Jim Mazzo told a conference call that during the first six weeks of 2008, “we have seen the deteriorating U.S. economy negatively impact our domestic LASIK procedure volumes.” Joanne Wuensch, an analyst with BMO Capital Markets, told Reuters that:

There’s a strong correlation between consumer confidence and U.S. Lasik procedures. People don’t spend money on Lasik if they feel like things are really bad.

On the other hand, bad economic news doesn’t appear to slowing down demand for other, less-expensive cosmetic procedures, such as injectable dermal fillers and other anti-wrinkle treatments. Analysts said the outlook for these cheaper procedures is not that bad. Aviva Shedletzky, a senior analyst with Millennium Research Group, a market research firm focused on the medical device, pharmaceutical and biotechnology industries, said:

It’s one of the last things to get hit when the economy turns. We’re not really expecting the economic slowdown to have a huge affect on cosmetic procedures. Our society is so focused on youth and people really want to look good… so as long as there’s at least some discretionary income, people will keep getting them.

And when discretionary income is gone, many patients turn to financing, according to Shedletzky, who said there are still creditors offering loans to patients who are over 18-years-old and who have a minimum income of $15,000.

Boob Job Bank
Source: Ever After Store

Polls Show Concerns Growing About U.S. Economy

Two recently-released surveys jointly-conducted by ABC News and the Washington Post depict just how negative Americans’ attitudes have become about the economy. Last night, MarketWatch reported that a weekly survey of consumer attitudes on the U.S. economy fell to its lowest level since late 1993. The ABC News/Washington Post consumer comfort index fell 6 points last week to negative 33. According to ABC, the index’s 13-point decline in the past month is “an unsettling sign,” as a 13-point drop occurred just before the 1990 recession and a 14-point drop took place prior to the 2001 recession. The record low for the index, negative 50, was reached in February 1992.

On Monday, Washington Post staff writers discussed a separate ABC News/Washington Post economic survey that was conducted at the end of last month, which showed Americans are more negative now on the economy than at any point in nearly 15 years. According to the poll:

• More than 8 in 10 Americans describe the economy as “not so good” or “poor.”
• Nearly 6 in 10 believe we are already in a recession.
• Three in 10 are pessimistic about their financial prospects for 2008.
• 39% of all Americans now cite the economy and jobs as the number one issue in the 2008 presidential campaign, up 10% in the past 3 weeks. No other issue reached double digits.

On the economic stimulus plan being crafted in Washington, only about 3 in 10 think it will be enough to avoid or mitigate a recession. When asked what they would do with the extra money, 27% said they would put it in the bank, 26% would pay off bills, and 5% percent would pay down debt. Only 20% of respondents said they would spend it. One individual told pollsters, “I’d go buy a hamburger.”

“Would you like fries with that?”

On America’s longer-term prospects, the respondents were evenly divided, with half saying the United States is in a long-term decline and the other half saying the fundamentals of the economic system are basically solid. Two-thirds are optimistic about what 2008 has in store for them and their families.

Consumer Confidence: How Low Can You Go?

Yesterday, the results of an ABC News poll showed that expectations of the U.S. consumer for an improving economy slipped to a 16-year low this week. In a monthly measure of expectations, 5% of those surveyed say the economy is getting better, the fewest since December 1991, while 65% says the U.S economy is getting worse.

Separately, the ABC News/Washington Post Consumer Comfort Index, which measures the American consumers’ outlook on current conditions, lost 4 points to read -24 on a scale that ranges between +100 and -100. This marks the index’s 23rd straight week in negative double-digits, the longest such slump in four years. The 2007 average was -11. Only 28% of those polled gave positive ratings on U.S. economy, which was down from 31% last week and a long-term average of 40%. 30% showed confidence in the buying climate, down from 31% last week and a long-term average of 38%.

These results reflect the latest findings from the RBC Cash Index consumer confidence survey, which last Friday showed the index had tumbled to 56.3 in early January, the worst since the index began in 2002. In December, the reading stood at 65.9. The index is benchmarked to a reading of 100 from January 2002.

According to Reuters, confidence measures are generally viewed as a barometer of consumer spending, which accounts for two-thirds of the U.S. economy. However, economists note that consumers do not always act in accordance with their statements to surveys.

‘We Only Put Out Good News Here On The Economy’

Regular readers of Boom2Bust.com have probably realized by now that I use quite a number of overseas sources for my posts. Reason being? I’m concerned that we may not be getting a clear picture of our economic health from the American media. Consider the following from Euro Pacific Capital’s Peter Schiff in chapter 2 of his book Crash Proof:

Yet, the American public remains oblivious because we’re not getting the facts. The government, the mass media, and Wall Street have a vested interest in consumer confidence, keeping the American public assured that everything’s basically okay. There may even be an element of altruism; strong economies are built on positive psychology. But too much of the data issued by government agencies is self-serving and ultimately counter-productive. Myths get reinforced and they get in the way of rational decisions. Wall Street buys in because it sells stocks and bonds when investors are optimistic, although it has been known to bet the other way with its own money. The media report the news as they understand it, but they get their understanding from the government and Wall Street.

In chapter 5 of his book Financial Armageddon, Wall Street veteran Michael Panzner adds:

Motivation is also a powerful influence. Individuals who work in the public sector, especially those who have been voted into office, or who work for brokers and other businesses that stand to benefit from positive sentiment, frequently find themselves- willingly or not- becoming cheerleaders for a bullish view, regardless of whether the data support it.

Think this is all mumbo-jumbo? Back on March 17, 2006, responding to a charge by Ron Christie, a former special assistant to President Bush, that he doesn’t report “good things” about the U.S. economy, MSNBC’s Chris Matthews said on Hardball with Chris Matthews that, “We don’t produce bad [economic] news on this show,” later adding, “We only put out good news here on the economy.” According to Media Matters for America from March 22, 2006:

CHRISTIE: No, wait. When do you ever hear people in the media come out and say that the economy is strong in this country?
MATTHEWS: Every single night on this network, we produce, on the half-hour, the latest stock averages. We show Nasdaq’s doing well and Dow’s doing well, and the economy’s doing well. We don’t produce bad news on this show.

Later on in the broadcast:

CHRISTIE: Because - what I’m saying to you is, why doesn’t the media, why don’t we sit and have a conversation on Hardball and say, “Let’s talk about some of the good things”?
MATTHEWS: We only put out good news here on the economy.

How about the following from the SouthtownStar, which is part of Chicago Sun-Times newsgroup. Columnist Marlene Lang sarcastically noted on January 14 that when it comes to getting bad (realistic?) economic news about the United States, we have to get it from across the pond:

We all know those Brits love to hate us. They never got over that tea party thing.

They’re gloating across the pond about the growing power of the pound to the U.S. dollar. And last week, the British Broadcasting Corporation seemed to be the only news source reporting that important financial geeks were saying a U.S. recession is upon us. That’s so impolite.

They never got over that tea party thing. Too funny. Anyway, I’ll keep on using diverse sources for my posts so we can hopefully get a clearer picture of where the U.S. economy is at, and where it’s going…

Vanguard Founder Says Recession Odds At 75 Percent

Earlier today, CNN Money posted the answers to questions Fortune readers asked of John Bogle, the 78-year-old founder of mutual fund giant Vanguard. With $1.3 trillion in assets, Vanguard is now the second-largest mutual fund company. Bogle talked about the odds of a U.S. recession, the U.S. housing market, the subprime crisis, and challenges to the U.S. economy, among other issues.

What are the odds of a recession right now?

I would put the odds of a recession at 75 percent. This economy is very much consumer-based, and I believe that 70 percent of the GDP is consumer spending. That’s a very high number. Two things are happening there: Consumers have fewer resources because from 2001 to 2005 they took $5 trillion out of real estate. That will not recur. This is a big drop. We also see weakness in auto sales and retail spending - we even see it at companies like Starbucks. There is another, equally important factor in consumer spending, and that is confidence. Consumers are not going to spend if they are worried about the future.

Will the real estate market improve anytime soon?

It doesn’t look so good. I really don’t see it improving soon. At some point homes will have to be built. But right now there is not much incentive to build new places when there are so many old places on the market. When those lines cross I don’t know. It’s complicated by the fact that many people have gotten into ARMs [adjustable-rate mortgages] who didn’t know what they were doing. I don’t know what is going to happen to those people when lenders foreclose. When banks were community banks, they were more careful. But when banks sell loans in a bundle, they are clearly not going to be concerned about mortgage quality. So we have to have a better system in the future to make sure we have a much better element of credit quality in mortgages.

How does the U.S. subprime mess compare with other crises you have seen in your career?

I’d say the most similar example was the S&L crisis of the late ‘80s and early ‘90s. The issues were somewhat the same: Institutions borrowed short and lent long.

The immediate concern for most investors is the subprime market, but over the long term what do you see as the biggest challenges facing the U.S. economy?

Externally, we are faced with $1.5 trillion already poured into Iraq and Afghanistan. So you have enormous expenditures in a corner of the world that is important to us, but it is very unwise to think we can bring democracy to a place that doesn’t share our values. There are also the challenges from low cost production in China and India. At home, we have a tremendous future financial problem with the federal deficit. We’ll have to take action on Social Security someday. Government spending has gotten to the point where we will have to either cut spending or raise taxes. Another problem is this deadlocked Congress. And I see the quality and caliber of our presidential nominees, and I am not impressed.

It raises the question of whether this country is even able to run itself anymore.