By now, you have probably seen the images on TV, of a greed ridden society, as "Black Friday" officially opened the Christmas shopping season in the US.
As investors, it is important to recognize the animalistic behavior of consumers, because herein lies the key to being an alert contrarian. If you can look beyond the obvious shock of seeing people falling over one another to save $100 on a laptop computer, you will see a much larger image of a society that's out of control. This mutant behavior has direct implications for our society, and our economic futures.
Let痴 take a few steps back, and look at the big picture.
According to cardweb.com, In 2004, the average credit card debt among consumers age 25-34, was $5,200. In the 29 days separating Thanksgiving and Christmas, it is estimated that consumers will charge approximately $108 billion on their credit and debit cards. Of the $108 billion, 80% of purchases are expected to be bought on credit, and 20% from debit.
Since many debit cards are tied to home equity lines of credit, consumers continue to rack up huge piles of debt on the paper increases of their home values. With interest rates rising, and home values falling, consumers continue to play Russian roulette with their financial futures.
As with any boom time, consumers perceive their homes as safe and liquid instruments. Our nation is in a longer term trend where wages are falling, and the costs of goods and services are rising. Most of this is due to the massive growth taking place in Asia.
While China's growth may slow in the months ahead, the countries growth prospects are on track to make the "Red Nation" the industrial superpower for the next 50 years. This means that the 20 year commodity bear market has come to an end, and the demand for raw materials will continue to escalate.
DECLINING WAGES AT: GM, FORD, & DELPHI
Here in the US, our country is in a sustained period of falling wages, and rising costs. All you have to do is look at what痴 going on in Detroit. GM and Ford are negotiating with their unions to cut wages and benefits. With falling demand, and higher energy prices, GM and Ford cannot continue to stay in business without reducing costs. The math is simple.
Delphi, GM's #1 parts supplier recently filed for bankruptcy after GM refused to bail the company out. If the truth be told, GM saw the Delphi bankruptcy as a roadmap to get its own house in order. Before its bankruptcy, Delphi's proposal to the UAW called for wage cuts of $11.77 per hour ( from $30.77/ hour to $19) for skilled-trade workers, and cuts of $14.35-$16.35 per hour ( from $26.35/ hour to $10-$12) for production workers.
Of course, the UAW is threatening to strike if the cuts are implemented, but now that Delphi is in bankruptcy, what choice does the union have? From a business standpoint, it would be more beneficial for GM, Ford, and Delphi, to pull up stakes and relocate their businesses overseas.
The situation in Detroit was not the beginning of our nations falling wage problem. And it may not be the end. For several years, starting with the George H.W. Bush and Clinton administrations, corporations have been fleeing the US in search for cheaper labor.
CONSEQUENCES OF FALLING WAGES
What do you want me to say? I think the consequences are obvious. Time after time I hear the arguments for why the real estate market will not crash. Of course, the most logical conclusion seems to be that low interest rates will continue to drive the housing boom. Oh, really?
If that's true, what happens if interest rates remain low, and incomes continue to decline? What price would you pay for a home if your wages were cut by 38%-58%? These are the wage cuts that Delphi is seeking from the UAW, and I wouldn't be surprised if GM and Ford followed suit. So, now do you think that low interest rates alone are enough to prop up the real estate boom? The Delphi, GM, and Ford situations are not isolated cases, they are just high profile.
Here's another scenario. How much would you pay for an 1100 square foot condo along the coast of Florida, or along the Gulf Coast? $1,000,000? $800,000?, $600,000? Come on, give me a price. Would you pay $800,000 for a beachfront condo that could get wiped out by a hurricane? Or pay $20,000/ year for Flood & Windstorm insurance if you could find someone to sell it? Would you still pay these outlandishly high prices for a condo if you had insurance, but were running the chance that your insurance would not pay up after a hurricane?
I am not giving you hypotheticals here, this is reality. How about this one, how much would you pay for a condo that provided zero positive cash flow, and very high mortgage payments? Come on, give me a price???
The low interest rate argument is at best, really lame. As wages continue to fall, it will be virtually impossible for real estate prices to continue to rise. The Fed can lower rates to zero, but as long as the average consumer continues to experience cuts in their wages, the real estate issue will be affordability, not interest rates.
REASON FOR GREED & MUTANT BEHAVIOR
People have always been selfish, self centered and greedy, but in the past they had the decency to hide it. What we are witnessing today is a lack of decency, morals, and respect for others.
There are many reasons for this behavior, and I am not going to get into all of the causes, but we have a huge problem on our hands. What bothers me is there seems to be no end to this behavior.
There are many things we can blame for the attitudes of people now days. The # 1 culprit is our television sets. Unfortunately, the programming on our TV's are shaping and molding the mindsets of our society. What's even more unfortunate is we are allowing it to happen.
We are so out of control that congress had to get involved to force major league baseball to implement harsher penalties for baseball players taking steroids. These ballplayers are influencing the behaviors of our youth.
All across the nation, city, state, and local governments are putting up cameras at intersections to help stop the country's latest epidemic; running red lights. Today, people are not running red lights bacause they cannot stop, they run the light because they do not want to stop. This behavior obviously shows a total disregard for the rights and safety of others, and reflects the total lack of character in a person.
If you want to know what痴 wrong with some of the kids today, look no further than your TV set. After having their behaviors molded by TV, kids go off to school and interact with others who have been influenced by TV also. Before you know it, your child begins acting like the people they have watched on TV.
I hate to tell you this, but its not just the children who are being influenced by television. Adults watching Donald Trump, Paris Hilton, or the Life Styles of the Rich and Famous, are green with envy. The key word here is ENVY. Here's the definition:
"A feeling of discontent and resentment aroused by and in conjunction with desire for the possessions or qualities of another".
If you are looking for the key reasons why people are greedy, selfish and resort to animalistic behavior, the above definition pretty much sums it up. This behavior is as much a part of the white collar culture as it is the working class. In fact, one could argue that the white collar culture could be the cause for many of the problems we are facing. The reason I say this is I don't know many blue collar workers that own TV stations, cable companies, work on Wall Street, or are CEO's of a corporation.
ECONOMIC IMPLECATIONS
I have often said that most people do not learn their lesson until pain is involved. The pain I am referring to is economic.
In time, the repercussions of consumer excesses will begin to ripple through our economy. Very low interest rates have extended credit to a variety of irresponsible consumers. This extension of credit has been the number one driver of our recent economic boom. This credit bubble is set to burst, and it will take years to remove these excesses from our economy.
If you don't believe we have a credit bubble, just count the number of credit card applications you receive in the mail every week.
The largest growth of new jobs in the nation has been in the area of real estate. This includes mortgage lending jobs as well as real estate sales positions. Mortgage refinancing boom has fueled consumer spending.
Banks and other lenders have invented loans such as "interest only", and "adjustable rates" that are tied to 20 year amortizations, and keep consumers hamstrung to the bank. These loans provide very little possibility for the average consumer to ever pay off the loan.
Since 70% of GDP is consumption, and consumption is the consumer, economic growth cannot be sustained when the consumer is broke.
Over time, all of the points we made here will surface. And when they do, the consequences will not be pleasant. Attitudes will change, excesses will be worked off, but not before there is a great deal of pain.
Just my opinion.
Comments (1)
As long as foreign central banks support the dollar with their surplus savings (right now I don't think there is any surplus since there is inflation worldwide), US interest rates will continue to decline in response to higher US consumer, public, and government debt to GNP ratios. And, And ...you will see lower and lower standards to support all types of loans. This is just simple mathematics. If and when the housing market collapses, it will occur with a major decline in the dollar. Didn't Ben Bernanke recently say there was no bubble in US real estate? You better believe he is going to defend it! It is the life blood of the economy. Californians say it a little differently: "It's too big to fail".
Posted by alan | November 27, 2005 2:29 PM
Posted on November 27, 2005 14:29