Layoffs, outsourcing, and corporate restructuring will eventually take their toll on the US economy. Of course, like our call on the telecoms a few years ago, these things take time.
When you look at the large number of jobs lost in recent years, one has got to take a few steps back and say, how long can the economy and the stock market continue to thrive when hundreds of thousands are losing their jobs?
We already know that outsourcing has been responsible for millions jobs lost over the past 5 years, and the closure of 2,000 manufacturing plants in the US. Since the unemployment rate does not measure jobs lost to outsourcing and foreign workers, the employment numbers being reported are not accurate.
This morning, AT&T (formerly SBC) said they "plan to cut an additional 10,000 jobs as a result of its merger with BellSouth Corp." When AT&T and SBC merged, 13,000 jobs were eliminated.
When you add up all of jobs lost due to restructurings, mergers, and outsourcing, the similarities to the roaring 20's and the depression are eerily similar.
Let's look at some similarities of the events that caused the great depression, and what's happening today.
1) Consumer Debt: In the1929, 80% of Americans had little or no savings. From 1925 thru 1929, buying on credit increased from $1.38 billion to over $3 billion. The current level of debt is much higher, and now that the real estate bubble has popped, the future for free spending Americans looks bleak.
The expansion of credit created a stock market bubble in 2000, and a real estate bubble between 2000 and 2005. This expansion of credit is responsible for the huge number of mortgage refinancing, and the creation of all the exotic mortgages created by lenders in recent years.
Many consumers are stuck with interest only loans, and lines of credit on the appreciated value of homes. As interest rates rise (7.25% on most credit- lines), and consumers losing their jobs, whose going to pay the note?
2) Mergers: There was a lot of merger activity in the 1920"s. With these mergers came a large number of job losses.
3) Repeal of Glass Stegal: Glass- Stegal was a depression era protection put into place to help prevent another depression from occurring. The repeal of this act has lead to the large number of mergers in the banking industry, as well as the large number of job losses that came with it.
In addition to the mergers has come a softening of regulations. Many of regulatory agencies have looked the other way as financial institutions suckered consumers into exotic mortgages, and interest only loans.
4) Change of the Bankruptcy Laws (October 2005): Knowing that the consumer is up to his eyeballs in debt, the financial lobby convinced congress to pass "The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005."
If you don't believe the consumer is in financial trouble, all you have to do is remember the "Lending Tree" commercial where a guy mowing his lawn says he has all of these possessions because 的知 in debt up to my eyeballs." Here's an article from the San Francisco Chronicle
I don't know how all of this is going to shakeout, but its not going to be a pretty picture. In the months ahead, many real estate speculators are going to have to go to closing on their real estate gambles. From what I am hearing, many expected to flip their properties before the closing date, but the buyers have suddenly dried up.
Stay tuned (and conservative), things could get very interesting in the months ahead.
