Housing slide has not bottomed out in all regions. The NE, SE, most of California (SW) and scattered portions everywhere else have NOT bottomed out on the declining market value of homes. Charts indicate that in those regions, the housing prices are still 200% higher than actual worth. Expect the Feds and the State of California to get really creative real soon. Also expect to see public backlash as many who do not “deserve” rescuing get it, and those “deserving” rescue do not get it. (Use whatever definition you wish for the two terms).
Other than for Chicago, the Midwest region is now stable, and has been relatively so for the past 60 days. The past two months of casualties has primarily been due to overloaded budget due to increased energy costs and food price increases. Those that had been squeezing by with less than 20% cushion in their finances were overloaded by the estimated 60% increase in budget needed for energy and food.
We should start seeing a MAJOR collapse in California and Florida beginning in mid-November. Not a good time for the two states responsible for 50% of our economic power.
There is both a critical tipping point caused by “too high a price” and another tipping point caused by “too low a price”. Back in 2004, I had calculated that a per gallon price of greater than $3.50 would create a significant economic slowdown. Once prices this year got over $4.00/gal., I had no doubt of what was coming down the tunnel.
The lower price end is $70 per barrel. We’re seeing current pricing at less than $65, and this will create another crisis as well. Without enough profit from oil, there is no incentive for:
a. Alternative Energy efforts. These efforts costs run in the Billions. Without an incentive of high energy costs, expect to see a lot of these Green projects lose funding or stock market support.
b. New Drilling efforts. Again, to establish a new well can cost in the hundreds of millions. Without adequate profit, there is no incentive to drill new holes. And if there are no new wells, when the NEXT energy crunch comes, we’ll be right back where we were this summer.
If pricing remains below $70, we’re going to be setting ourselves up for a VERY nasty economic recovery.
3. WHERE TO INVEST?
First a disclaimer: I am NOT a financial adviser. Take any action at YOUR OWN RISK. The following is based on my personal research and my own strategy for surviving the economic storm.
If you’re like millions of mutual fund owners, you’ve seen your portfolio lose value anywhere from 10%-50% percentage in the past six months. For those of you who didn’t move fast enough, it’s time to consider shifting your investments to the following:
a. BioMed Industry. It is still a hot market, and will weather the storm better than other areas. The reason is due to equity and forecast. The value of biomed does not easily change when other areas of the economy bounce. In addition, the forecast is that people will continue to need medical care — there is no decline in illness during bad times.
b. Treasury Bonds. DO IT QUICK! You’ll want to do this BEFORE the Federal Reserve lowers interest rates in order to obtain maximum gains from Treasury Bonds. Hang on to them unless interest rates show signs of rising. Remember the general rule: Treasury Bond yields go UP as interests rates go DOWN.
c. Find the best rates on six-month and 2-year CDs and shift investments into those as well. Again, do it before the Feds take action on lowering interest rates.
d. If you REALLY want to play stocks, it may already be too late to jump into the best bets. Generally, tight economic times means people change where they spend for entertainment. Businesses like NetFlix will see an increase as folk begin staying in and watching more rental movies. If you have a Timeshare in a Condo in Florida, you might not do well for the next 9-18 months, as an example. Places like Walmart and Target will increase business as shoppers move away from higher priced stores.
If you’re in realty, the automotive manufacturing sector, or housing sector, then times will be tough. If you’re in industries where there is a heavy reliance on discretionary spending, such as vacation resorts, then expect to see a significant squeeze in business unless your particular zone is family-oriented and on the conservative end of cost.
Expect to see an additional 30,000 jobs lost in the automotive industry, with an additional 250,000 unemployed in other sectors by Spring 2009. We’ve already crossed the magic tipping point of losing over 400,000 jobs this year. (That was the magic number I had estimated would be the clear evidence of economic peril).
As I predicted to my friends and family back in the Spring of this year, expect to see either GM or Chrysler go down the tubes. Don’t be surprised if the Japanese buy one of them. They will do so because of the rising difference between the Japanese yen and the US dollar. Japanese manufacturers NEED an immediately home base in the US. What better way than to take over an existing infrastructure that is poorly run? If the Japanese merely buy the ASSETS without the employees, then hiring will restart WITHOUT unions. Think about that.
Expect unemployment to hit 9% to 12% (depending on the US Region) by Spring 2009.
5. WHAT HAPPENS IN SUMMER OF 2009?
I’m pushing the envelope of my little crystal ball. I see a clear point of delineation at this time frame. If the cost of oil is stable and above $70 per barrel, and the pricing decline of housing has completed its worst in the remaining regions, then the economy will be ready for a gradual recovery.
On the other hand, we could see pricing continue to collapse in ALL sectors, creating what economists dread the most: DEFLATION. Also known as instant DEPRESSION. Here’s the bad news: a depression doesn’t merely reduce the costs of everything, it also reduces everyone’s income. It’s an ugly one-two punch that the Feds and the Treasury are trying to avoid. It’s very possible they will avoid the big D word, but it will require:
a. Stabilization in the housing sector.
b. Japanese buyout of either GM or Chrysler.
c. Chinese economy to maintain GDP growth above 6% or so (they are now at 9% which is the lowest in a number of years, indicating a rapid slow down of the economy).
d. A steady low level interest rate while avoiding inflation. This will be a neat trick to pull off, since any extended period of time where interest rates are lower than inflation will create an over-abundance of money. The Feds and the Treasury will need to continually rebalance their dealings with the banks and other institutions with great dexterity and flexibility.
The good news is that this is hitting the entire world, so it’s not merely an American phenomenon. The bad news is that this is hitting the entire world, because the US GDP is equal to the EU + Asia, combined. Thus, the collapse of the US economy has triggered a domino effect.
Watch for the signs as outlined above. We’ll all know by next summer which way things are going.