Friday, February 18, 2011

'AN ECONOMIC KATRINA IS ABOUT TO HIT'

From my pal Jay Wall. I sure hope Jay’s prediction of pending financial doom will not bear fruit.

PERFECT ECONOMIC STORM BREWING IN HOUSTON, NATION
By J.W. “Jay” Wall

Houston Business Journal
February 18, 2011

I am afraid, sincerely petrified, for my country, and, no, I’m not channeling Glenn Beck.

My business, tenant representation, is good. There’s money in the bank. My accounts
receivable are current. My retirement account has almost recovered from its 2007 lows. We refinanced our house with a conventional 4.25 percent 15-year loan.

Nevertheless, I fear the perfect storm, an economic Katrina, is about to hit and economic Armageddon will be upon us in the not-too-distant future. Let me tell you why.

First, much of our nation’s so called “economic recovery” is a mirage. Our country’s problems: fiscal incontinence, monetary promiscuity and legislative/regulatory misfeasance — a dangerous combination. It seems that the federal government is mostly a vehicle for transferring income and wealth, as opposed to providing the “public-goods” services and infrastructure a free-market economy depends upon.

Washington’s fiscal incontinence continues to flow unrelentingly and manifests itself perhaps most putridly in the $6 billion ethanol subsidy just passed by Congressional Republicans, a boondoggle for which there is not a single economic or environmental rationale. Curious as to why grocery prices are rising unremittingly? Perhaps part of the reason is that we are burning 40 percent of the nation’s corn crop.

To get $250 billion in stimulus, President Obama, with the complicity of the newly empowered/energized Tea/Republican Party, agreed to extend the Bush tax cuts at a cost of around $750 billion, and eventually much more, as these temporary cuts will most likely become permanent.

In other words, our Congress just added a trillion dollars to the already insanely bloated deficit. Bush-era deficits of $500 billion have soared to $1.4 trillion.

Worse, it seems Republicans are now becoming even more deeply complicit in continuing the kick-the-can philosophy of dealing with our nation’s problems, “Why do today what you can do tomorrow and why do tomorrow what you can put off forever?” To fund the increasingly gaping deficit, the government is running its printing presses nonstop, thus the debasement of the dollar continues, which will ultimately cause oil prices and other commodity prices to skyrocket, particularly if the dollar is no longer seen as the world’s reserve currency.

Whatever, it is only a matter of time before inflation kicks in with a vengeance.

Courtesy of the Federal Reserve and its aim to “maximize employment,” the Fed is buying up to $600 billion worth of long-term Treasury obligations to push inflation up and bond yields down. The notion that the Fed can raise inflation and lower bond yields implies that bond buyers are dolts. They aren’t. Witness the dramatic rise in the 10-year Treasury over the past four months from 2.4 percent to 4.0 percent.

We are monetizing our debt and, in turn, debasing the dollar. The Fed buying the banks’ bad assets and long-term Treasuries is moving the Fed’s portfolio further out of the yield curve, risking massive losses.

We are re-inflating the stock market bubble and starting to see excessive financial risk-taking. The revival of financial risk-taking is shown by near record margins and supercharged financial engineering: leveraged buyouts, debt-financed stock buybacks and largely debt-fueled mergers and acquisitions — all are “equity friendly” in the short term, though not necessarily job creating — yet another stock market bubble in the making.

Locally, consolidations in the exploration and production, or E&P, and oil-service sectors have begun in earnest: Baker Hughes/BJ Services have reunited; Schlumberger has acquired Smith International; Apache took over Mariner Energy, etc. The dominos in the next major wave of consolidation in the oil patch are starting to fall with a vengeance. I predict this wave will be as significant as the Exxon/Mobil; BP/Amoco/Arco mergers were in the early 1990s, with similar losses in employment.

Were intellectual honesty/sanity to prevail, the Republicans would admit they launched a giant new entitlement program — prescription drug benefit for Medicare recipients — under President Bush without really paying for it. In addition, under Bush we pursued two wars without cutting other spending or raising taxes. In fact, they just further cut taxes again via a reduction in the payroll tax — from 6.2 percent for employees to 4.2 percent. We continue to fight two wars and have ladled on additional societal burdens such as ObamaCare, which we will never be able to pay for, until and unless we start taking our medicine.

The Democrats set out to trim billions of dollars in prospective Medicare spending but used the money to expand health care for others rather than extend the life of Medicare itself. What we needed were changes in incentives to encourage consumers to demand value and health care providers to supply it. Instead Obama doubled-down on the perverse incentives of the existing system.

Some frightening facts:

• Bankruptcies, both personal and among small business, continue to surge.

• Roughly one in four homeowners are in trouble, and, soon, an estimated 40 percent of American homeowners will find themselves with mortgages in excess of the value of their homes. Fortunately, Houston’s numbers are far better, as we didn’t have rampant housing inflation, probably due to a great freeway network, abundant land and the lack of zoning.

• Nationally, we have over 20 percent combined unemployment and underemployment, and, although Houston is better off, we ain’t better off by much.

• Small business — our city’s and country’s main jobs driver — is in turmoil and often unable to borrow to fund operations.

• Big business is just coming out of deep cost-cutting mode.

• Low interest rates, although rising, continue to be a cruel punishment for savers,
particularly elderly savers.

• Backdoor inflation is rewarding profligate debtors and turning savers into suckers.

I firmly believe we are in a state of economic limbo — before we have a period of hyperinflation, as this Ponzi-scheme of a recovery (TARP, TALF, HAMP, Cash for Clunkers, etc.) comes to an ignominious end.

It seems that, in a perverse manner, the nation’s housing bust wound up acting as fuel for the latest consumer-spending binge. Many borrowers have succumbed to the “Thelma & Louise” school of thought, and consumer spending will prove this out. Via “strategic defaults” — simply not paying their mortgages — many consumers have continued to splurge, as they have that much additional disposable income from what was their mortgage or rent payment.

There are no quick fixes. The more government tries to paper over the housing problem, through various forms of delinquent-borrower aids and exaggerated unemployment subsidies, the longer the crisis will continue. The housing market will not achieve equilibrium in real terms until it is allowed to bottom out, find true market pricing and recover over time.

The answers to our nation’s economic problems will be many. Most will be painful. The size of government must shrink. Much of the reason the economy is so fouled up is because superfluous government regulations and subsidies have slowed the economy. These have prevented market forces from operating the way they need to for a market economy to thrive. They have precluded an efficient allocation of resources.

Having said that, I believe we need an EPA, we need an OSHA, we need an SEC, we need to regulate derivatives trading.

They’ve created a nation of spenders, speculators and consumers, and they have devasted the savers, manufacturers and investing class that built this country. The country is overly indebted, savings-depleted and underemployed. We’ve abandoned capitalism and embraced socialism.

Taxes must rise, but hopefully the tax code will be radically simplified. Social Security needs to be means-tested. The age of eligibility for Social Security will rise. If the government doesn’t pay for what it purchases with current taxes, it must raise them later.

Former Fed Secretary Paul Volcker suggested bringing back some version of Glass-Steagall, the Depression-era legislation that kept commercial and investment banking pursuits separate. Although the moment may have passed for its resurrection, I am in favor of anything that makes “too-big-to-fail” a thing of the past and precludes investment banks from again “risking public pain at private gain.”

By attempting to repeal all consequences of prolific indebtedness and fiscal irresponsibility via behemoth bailouts, Uncle Sam has encouraged even more of the behavior that put our country in such desperate straits in the first place. Further, refusing to pursue civil and criminal actions against the perpetrators of the last meltdown only gives fuel to the fire being kindled as we speak.

Having said that, there’s nowhere else I’d rather be than Houston. We will weather the storm better than anywhere else.

_____
J.W. “Jay” Wall III is a senior vice president with Moody Rambin Interests in Houston, specializing in tenant representation.

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