A plague of toxic everything (Headlines from the Meltdown)

General comment from Cardin: A few things I’m reading and hearing — none of them referenced below — suggest that January’s generalized stock market mini-crash/meltdown may have played itself out, and that the coming weeks may witness a generalized, although volatile, meltup. Only time will tell.

What’s certain is that other problematic aspects of the American economy, such as the plague of toxic debt, the epic-level writedowns among financial institutions that are accompanying it, the real estate crash, the foreclosure crisis, sky-high energy prices, and the pullback of the tapped-out-and-indebted American consumer, will continue in their current direction. If stock markets do go up for awhile in the face of all this, it may serve as evidence of a new type of “decoupling” that contrasts sharply with the popular meaning of the term as it has been used in recent years. The popular meaning, in the words of a recent Time article (“Why the U.S. Economy Still Matters“), is that the “United States, though worth 29% of the planet’s GDP, no longer control[s] the economic fate of everyone else.” As we’ve seen over the past week, it Just Ain’t So.

If the stock markets go up with many other parts of the economy still in full-blown, long-term crisis mode, a new and better use of the word “decoupling” might be to refer to the detachment of the financial economy from the rest of the economy. What exactly would it mean, and what would it feel like, for us to have a Dow at 14,000 or even higher while house foreclosures keep soaring to record heights, venerable retailers like Sears and Kmart tank to the point of crumbling (NYT: “Saving Sears Doesn’t Look Easy Anymore“), millions of consumers experience a personal financial crash due to over-indebtedness and other problems, and soaring food and fuel prices — happy news for traders in those areas, grim news for everybody else — keep squeezing us all relentlessly?

Quite simply, it would look and feel as if the financial economy had decoupled from real life. It would look like the financial world was one big hallucination, a manic game of “let’s pretend” being played by people who have forgotten they’re pretending.

What’s that again about the “hallucinated economy’ that James Howard Kunstler, John Michael Greer, and others have been talking about for several years now? What was it, for example, that Greer wrote way back in the mists of prehistory — specifically, in October 2006 — in an essay titled “Economics: Hallucinated Wealth“?

The economy of markets and statistics has aptly been compared to a circus, and like any other circus, it serves mostly to distract. While interest rates wow the crowd with their high-wire act and clowns pile into and out of various speculative vehicles, the real story of economic decline will be going on elsewhere, in the non-hallucinated economy of goods and services, jobs and personal income, all but invisible behind a veil of massaged numbers and discreetly unmentioned by the mainstream media. There’s good reason for that to be tucked out of sight, too, because it won’t be pretty at all.

Look at current headlines, and also at current life on the ground.They’re not pretty and they’ll continue to be ugly, regardless of what the hallucinatory world of the Dow etc. might do in coming weeks and months.

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2008 will be catastrophic for U.S. economy – Richard Heinberg, Energy Bulletin, Jan. 23 (also at Heinberg’s Website, RichardHeinberg.com)

It’s becoming increasingly clear that 2008 will be a catastrophic year for the US economy, and therefore probably for that of the world as a whole. The reasons boil down to two: continuing and snowballing fallout from the subprime mortgage fiasco (exacerbated by an orgy of debt-leveraging), and record-high, continuously advancing oil prices.

….It may be enough just to call it a “depression.” Even mainstream publications are now using the “D” word, at least conditionally

….[A]s this mess unfolds we may see extreme symptoms of inflation alongside those of deflation.

For an economy, this is the worst of all possible worlds. We have never seen anything quite like it. Maybe it’s a “Perfect Storm” economy.

Fortunately, there is at least one upside to all these downers: the collapse of the current debt-and-growth based economy may finally force a redesign of the money system and the “science” of economics. But this will take a while, and it will help if there are good ideas out there being widely discussed and promoted, such as the notions of a steady-state economy or an energy-backed currency.

Meanwhile, if you’re interested in finding shelter during the storm, get thee to the productive side of the economy. Grow something, or learn to make or repair something useful.

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A Gathering Storm – Time, Jan. 24

First it was a credit crisis, emerging last summer out of the gone-mad market for subprime mortgages in the U.S. Then it was a U.S. economic slowdown, maybe a recession, which appears to have begun in December. Now it’s a worldwide stock-market minimeltdown. At the beginning of the week, Asian and European markets plunged. Wall Street was closed on Jan. 21 for Martin Luther King Day, and to avoid the risk that it would follow other markets south, the Federal Reserve announced a 75 basis-points cut in its key interest rate before the markets opened on Tuesday. Though the street opened down, it quickly rallied — to be followed, at least at the outset, by Asian and European markets.

Say what you will about today’s global economy, it ain’t dull. And with a significant portion of the world’s economic movers, shakers and interpreters gathered in the Swiss mountain town of Davos for the annual meeting of the World Economic Forum just as markets from Mumbai to Madrid were freaking out, there was no shortage of explanations for the cur-rent chaos.

….Here’s one telling statistic, offered during the Board of Economists’ meeting by Stephen Roach, the former chief economist of Morgan Stanley, who is now chairman of the investment bank’s Asia operation: over time, consumer spending has made up about 67% of economic activity in the U.S. In recent years, consumer spending neared 72%. To rebalance the U.S. economy, the figure is probably going to have to head back to 67%. The question is how long it’s going to take. “If we take the five percentage points out this year, it will be the mother of all U.S. recessions,” Roach said.

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Homes see first price drop on record — CNNMoney.com, Jan. 24

Prices of homes sold in December registered the biggest year-over-year decline on record, according to an industry trade group, and 2007 is the first year on record that has seen a drop. A report issued Thursday showed the problems in the housing market have not yet bottomed out.

The National Association of Realtors (NAR) said the median price of homes sold in December fell nearly 6 percent from a year earlier to $208,400. The three biggest declines in prices ever recorded have now come in the last four months.

In addition to the December price decline, NAR reported the median price for all homes sold in 2007 fell 1.3 percent to $218,900, the first time that the annual price reading has shown a decline since the group started tracking that measure in 1968.

“What we saw in December was a rough month to cap off a rough year,” said Mike Larson, real estate analyst with Weiss Research. “There wasn’t much holiday cheer.”

[Cardin comments: This serves as further evidence of just how huge — vast, epic, gargantuan, inconceivably ginormous — the greatest real estate bubble in history really was. “Tower of Babel,” anyone?]

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Housing prices to free fall in 2008 — Merrill — CNNMoney.com, Jan. 23

The worst housing financial crisis in decades is only going to get worse, a Merrill Lynch report said Wednesday.

The investment bank forecasted a 15 percent drop in housing prices in 2008 and a further 10 percent drop in 2009, with even more depreciation likely in 2010.

…For those who think that the worst is over, Merrill Lynch said that housing prices still remain comparatively high. The brokerage believes that home prices are still far above historical norms when compared to other measures such as rent or GDP. “By our calculations, it will take about a 20 to 30 percent decline in home prices to correct this imbalance,” said the report.

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The Aftermath of a Phony Boom – The Daily Reckoning, Jan. 24

“Worries that the good times were a mirage,” comes a headline from the New York Times. Ah ha…the mainstream press is finally catching on to what we’ve been saying for the last five years. The boom was a phony…a fraud…a scam…a mountebank and a humbug. It was a like a polished flim-flam artist who flattered the middle classes with cash and credit – only to pick their pockets. People thought they were getting richer — that’s the illusion that soft money policies are intended to create — so they increased their expenses and went deeper into debt. Now they’re facing a serious recession in the worst financial shape of any generation in history.

….When Ronald Reagan took hold of the White House in 1980, it was a triumph of hope over despair. It was “morning in America,” he said. He was right. Yields fell for the next 25 years and hope increased.

Now the sun is setting.

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An era of illusions – International Herald Tribune, Jan. 26

I don’t see how you can avoid a certain amount of gloom given the week we’ve just had — and its implications for the future.

….All the things that the bears have been predicting were suddenly coming to pass.

“This is nothing like I’ve ever seen,” said Peter Bernstein, author of several best-selling books on business and financial markets — and a man who has pretty much seen it all. Normally, he said, bear markets are triggered when stock values get out of hand, as was the case when the technology-stock bubble burst in 2000. But not this time. The market is in trouble because the larger economy is in trouble. “The collapse of credit is what is driving this recession,” he said.

Daniel Alpert, the managing director of Westwood Capital, wrote: “In past debt debacles, and other market crises, the affected assets have been things like commercial real estate, farmland, tech stocks and bank shares. This time around, along with the stock market, it is people’s homes, the repricing of which literally hits us where we live.”

….Even if this is not the end of an era, the events of this week, and of the past few months, have served as a reminder of how much Americans, especially, need the stock market to keep going up. Even after all this time, many, if not most, baby boomers are not financially prepared for retirement. They have invested poorly, or not set enough aside, or tried to make a killing when slow and steady would have been the wiser course. Study after study documents that stark reality. Now, time is winding down, and the thought that the market will stop going up is almost unbearable. Even though middle-aged Americans might not be prepared financially to retire, a rising stock market at least created the illusion that they could get there. One of the reasons there is so much fear right now, I think, is that illusion is being exposed.

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A bad market? You ain’t seen nothin’ – MSN Money, Jan. 24

We may come to look at the period between July 2007 and January 2008 as a sort of phony war in the worldwide credit crisis, because although the market has fallen 15% since summer, there have been no defaults of key bonds or asset-backed securities. The curious lack of real blowups has led even seasoned observers to believe that fears were exaggerated and that chaos will be averted.

In reality, however, the skirmishes we’ve seen so far might be little more than a prelude to a deeper, harsher, longer decline than most yet perceive possible. And in a very postmodern twist, it is beginning to look like unexpected consequences of an investment instrument designed to mitigate risk could turn out to be the nuclear option that bombs the globe into the financial equivalent of World War III.

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The worst lies ahead for Wall Street – Crain’s New York, Jan. 19

“As bad as things are for the banks, it’s only going to get worse,” says Michael Shedlock, an analyst at Sitka Pacific Capital Management. “The next shoes to drop are commercial real estate and credit card loans.”

In the past three months, Citi, Merrill, Morgan Stanley, Bear Stearns and others have tapped investors for more than $60 billion in cash to help cover their mortgage-related losses. Most firms have turned to Asia and the Middle East, far from the frozen credit markets of the United States and Europe.

“The scale is unprecedented,” says Manhattan College finance professor Charles Geisst, author of Wall Street: A History.

Furthermore, the banks’ troubles show no signs of receding anytime soon.