Wednesday, April 16, 2008

Time to Panic? (Warning: Limited/no humor content.)

I'm not usually one to panic in the event of a major economic downturn - heck, I got caught in the burst of the dot-com bubble while attempting some risky day-trading that should have me carrying over a capital loss on my tax returns for at least the next decade, and I stuck it out and learned to be an investor instead of a trader, which is a topic for another day. But I'm seeing some indicators here that Wall Street is asleep at the wheel and this subprime mortgage-triggered downturn could end up being much bigger than predicted.

The subprime mortgages kicked off a chain of events that are still unfolding: credit card defaults are up and we're starting to see higher rates of default of prime mortgages in overheated markets like California, Nevada and Arizona. Banks are declaring record losses and I think we'll see some more Bear Stearns-style implosions before all of this is over. (When Citigroup is worth less than Apple, something's not right.)

Now I'm seeing the damage rapidly spread to the retail sector. CompUSA is out of business, Linens-n-Things is expected to declare bankruptcy any minute now, Sharper Image is done, and there are more as well as more to come. In addition to the chains mentioned in the article, there are rumors of Borders Books being on the edge of bankruptcy and Sears/KMart has been teetering on the edge for years. It's the perfect storm for retailers: consumers have less money and are spending more of their income on the ever-escalating prices of gas and food, consumers have less access to credit, the credit crunch is making it more difficult for retailers to access credit lines that get them through rough spots, and their costs are going up due to the increased cost of transportation and the weak dollar driving up the cost of imports. I'm expecting widespread chaos in the retail sector by winter at the latest.

I was in the mall the other day picking up some socks and underwear and I was struck by how empty it was. Most of the patrons seemed to be teenagers who weren't spending money, just hanging out. In the store I was in, employees outnumbered customers 2:1.

I'm keeping an eye on RV listings on eBay (long story) and motorcycle listings, and I'm seeing a lot of people who owe tremendous amounts on these things and are trying to get out for what they owe, but no one's buying because they're asking too much. Once upon a time they could afford the payments, now they can't, and they now owe more on the luxury items they've bought than the items are worth. I wonder what the stats are like on auto/boat/RV/motorcycle repos. I bet they're impressive.

For the first time in a long time I'm looking for a safe haven but little is safe. CDs and savings accounts pay a pittance. Bonds are in the toilet. If this is truly the beginning of a period of stagflation, I don't see anywhere to put savings where it's even going to keep up with inflation.

And still Wall Street carries on. The DJIA is impressive considering recent market events. Are there really people who believe that a $600 check is going to fix this?

I'm no economist. I'm just a guy. But I see big, big trouble on the horizon.


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