DOWNTIME Part 2 – Tsunami Warnings
During the winter of our discontent, which was January and February of 2008, the Bush administration fiddled as the U.S. was falling. While the Gurus of Government played happy music on their violins, singing that the economy was “fundamentally sound,” I was telling friends that we had entered a recession that had all the makings of another depression. In the spring of 2008, while the Bush administration and congress were still arguing over whether or not we were about to enter a recession, I was stating that clearly we were already deep into a recession and that a depression was about to inundate us.
The landslide of homes into the sea was already well under way. The question was what economic waves would that landslide create. Suddenly we knew: the first tsunami wave of our own landslide hit us, for our own shores were closest to the housing collapse. Bear Stearns crashed on our shore. The Wizards of Wall Street, proclaimed that the fall of Bear Stearns was nothing compared to the failure of savings and loans in 1987. We would weather it fine. The president, in his denial, indicated we had a minor economic jolt. I, on the other hand, began talking in terms of an economic tsunami right then and said that the collapse of Bear Stearns was just the first wave of much greater destruction to come.
The world learned by observation in December of 2004 that physical tsunamis come in multiple waves, not just one big splash. You would think people would realize that’s the way it is with fiscal tsunamis, too; yet friends argued back that the U.S. could not be entering a depression because many elements that had happened in the Great Depression did not happen with the fall of Bear Stearns. I pointed out that the Great Depression did not happen on Black Tuesday in 1929. What happened on Black Tuesday was the first wave of many failures that developed into the Great Depression over a period of many months, and I predicted that’s what we were about to play out right in front of us. To clarify what I meant, I laid out what I now call my economic tsunami warning system.
The first wave that crashed in Knave Dave’s economic tsunami warnings was Bear Stearns. Within the short time it took to wash over us, I predicted that it would push heavily on two or three other core financial institutions, which would also give way. This would cause the crushing of our economic central nervous system in the U.S. and would be the second wave of the Depression.
The second wave happened in far more spectacular fashion that I envisioned. Yes, two institutions went down almost immediately after Bear Stearns. Lehman Brothers and Merrill Lynch both toppled, just as I had predicted (not that I had predicted those specific institutions, but just that two or three of that kind would fall). That was unheard of until the truly unheard of actually happened: In rapid succession Fannie Mae and Freddie Mac also crashed upon the U.S. shore, and then J.P. Morgan and Goldman Sachs and AIG piled on top … and finally Washington Mutual, the behemoth of thrift banks, collapsed of its own Gigantism. The U.S. was awash in a sea of massive failures, and the water had turned to blood! So, the second wave was more spectacularly fierce than I had anticipated. I had anticipated more would would fall after the second two or three, but not that they would all crashed on the shore at nearly the same time. It was a resounding and deafening roar.
The third wave in Knave Dave’s economic tsunami warnings was that the first and second waves that hit U.S. shores would do what tsunamis are well known for doing: they would bounce off and head over to European shores. The failure of U.S. financial institutions would certainly cause the failure of some European banks. Suddenly, even the most highly respected and conservative banks in the world, Swiss banks, took a pounding. One of the largest of all Swiss banks Credit Suisse staggered and almost fell. Several European banks would have fallen if not for massive European bailouts.
The fourth wave in the economic tsunami that I predicted would be the failure of major manufacturers in the U.S. as a result of credit challenges overseas and at home and their own loss of market. In late spring, I predicted that this wave would take a little longer in coming and would not arrive until fall of 2008, but I proclaimed that, by the advent of fall, we would be seeing bank presidents competing for jobs as hamburger flippers. In other words, we would see major increases in unemployment in the fall, starting in top management, as a result of the devastation from the waves before. This rising tide of unemployment would mean that major manufacturers would lose their markets. The manufacturing wave hit in fall, as predicted, when the big-three automakers announced simultaneously that they were on the verge of bankruptcy.
Really, anyone should have seen the fall of the Big-Three coming long ago. I had predicted the demise of that particular group back in 2005. Why? Remember the loans they were making then in order to offload product? They were “selling” their cars at zero down-payment, zero interest, and zero payments for a year, and that was when times were rosy for most in the U.S. “Heck,” I said, “That’s like a free auto lease for one year. What’s their game plan at the end of that? There’s nowhere to go. Everyone who is going to consider buying a new car for the next two or three years is going to jump on this program now, and then there will be no car sales down the road. You can’t keep giving them away forever just to keep that game up.” Meanwhile, they did just give away their cars that year because many of those people would default on those loans when it came time to pay. I said, “Heck, they’ll just consider the car a free loaner, and they won’t care that they default on their loan because they have zero money into the car. They’ll just say, ‘Thanks for the loaner, go ahead and wipe out my credit rating; it’s looking like it’s shot anyway, and come and pick the car up at your own expense.'” It was all done to pump up sales volume and look good for the short term without any regard to an end plan. The profits of 2005 were false profits.
I anticipated that GMAC, General Motors’ finance division, would be in foaming waters when it came time for people to start paying on those loans. Is it any wonder that GMAC is now the whirlpool at the center of General Motors, sucking it under? So, the fourth wave of the economic tsunami hit almost as spectacularly as the second wave had, and it happened with the manufacturers that I was certain must be sitting in a precarious position.
What did Knave Dave say would be the fifth wave of the depression that was sweeping over us? He said that a shocked and reeling public, fearing unemployment, would fail to buy at Christmas time, causing major retail failures. Some will say, “Aha! You were wrong. Sales were not that bad during the holidays.” Ah, but they are wrong. I explained this in December to my friends. “The black lining on this silver cloud,” I said, “is that there are no profits in any of those sales. Just as the Big Three did a few years ago, all the major retailers pumped out their entire inventory at a break-even level just to clear it out and cut their losses.” You see, sales volume can be tabulated right away, so that is the first news we hear; but it takes a month to calculate the profit of the month before after all returns are in. So, the sales volume figures did not look too bad.
Mark my word, though, we are in for some black news when the books are finally closed on December. Actually, it will be more like red news. Before the end of January, you will see major retailers beginning to report that they had no profits at Christmas time or even minor losses. This is major bad news because major retailers make well over sixty percent of their profits for the entire year at Christmas time. You will see Target, Sam’s Club, Walmart and other giants of the retail industry start to announce layoffs before January closes and throughout February.
Already the smaller retailers have begun to go out of business entirely. News came in at the beginning of January that mall vacancies are at a ten-year high. It’s not the big stores that have closed there doors yet, but the smaller retail businesses that have less staying power. Some major malls in retail Meccas, such as Honolulu, are already facing bankruptcy. While 700,000 jobs were lost in the U.S. economy in December alone, this fourth wave is still passing over us, so the bodies cannot yet be counted in its wake. Unemployment hit 7% in December. As the retail body count stacks up over the next couple of months, I predict we will finally enter double-digit unemployment, which we haven’t seen in a quarter of a century.
This adds up to the sixth wave of our plunge into a depression, which is the failure and foreclosure of commercial real estate. The landslide that triggered this whole tsunami, remember, was the failure of residential real estate. As commercial real estate slides away, the sixth wave is a repeat of everything that happened with the first real-estate failure, possibly on a smaller scale, but still badly damaging.
Office vacancies in the U.S. have already hit 14%, and rents have fallen in 65 of the 79 major U.S. markets. Already 1.5 square miles of office floor space were vacated in 2008. Once you start adding the vacating of retail floor space and more vacating of office floor space, you can see that commercial real estate is already beginning its long slide into the sea.
Great plagues come in sevens, don’t they? So, what will be the seventh wave of this depression? The seventh wave may be a ways off with small reflections of waves 1-6 in the meantime as more foreclosures lead to more unemployment and a few more bank failures. These are the tsunami waves bouncing off shores for the third and fourth times before they finally settle down to where we can start to pull ourselves out. Part of this bouncing will be seeing all the same things happen in countries all over the world, thanks to the U.S. debt addiction.
The seventh wave is the wave of ultimate destruction, and it’s building out at sea right now. It’s a rogue wave, which scientists say forms when large waves pile on top of each other. This rogue is the inability of the U.S. government to finance its debt. Many of us have seen this coming for a long time, but the present scenario makes it almost inevitable that the time is soon upon us, especially with the bailouts. Countries have been talking for the past year or more about moving away from investing in U.S. dollars (i.e., U.S. Treasury notes) because they do not see the U.S. as a secure investment any more. The U.S. has probably permanently lost its financial reputation.
Right now, the U.S. is facing the prospect of trillion-dollar deficits for the next few years, which could double the total U.S. debt in one presidential term. These enormous deficits make it look all the less secure. Right now, the U.S. is selling bonds to finance that debt at about 1-2% interest, the lowest interest it has had to pay ever (because no one wants to buy stocks, so money is pouring into bonds). What happens when the U.S. has to raise those interest rates that it pays out to their norm of 4-5% in order to attract the investment of foreign governments into financing its economy? What happens if that foreign money starts to run away, and the U.S. has to pay 7-8% to attract it to stay? The interest on the national debt alone is about $450 billion a year now. That’s half of the entire proposed bail out, just being paid in interest. Double the interest, and we’re talking adding a whole bailout to the U.S. budget every single year in interest alone.
That’s when total collapse comes, and the “fundamentally sound” little island sinks into the sea, and a whole new world has to begin. And there is already serious planning for that brave new world to form via unified global economic policies and structures. More on that at another time.