Financial topics

[freddyv]

That consumer spending has remained above 70% is shocking to me and shows that while the public seems to know that something is going on, the real substantive change that Generational Dynamics calls for has not really taken hold. How can we have 10% unemployment and 17% underemployment and so many businesses gone without having a drop in consumer spending?

Here's another quote from Richard Russell that I hadn't seen when I posted the above quote:

I just read the famous Levy Forecast (they were a favorite of the late Barron's editor, Bob Bleiberg. The Levys talk about the "new abnormal," and they note the following:

"Net private investment didn't merely have a cyclical decline, it ceased.

S&P profits both reported and operating earnings -- completely collapsed to below zero for the first time ever.

Household wealth as a percentage of disposable personal income experienced by far the greatest decline in the post-War era.
..."

From a big-picture perspective none of this makes sense. How can we be losing so much wealth and yet have consumer spending remain at 70%?

Ahhhh...could it just be that the economy as whole is shrinking just as fast as consumer spending but that consumer spending will shrink over a longer term?

Fred

[wvbill]

I am a huge fan of Richard Russell and more so these days because of his age and experience and the fact that he seems willing to accept reality while knowing (because of his experience) that some things are inevitable. I am also a fan of Bill Gross and yesterday Richard Russell was discussing the much talked-about Barron's Roundtable and this comment stood out:

(Bill) Gross again -- The jobs situation leads to what drives the economic consumption. Without jobs, consumers can't spend. Remarkably, consumption has stayed above 70% of GDP amid the recession, but consumers can't continue to spend unless the government continues to write the checks.
...
Russell Comments -- Bill Gross manages the world's largest bond fund. Gross is a leader of the PIMCO crowd, one of the smartest groups around. Gross has a great grasp of the Fed, the money markets, and he knows the value of income. Reading between the lines, I gather that Gross sees hard times ahead. Gross believes painful sacrifices will be needed, in the face of a possible economic downturn.

That consumer spending has remained above 70% is shocking to me and shows that while the public seems to know that something is going on, the real substantive change that Generational Dynamics calls for has not really taken hold. How can we have 10% unemployment and 17% underemployment and so many businesses gone without having a drop in consumer spending?

John, I am interested in your opinion and comments based on your GD perspective.

Fred
http://www.acclaiminvesting.com/

It certainly is surprising -- my comments would be:

Since GDP has declined, the 70% is much less money even though still a high ratio, and that is with all the stimulus -- cash for clunkers, etc.

As you point out, it is also my experience, that people know something isn't right but are still unwilling to dramatically change their spending habits. They still think/hope that soon we will return to the good old days. It will take a little more time or another "knock up the side of the head" before they really begin to get it.

Bill

[John]

Dear Freddy,

> That consumer spending has remained above 70% is shocking to me
> and shows that while the public seems to know that something is
> going on, the real substantive change that Generational Dynamics
> calls for has not really taken hold. How can we have 10%
> unemployment and 17% underemployment and so many businesses gone
> without having a drop in consumer spending?

> John, I am interested in your opinion and comments based on your
> GD perspective.

This is exactly why I keep on saying that there HAS to be a major
panic. When we were discussing this last year, some people suggested
that the crash had already occurred, but you've provided the very
reasons why a major panic and crash has yet to occur.

When I first started getting into this stuff in 2002, I was surprised
to learn that the crash only began in 1929, and continued for four
years. I've heard about and discussed the "crash of 1929" my whole
life, without realizing that the crash did not occur on a single day
or a single week.

When my teachers talked about the "crash of 1929," they were actually
talking about the "panic of 1929," the day when everyone went nuts
and tried to sell, all at the same time.

That hasn't happened yet this time. What we still have to see is a
panic, a point in time that will be remembered for decades, quite
apart from the "crash," which can be thought of as ongoing.

It's the panic that will cause the public to reevaluate its behavior
and change it for the rest of their lives.

John

[aluk22]

John said

t's the panic that will cause the public to reevaluate its behavior
and change it for the rest of their lives.

I read all the posts here and really enjoy it but never have posted before. I need to ask this question, though.

Is a panic really possible in this day and age? Trading was so much different in 1929. John keeps saying there's going to be a panic but I wonder if it really can happen. Logistically, is it really feasible to think that people and institutions worldwide will all capitulate and things go amok and a situation develop whereby everyone loses everything and the S&P goes down to 300 or whatever?

[xakzen]

...
As you point out, it is also my experience, that people know something isn't right but are still unwilling to dramatically change their spending habits. They still think/hope that soon we will return to the good old days. It will take a little more time or another "knock up the side of the head" before they really begin to get it.

My anecdotal experience is that our society is becoming stratified into those you know something is wrong and have changed their behavior and those who continue to believe that everything is okay and the worst of the crisis has past. This became apparent to me when I asked my Sunday school kids what they got for Christmas. The answers ranged from 1 kid getting an ipod, DSi, pellet gun & $100 iTunes card to another kid who along with his 3 siblings got a kitten. I know the families of both and the difference is the latter kid's dad was recently layed off and is now delivering pizza and of course the former kids dad has a government job.

I think this generation (gen-X) will continue this bi-polar stratification for as long as the elites can continue the con that we are in a recovery, but it's hard to convince a family who is out of work that the worst is over. Strangely enough I know another family were the dad works at a private company which has had draconian lay offs, but still he got the kids expensive electronic toys. It's difficult for me to explain to the other kids and my own with out being condescending.

[John]

> I read all the posts here and really enjoy it but never have
> posted before. I need to ask this question, though.

> Is a panic really possible in this day and age? Trading was so
> much different in 1929. John keeps saying there's going to be a
> panic but I wonder if it really can happen. Logistically, is it
> really feasible to think that people and institutions worldwide
> will all capitulate and things go amok and a situation develop
> whereby everyone loses everything and the S&P goes down to 300 or
> whatever?

Major panics have occurred throughout history. I'm not sure why you
think it couldn't happen today.

Certainly human emotions aren't any different today.

What HAS changed is that things move a lot more quickly today.

Here's how I've described this in the past:

> A generational crash is an elemental force of nature, like a
> tsunami.

> You'll have millions or even tens of millions of Boomers and
> Generation-Xers in countries around the world, never having seen
> anything like this before, not even believing it was possible, and
> in a state of total mass panic, trying to sell all at once.
> Computer systems will crash or will be clogged for hours, or
> perhaps even for a day or two. People who had hoped to get out
> just as the collapse is occurring will be totally screwed, and
> will lose everything. Brokers and other institutions will go
> bankrupt.

> This might happen tomorrow, next week, next month or thereafter.
> We can't predict when it will happen, but it's coming soon with
> absolute certainty.

In fact, it's quite possible that the new panic will be started not
with people, but with computerized trading programs.

Here are a couple of articles that I've written on this subject:

** The Bubble Algorithm - How computers and herd behavior are inflating the stock market bubble
** http://www.generationaldynamics.com/cgi ... 06#e090706

** The influence of computerized trading programs
** http://www.generationaldynamics.com/cgi ... 02#e090702

And so, to directly answer your question, a panic today is just as
possible as it has been throughout history, and will be far more
destructive and devastating.

John

[John]

> My anecdotal experience is that our society is becoming
> stratified into those you know something is wrong and have changed
> their behavior and those who continue to believe that everything
> is okay and the worst of the crisis has past. This became apparent
> to me when I asked my Sunday school kids what they got for
> Christmas. The answers ranged from 1 kid getting an ipod, DSi,
> pellet gun & $100 iTunes card to another kid who along with his 3
> siblings got a kitten. I know the families of both and the
> difference is the latter kid's dad was recently layed off and is
> now delivering pizza and of course the former kids dad has a
> government job.

This is a very interesting observation, and it's occurred to me as
well. The stratification you mention seems to be similar to the
political split between Republicans and Democrats. Each side is
absolutely convinced the other side is wrong, and is willing to drive
off a cliff to prove it.

John

[xakzen]

This is a very interesting observation, and it's occurred to me as
well. The stratification you mention seems to be similar to the
political split between Republicans and Democrats. Each side is
absolutely convinced the other side is wrong, and is willing to drive
off a cliff to prove it.

John

It hadn't occurred to me that it is like the political rift, but you are absolutely correct. Having driven off my own financial cliff to disprove the validity of the recent stock market rally. When I first became aware that this situation was akin to the Great Depression, I (like everyone else) looked at the DOW chart from that period and couldn't understand how it could have such explosive rallies again & again in spite of the over all trend down for over 2 years. I wondered what were they thinking. Now having lived through one such event and your insight, it's clear that it is a test of wills. One side insisting on the unsustainable status quo and another insisting on a new direction. Or maybe it's like we are all in different stages of grief over the end of that lifestyle. I can identify them in myself, but thanks to your website I am probably a little ahead of the curve. I'd like to think I've made it to acceptance, but the broader public seems to be just finishing the denial stage which means that there is going to be a lot of anger coming soon.

[freddyv]

My anecdotal experience is that our society is becoming stratified into those you know something is wrong and have changed their behavior and those who continue to believe that everything is okay and the worst of the crisis has past. This became apparent to me when I asked my Sunday school kids what they got for Christmas. The answers ranged from 1 kid getting an ipod, DSi, pellet gun & $100 iTunes card to another kid who along with his 3 siblings got a kitten. I know the families of both and the difference is the latter kid's dad was recently layed off and is now delivering pizza and of course the former kids dad has a government job.

A very good observation. I have been struggling with this. I know many people who barely make it month-to-month and yet they still have not changed their habits, mainly because of societal pressure, and that tells me that we have yet to really have the Fourth Turning into the crisis era. Imagine if we experience something like the earthquake in Haiti, which will change peoples lives in a big way, just as a true economic crash here would. John is right, it will happen, it's just a matter of when and how. Life has a way of doing the unexpected just when you least expect it.

When I see families more worried about putting food on the table than how to ruin their kids I will know we have made the turn. At that time society will also cease to get so excited about things like climate change and political correctness as survival once again becomes the main focus.

Fred
http://www.acclaiminvesting.com/

[freddyv]

Is a panic really possible in this day and age? Trading was so much different in 1929. John keeps saying there's going to be a panic but I wonder if it really can happen. Logistically, is it really feasible to think that people and institutions worldwide will all capitulate and things go amok and a situation develop whereby everyone loses everything and the S&P goes down to 300 or whatever?

Yes, a panic is possible and is actually more likely because people have your attitude. I believe that Haiti's last big earthquake was over 200 years ago, perhaps if they had them more often they would have building codes that would have allowed them to ride out a 7.0 earthquake with minimal damage. My point is that people become complacent and fail to save and develop safeguards against catastrophe. Panics, catastrophes, etc, will always happen, how we react and how we have prepared for them decides their effect on our lives. Generational Dynamics can be a big help in clearly seeing how and why we become complacent.

Fred
http://www.acclaiminvesting.com/