Wednesday, October 21, 2009


Depression talk is gaining steam again.

The blog-o-sphere is a tither today about the last hour of trading on the stock market in which the market suddenly reversed course in the final hour of trading.

Analysts attribute the tumble to a downgrade of Wells Fargo & Co.

Fargo, the largest U.S. home lender this year, slid 5.1% after Bove of Rochdale Securities cut the shares to “sell” and said earnings were boosted by mortgage-servicing fees rather than improving business trends. Wal-Mart Stores Inc., the world’s largest retailer, tumbled 2.1% after saying it expects a “tough” holiday shopping season. The Standard & Poor’s 500 Index reversed a 0.9% advance as nine of 10 industry groups retreated, led by financials.

“Wells Fargo’s downgrade spooked investors,” said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages about $2 billion in San Antonio. “Investors are concerned because that’s one of the biggest in the industry and most of the recent news has been positive so far. So that could be an indication of problems ahead for other big names.”

And those 'problems' are significant.

Jobs: The United States continues to lose jobs month over month. And, while the statistics being released are showing a slow down, many are coming to the conclusion that this is basically a fabrication. There are thousands of people falling off of unemployment compensation each week — none of them are reflected in the official numbers. estimates unemployment is above 20%. These numbers are rapidly approaching the unemployment rate during the 1930s.

Credit: As we noted yesterday, credit is contracting. The last decade in America has seen credit (or debt, however you want to look at it) essentially become used as a second income. No more. The banks may be getting billions in loans, but for the individual on the street, credit is frozen. Couple this with the loss of primary income streams and you have a lot of people with no money for even essential goods.

Real Estate Foreclosures: Foreclosures in the US continue to mount. In addition to the foreclosures of the last 2 years, millions more are in play right now, regardless of the mortgage programs the government institutes. Job Loss + Credit Contraction means there is no way millions of people will be able to make their monthly payments. Nowadays, once you lose your job, you aren’t going to have an easy time finding a new one that adequately services personal debt. In real terms housing prices are not done dropping. There are some conservative down-side estimates that say an additional 15% is likely. But, what if they are underestimating? What if it turns out to be 30%, or more?

Japanese real estate lost 80% (adjusted for inflation) in the 1990’s and so did their stock market. Fears that the United States is rapidly travelling down an identical road are starting to influence observers.

Defaults: Debt defaults keep rising. Bank of America just released their numbers and lost upwards of $2 billion dollars, due in part, to credit card defaults. This is not the sign of a healthy consumer. When a consumer defaults on a credit card, that is leading indicator that they will not get easy credit if they need it in the future. A default in 2009 is a big red flag for lenders. Empirically, this seems like it may be a leading indicator for continued credit contraction on the consumer side.

Small Business: Small businesses are getting hit hard. Small business is the engine that runs the entire US economy. Right now, they have no access to loans, and the consumer is drying up. To survive, they’ve had to cut costs significantly. The next step will be to cut jobs. Many have already resorted to letting people go. As much as owners may not want to let go of their people, they realize they have no choice at this point. Incidentally, many major corporations showing “better than expected” results employed these same strategies. But, the businesses themselves, not necessarily by choice, are perpetuating the negative feedback loop. As they lay off employees, more consumer income is destroyed, leading to fewer revenues across the board for a majority of businesses, big and small.

Middle Class: The Middle Class is holding on for dear life. If small business drives jobs and production, it is the middle class that drives consumption. And the middle class is getting hammered for all of the reasons mentioned above. Many middle class families are realizing, or will realize very soon, that their lifestyle choices are going to need changes. Cut out the gym and take a jog instead. Why pay $100 for cable when you can get similar, if not better, news and movies online for $30 a month? Is organic really necessary at the grocery store when one can save 30% buying the regular stuff we grew up on? Do I really need to get a new car when my 2005 Explorer is just fine? Why go out and spend $100 when dinner and a movie at home a couple of Fridays a month saves enough money to pay the electric bill? These and other questions are going through the collective mind of middle class America. They are desperately trying to avoid becoming a member of working or under class America. The initial step to maintain stability is the same as with small businesses - cut spending.

Combine all these factors and more and more analysts are drawing parallels to 1930/1931.

Trends Forecast founder Gerald Celente, a noted business consultant and author who makes predictions about the global financial markets, is gaining followers for his conviction that these are the opening states of 'the Greatest Depression'.

And with the way the market dropped in the last hour of trading today...

...many in the blog-o-sphere are sounding the alarm that investors should be on high alert for the rest of the week.

Investor emptor!


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  1. This is interesting. What doesn't make sense to me is why none of this is visible in Vancouver. Every big-box store is crammed with people, parking lots are full, malls are full. There are very few visible signs of a recession here, as far as I can tell. No one I know seems worried in the slightest about carrying a massive debt load.

  2. Love your blog. I think it is strange that you have so few comments for each post, but maybe that is because you said it so well the first time. In Victoria we are still "living the dream." It will be hard times ahead.

    On a slightly different note: I think you mean "Caveat Investor"
    Emptor = buyer

    Yay! Latin class just made a contribution to my life. That was a surprise!

  3. I agree with Kate that on some level it doesn't look like people are cutting back, or have much fear of what can/will unfold in the economy.
    Having said that, I do get the sense that people, especially younger adults, are working harder and harder to keep up. It really seems that Vancouver has become an incredibly hard place to live in. I think I remember the West Coast being described as easy going and laid back...this certainly doesn't match my experience of it in the past few years.

  4. Caveat Blogger?

    Thanks to all for the comments and welcome to the blog.

  5. What's interesting is that there was an article in Clusterstock over a month ago, quoting Dick Bove as saying Wells was 'sitting on a volcano about to blow'. Which makes is morning 'buy' recommendation pretty dubious.
    He's actually not - in some circles at least - all that respected - he made a similar 'buy' recommnedation a week before a major bank collapse - forget whether it was Bear or Lehman now.

    What I find bizarre is the sudden tanking allegedly based on one analyst's single recommendation. Seems at the very least, a bit skittish, no?
    Either that or there was some other reason that coincided with the Bove announcement. Something ain't right at any rate.

    Though with today's rally it now all seems to be just as quickly forgotten again.

  6. Thanks for the comment.

    Interestingly Peter Schiff had this to say about the 'end of day' collapse...


    Most media reports attribute this to a relatively prominent bank analyst downgrading Wells Fargo (WFC) post earnings, but this writer believes it had more to do with another matter.

    At roughly 3:25 PM the New York Times broke a story on large pay restrictions on the "worst of breed" companies that are only alive today due to government largess - let's call them the Dirty Seven. Two of those seven are Citigroup (C) and Bank of America (BAC)... one might consider this some sort of shot across the bow at the banking industry in particular - either way it adds a level of uncertainty.

    - Responding to the growing furor over the paychecks of executives at companies that received billions of dollars in federal bailouts, the Obama administration will order the companies that received the most aid to deeply slash the compensation to their highest paid executives, an official involved in the decision said on Wednesday.

    - Under the plan, which will be announced in the next few days by the Treasury Department, the seven companies that received the most assistance will have to cut the cash payouts to their 25 best-paid executives by an average of about 90 percent from last year. For many of the executives, the cash they would have received will be replaced by stock that they will be restricted from selling immediately.

    With that the S&P 500 dropped 0.9% and the NASDAQ 0.6%.