I'm not trying to be arrogant with this post...I'm a total layman when it comes to economics. I took an economics course when I was at MSU - but at the time, economics was about the least interesting subject I could possibly imagine. Since then, I've become fascinated by the economics, although still, I'm most certainly ignorant by comparison to anyone who has formally studied the subject.
But with that said, I think I can actually boast that on some level, I predicted the economic crisis we're now working through. To my untrained eye, there were a lot of indicators (although not the financial ones they speak of on CNBC) that raised my eyebrows - as far back as summer 2003.
PAST PREDICTIONS...
In June 2003 I took a new job, and moved to Traverse City. I immediately started looking for a house to buy. I had an acquaintance who worked for Merrill Lynch, and as soon as he heard about my plans to get into a house, he gave me a call, and tried his darnedest to get me into an "interest-only" loan on a 5-year balloon. I was pretty naive, and this sort of loan really appealed to me because he said it would enable someone like me to buy a REALLY nice house - certainly much nicer than what I could have afforded with a more traditional, fixed rate loan. He even said that if my parents were willing to cosign for this loan, that I would most certainly be approved, and be ready to put my new-found buying power into my dream house...not only that, but he was confident that when the balloon rate ended, that I'd be able to refinance on the equity of the house, because surely a house in Traverse City would be worth way more when it was time to refinance in 2008...
Thank goodness my Dad is a pretty smart guy. I told him about my plan to apply for the interest-only loan, and he kinda laughed before asking "are you serious?". He quickly explained to me that interest-only balloons were a disaster waiting to happen. I called the guy back, and went with a traditional loan from my credit union.
I used to drive a truck. For a few years, I thought it was the stylish thing to do, and without regard to the amount of money I spent filling up the gas tank, I continued to love driving a truck. Sometime around the middle of 2004, my love-affair with truck-driving began to unravel as gas prices slipped past the $2.00/gallon mark. At the time, I was living in Traverse City, and I was making a lot of trips to Detroit and Lansing to see friends - and in doing so, I realized that my gas-guzzling truck was drinking down about $40-$50 in fuel for each trip I made "downstate". Ultimately, I realized that my truck-driving ways were absurd, and I went radical and bought a TDI (diesel) VW Golf. My fuel consumption immediately dropped by about 60% (the TDI gets somewhere between 38-46 mpg). Eventually, as I continued to watch gas prices climb, I realized that the demand for gas-guzzling SUV's was taking a hit. I remember a conversation I had at the time with my friend Jake, and I predicted (somewhat arbitrarily) that when gas hit $4.00/gallon, the American/Big Three car companies were going to crash because they didn't make any good small cars, and thus were wholly unprepared to deal with fuel prices above $2.00/gallon...I looked at my own budget and realized that if I was driving a truck, $4.00 gas would absolutely devastate my finances.
Soon after - in the summer of 2005, I moved back to the Lansing area. I started to consider the possibility of buying a house or condo, and eventually I found a brand-new 1-bedroom condo in East Lansing that I really liked. The condo was about 650 square feet (tiny), and the developer was asking $115,000. At first, I thought the price was outrageous - but I warmed up after I kinda shopped around, and realized that $115,000 was sort of the "going rate" for a small condo in East Lansing. I decided to apply for a loan, and as I was waiting for my loan approval, I got to thinking about an old mantra I had learned a few years earlier when I was working a lot with builders: builders at that time were charging somewhere around $100/sq. ft. for a "starter home". I did the math: my East Lansing condo was $177/sq. ft. I immediately wrote a new "lowball" offer and sent it to the developer only to have it rejected without a word a day or so later. I decided not to make any more offers because it just seemed to me that real estate was inflated, and that the prices just didn't seem realistic or sustainable...
...COME TRUE
Last summer, Merrill Lynch became one of the first Wall Street big-whig casualties as it was forced to write down failed loans, and lost $19.2 billion ($52 million/day) between July 2007 and July 2008.
Last summer, fuel prices reached into the upper $4.00 range, and people quit buying the large, high-profit vehicles that the Big Three made a fortune selling back in the 90's and early half of this decade. It devastated the industry, and GM/Ford/Chrysler are reeling to adjust.
And today, you can drive past that same condo development in East Lansing, and the sign out front advertises prices that are 30% lower than they were back in 2005...and 20% lower than what I offered four years ago.
WHAT'S THE DEAL?
Last week, BusinessWeek featured a front-page article that raised questions about economists, and their collective failure to predict the economic crisis. How can they screw up so badly, when someone like me with virtually no finance education, saw the writing on the wall as far back as 2004?
Correct me if I'm wrong, but as I see it, the problem is that economics is a very difficult field to study using experimentation. It's virtually impossible to "experiment" with economics. Economists have to wait until disaster strikes, and then they spend years, or decades trying to figure out what happened, and what could have prevented the disaster. People are still trying to figure out the depression, and they're still trying to come to agreement on the legacy of the "Reaganomics" of the 80's. The economists just don't know.
Additionally, economics is closely tied to psychology. Not only do economists have to try to figure out the finance element of their predictions, but they also have to try and account for the mental elements - basically, what causes people to save vs. what causes people to buy?
Economics is also uniquely tied to politics - which means that here in the US, the economic policy ebbs and flows with the ebb and flow of our partisan politics. In years of republican control, the economic policy tends to be conservative...in years of democratic control, the policy shifts back to liberal. There's a complete lack of consistency.
UH OH...
Unfortunately, my latest sense is that this economy might not be close to a rebound...certainly not as close as what people hope.
These are the problems I see...and the Economist too.
1) Unemployment is still rising.
People (like me) are freaking out, wondering if they're going to have a job next month, next week, or tomorrow. When people freak out wondering about their jobs, they save money. When people save money, they aren't buying anything. When people don't buy stuff, manufacturers quit making stuff, and they lay more people off. Until unemployment stabilizes, or starts trending back downward, the economy is going to be scary.
2) Real estate hasn't quite hit the floor yet.
I don't think real estate has hit a floor. I'll admit that homes have started moving again, and that's a good thing - but I'm a little bit concerned about cash buyers (who create a "fake" uptick in demand), and the fact that there is a glut of foreclosures that are still sitting on the market. Until the foreclosure properties have been bought up, and the cash buyers disappear, there really isn't going to be a true rebound in the market. I define a true rebound to be the point where the properties are being bought up by homeowner "end-users" (a term I picked up from my friend Grant) - and not the cash-buying landlords and investment firms.
3) The automotive industry is FAR, FAR away from getting itself straightened out.
If any of the Big Three declare bankruptcy, it will throw the rustbelt into a whole new tailspin as the creditors are hung out to dry (think suppliers, bondholders, and municipalities). The midwest consumer has far-reaching effects on the nation's economy, and if one of the Big Three goes down, the recovery here will be put on hold another 6 months...at least.
LOOKING AHEAD
But the good part is.....There are some positives.
1) Inventories are running out. Initially, this might seem like a bad thing, but it's not. As inventories run out, demand for product increases, and when demand for product increases, production goes back online, and people get their jobs back.
2) Governments around the world, and especially here in the US have injected a massive amount of liquidity into the banks in an effort to get them lending again. It looks like maybe the banks are finally getting comfortable loaning money to consumers, and with the interest rates as low as they are, the US treasury is doling out ridiculously cheap money.
3) With the available cheap money, and a new willingness to hand out loans, people will start making big-ticket purchases again, and this will be good for real estate, as the "end-users" I mentioned earlier start buying single-family homes, and rebuilding our neighborhoods. Eventually, the demand will increase, and people will find good investment in homes and real estate.
4) Tough times breed ingenuity. When people lose their jobs, they're often forced into working for themselves, or learning new skills. Sometimes this leads to new ideas or people figure out that the job they've had for the past ten years didn't allow them to fully tap their talents. Additionally, companies are forced to get innovative when times are tough. Budgets are stretched, and people find they have to work harder to glean profits.
So with that being said, there are a lot of things to look forward to - although it may take longer than we anticipate. Hopefully our automotives can hold it together, and if so, the worst of theis downturn will be behind us, and unemployment will smooth out by late summer. If not, we're looking at early or mid-2010 before we can expect any sort of major sustaining upswing...
