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Bond expert Henry Kaufman (the original "Dr. Doom" for his 1970s and early 1980s bearish bond forecasts) believes the secular bond bull market is over. In a February 14 Wall Street Journal op-ed, he tracked the rise in the cost of long-term government debt from 1946 to its 1981 peak, then down to around 2.5% early this year, "which probably marks the end of this extended wave." Yet conditions today compared to 1946 are "strikingly different" and very worrisome given the private sector debt overload, the federal government issuing an unprecedented volume of new obligations, and the Fed printing money like confetti.In 1946, "the nation stood on the brink of an unprecedented boom (whereas) today wealth is contracting massively and the economy" teeters on the edge of depression. "Which raises (serious) questions: Why are we so poor at managing our key economic institutions while at the same time so accomplished in medicine, engineering and telecommunications? Why can we land men on the moon with pinpoint accuracy, yet fail to steer our economy away from the rocks? Why do our computers work so well - except when we use them to manage derivatives and hedge funds?"
Securitization, globalization and the explosion of debt changed everything for the worst and "altered financial behavior in ways that econometric models miss....Let's hope that is about to change. A central goal of new financial legislation should be to rein in extreme financial behavior."
For the latter, Philip Stephens, in a March 9 Financial Times op-ed, proposed: "Fix the banks first - and then shoot the bankers" in commenting on the collapsed UK banking system and lack of decisive action to correct it. Sounds like a sensible way to address America's problems as well.
The Thud of More Shoes Dropping
Deteriorating commercial real estate is another with experts saying it resembles the housing decline with about a one-year lag, so right now it's increasingly apparent. Look at the signs.
On January 12, Financial Week headlined: "Banks gird for commercial property collapse (as a) spike in loan defaults batter balance sheets," and it's just beginning. According to Fitch Ratings managing director Eric Rothfeld:
"Loans originated at market peaks experienced from 2005 - 2007 will face increasing defaults as real estate performance declines during the stressed economic climate of 2009 and beyond." More defaults mean greater losses for exposed banks, already reeling from the housing collapse and trillions of toxic debt on their books.
Developers are also hard hit given empty buildings, vacant shopping malls, and for-sale signs everywhere. On March 5, the Washington Post said "Not a single office building has been started in (D.C) since October, a sign that the slowdown that began in the far-out suburbs has now reached prime city locations." According to Gerry Widdicombe, director of economic development for the city's Downtown D.C. Business Improvement District, "Things are frozen. Nobody's doing anything." It's the same most everywhere across the country except for occasional small deals that are owner and investor-financed.
More signs include idle cranes, empty lots, few new tenants, rising evictions, falling rents, a 95% year-over-year drop in commercial mortgage backed securities (CMBS) issuance, and soaring CMBS delinquencies. The American Institute of Architects reported that its Architecture Billings Index (ABI) hit a historic 33.3 low in January, reflecting the worst conditions seen since the index's 1995 inception.
On March 10, Moody's reported that corporate bond defaults will triple their 2008 level, be 15 times more than in 2007, and said bankruptcies usually follow. They placed 283 companies on its bottom-rung listing, up from 157 last year, and added 73 companies since last reporting.
Well-known companies made the list, including General Motors, Chrysler, Eastman-Kodak, AMR (parent of American Airlines), UAL (parent of United Airlines), AirTran, Advanced Micro Devices, R.H. Donnelly, Rite-Aid, Reader's Digest Association, and numerous top retailers because of reduced consumer spending.
According to experts, many, perhaps all, large US banks are zombies. They're insolvent "dead men walking" and should be on the list as well. So is the US economy suggests Nouriel Roubini in a March 5 Forbes.com article headlined: "The US Financial System is Effectively Insolvent." In it he explains the "grave risk of a global L-shaped depression, (much) worse than the current, painful U-shaped global recession" that's deepening as conditions continue to deteriorate. "Shoot(ing) the bankers" may indeed be a good start to fix it.
Perhaps also help the "1 in 50 children in America (who) are homeless each year" also, according to a new National Center on Family Homelessness report titled: "America's Youngest Outcasts - State Report Card on Child Homelessness." It calls it "unacceptable for one child in the United States to be homeless for even one day, (and says) children without homes are on the frontline of the nation's economic crisis." The problem continues to worsen as foreclosures increase, yet the administration and Congress aren't helping.
"The year 2008 will long be remembered....as a time when grossly overpaid bankers (and) captains of industry....hobbled to Washington (asking) for bailouts (in the billions of dollars). Ignored by....Congress and the media were (many thousands) of children - many still infants and toddlers - who were (and still are) homeless in the midst of this economic (calamity). Without a voice, more than 1.5 million (of them) go to sleep (each night) without a home each year....they endure (too little food), a lack of safety, comfort, privacy....adequate health care, uninterrupted schooling, sustaining relationships, and a sense of community." Their deprivation is inflicting "profound and lasting scars," yet public discourse excludes them from consideration and consigns them to be another lost generation - unwanted, unnoticed and ignored by an uncaring government.
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