Replaying 1929? From: May 6, 2001

The Intermediate Term View: Plan on having TWO Recessions

The 60th floor view: You there, Howard?

Because it was about a quarter to seven, on Tuesday morning (of last week)when I arrived at the office, I decided to devote a few minutes of quality time to getting hold of my old friend Howard Hill, who has generously contributed to this site in the past.  Unfortunately, having been elevated to his “money perch” 60 stories up on Wall Street, Howard doesn’t have as much time to contribute to Urban Survival, as he used to.  But it’s fun catching up.

Now, if you’re a real long-time reader of this [more or less] weekly report, you might remember that Howard was unloading his Long Island house, which in most areas of the country would be a palatial estate or mansion.  Despite it’s numerous rooms, and near perfect restoration, not to mention the 10-seat trading office done in tasteful light wood décor, Howard admitted he has unloaded it and has moved into more realistic digs.  Digs, that Elaine & I would still have to go “Bonnie & Clyde” to afford.

“So, what do you think of this almost, but not quite a recession”, I asked him for openers.

“Well, it looks like we will bottom by the end of the second quarter, and maybe even recover a bit by the 4^th quarter.”

“How so?” I probed.

“Well, there’s likely to be a bounce of some kind, because the Republicans are getting their tax cut.  You know, the problem with the country is most of us don’t “get” that the Republican party lives on a BIG LIE.”

Dusting off my GOP roots, and after supressing a cough, I asked “What do you mean?”

“Think about it,” said Howard.  You got a doubling of the national debt in less than 10-years of Reagan and Bush.  Now you’ve got an encore. If that’s not a “tax & spend” deal, then nothing is.

“And what’s the alternative?” I wondered.

“I’ll take a kid working for $15 an hour on a public works project any time.  That’s because when you spend the same $15 on the defense industries, the money never somehow shows up at the local Safeway.  It goes to the rich folks.”

“So where does that put us in the Kondratieff Longwave” I asked, knowing that Howard was aware of my late 1930 placement from reading the site now and again.

“Oh, I think we’re in the 1930 period somewhere” he admitted.  “The fact that most people don’t remember about the Depression is that there were no housing foreclosures going on in the early part of the 1930’s.  But then, the nature of things has changed.  Back then when people ran out of money, they would be foreclosed on.  Now, you just pick up the phone and dial a finance company and someone out there will lend you money.  I can’t tell you how many banks and finance outfits have mailed me unsolicited Platinum cards with a pre-approved limit of $25-thousand and up in the past few months.”

“Jeez, Howard, funny you should mention that” I interjected.  “I just got a check for something around $5,000 from Household Finance.  These guys sent out a check in the mail to me – and I hope to never do business with them – but they somehow got my mailing address and sent Elaine & I this check.  So being a good MBA, I read the fine print.  You know what the interest rate was?  Check it out:  27.65% APR.  These guys who run direct response mail campaigns like this have got to think the country is inhabited by nothing less than a bunch of dumbshitz.  Not that they’re entirely wrong, mind you.”

“Yeah, when you look at the economy”, continued Howard, “the way I think it’s going to roll over into the Depression you keep writing about will go something like this.  First, you will see the rich people start rolling out of speculative investments.  Joan Rivers and other show biz people, are busy buying real estate.  River’s has something like 40 or 80 acres up the road.  Rumor has it that Billy Joel is planning to buy an island that the Morgans had only 4-houses on back in the 1930’s.  So you can see the big money is leaving town.  Ok, what’s next is that the next layer down the pyramid will start with layoffs, and each time you go down a layer, you get this cascading effect.  By the time this real-life trickle down comes about, what you see is an increase in the savings rate and a decrease in discretionary spending.  Here’s an eye-popper for you:  The restaurant industry in the U.S. employs 10-million people.  That’s way more people than work for the whole federal government.  Now when this discretionary spending by the folks up the foodchain ends, you will see massive unemployment among the people who are working in car detailing shops, in restaurants, and what I guess you can summarize as the discretionary spending market.”

Howard had my attention.

“So not only is about two-thirds of the nations economy based on the service sector” he continued, “but the fact is that of that 2/3 ‘rds, about 40% of that is discretionary.  So when people finally get it, that the economy is souring, [probably late this year], then we see the cascading effect really snowball.”

I did a little of that MBA math stuff and figured that  the 40% of 66% of the economy would put layoffs somewhere north of 25% in those troubled services.

“Yeah, figure that you won’t need a massage, and you’ll wash your own car” he said.  “But it makes sense, because few companies are making money.  If you look at the basics of economics, the Growth Rate must equal the aggregate of profits reinvested in the economy.  Can’t be any other way.  So if no one is making profits, there’s no reinvestment, and well, you got the picture.”

“Hell, Howard, that’s a depressing outlook.,  Glad I called”, I said.  “What’s your take on the Dow for year-end”.

“Oh, I think about 7,400 or so oughta do it.  But that’s not going to hurt everyone.  Do you know what a designer cow is?”

Elaine’s ranching background hasn’t completely rubbed off, so I told Howard, “No, what’s a designer cow?”

“Well, up in the Milbrook area of Duchess County (NY) [about 50-miles from Manhattan] you’ve got all these rich people, who don’t want to live in the Hamptons, who have purchased some good sized farms.  And what they do with their riches is they buy what’s essentially eye-candy.  They buy a home in a pastoral setting, and then they make it look as much like the painting as possible.  So then they go out and buy eye-pleasing animals and they put them in their white fenced pastures because they look good.  Now here’s the catch: Despite the fact they buy prime dairy cows, getting up and milking them is too much of a hassle for the New Gentry, so they let the cows go dry.  And that’s where the term “designer cows” comes from.”

As I was writing this down for this week’s report, Elaine reminded me that more than a few county fair contests have been decided by curly haired cows that look the most feminine. “Where would you put money, Howard?”

“Oh, you could do a worse than buying that series I Savings Bonds.  They pay about inflation plus three and a half points and they have no risk.  Compare that with some of the commons out there.”

Well, it got to be time to ring off.  But, I had what I called Howard for: I had the view from Wall Street level and an insider’s sense of how things are going.  It was enough for me.

I’ve decided to keep sitting on my wallet and collecting a few of those antiquated Savings Bonds,because guys like Howard may not be right today, but over the long-haul, they’ve made more money than me.  Even after selling the big Long Island mansion at a loss.

Howard was kind enough to send me a permission to extract these parts of our conversation - and he noted that this year's recessions will probably begin to end in Q4 of 2001. But that BIG event, the one that will get started in the spring or summer of next year, will be the Big Event. That one will be caused by the death of discretionary spending. That's when we will see lot's of "little people" get nailed.

Make note of this:

Howard's view is that we are now going through only the first of two recessions: a "High tech capital expenditure" recession. Next year, we get the real deal: the "discretionary service spending" recession. That one, says Howard, could last 6 to 12 QUARTERS. That's 2 to 4 YEARS. That's when things like real estate go totally tango uniform. It's also when cash will truly be king as the excesses of debt are wrung out of the economy.

When you think about it, in Elliott Wave terms, it sort of makes sense. The first leg down is the one we are going through now. Call this wave A. Next, the market makes a recovery - which who knows, we could be in right now. But then next year, people hit with $3.00+ per gallon gas, and rolling blackouts will really pull in their spending. Then, well, as you've read here before, the lights sort of go out - metaphorically speaking.

One place where you're really likely to see this is in real estate. I've tried to tell friends and colleagues for about 2-years that housing is about the worst thing to be highly leveraged in right now. The housing prices are already starting to roll over here in the Bay area, and it doesn't take a Stanford MBA to figure out real estate tends to tank about a year after the market tanks. Even a "discount MBA" like me can see it, clear as day.

Putting on my Karnak the Magnificent hat, I see the markets continuing the downward trend (as you'll see below in the weekly charts) and after that, the real grinder coming next year when the market fails to recover, and people wake up one morning and decide that yes, things really are bad. Very bad. Maybe going the same route as 1929-through 1937.

Enjoy the tax cut while you can.

Readers? RIGHT!

One of the readers of this site, a right smart fellow in fact, wrote me a note suggesting that maybe I was a little too pessimistic in the "Which of the Four Horsemen" piece that was up last week (and still available from the home page of this sight or by clicking here ). As I try to write back to folks who take the time to write in, let me share some of the statistical reasons (and a touch more detail than I shared with Cameron) why an optimistic case, or even a "not-too-bad" muddle through outcome, is not very likely over the next 10-years or so...

While I agree with most of your points, Cameron, the problem is that what
you're suggesting is like betting on multiple rolls of the dice at the craps
table.  The bets you list are:

1. Fusion becomes realizable: 50-50 bet. That's on a good day.
2. US kills off all livestock: 50-50 bet  (odds now .50*.50= .75 or 1 chance
out of four) as bio-terror seems to be an emerging trend.
3. Genetics breakthroughs with no side effects (allergies): 50-50 so now a
12.5% chance). There's already a Frankenfood backlash to engineered foods.
4. If u.s. pays down debt?  Another 50-50 at BEST IMHO: now we're down to a
6.25% chance. Tax and spend, as Howard notes, is the BIG LIE in D.C.
5. If Arbai comes to its senses  - clearly a 50-50 deal, so now down to
3.125% chance. If you had oil power, wouldn't you exert it?
6. China and India get rational on food?  50-50 chance: now a 1.5625%
chance. How do you get rational, though, with billions to feed?
7. Japan and Europe get rational on US consumption? 50-50 chance: now a
0.78% chance. Look at how hooked on spending we are! Bet on that changing?
8. Russia avoids a totalitarian regime? 50-50 so now a 0.39% chance
9. US can continue to roll over debt this long?  50-50 chance, or  a
0.1953125% chance

In other words, if we could get everything on the list to work out just
right, then we would have a slim chance (two tenths of one percent, in fact)
that what you're hoping for will really come to pass.  Now I'll throw in one
more monkey wrench - that the bad guys out there don't use a chemical or
biological or nuke in anger: here only a 50-50 chance over the next 10
years.  So now we're talking about a 0.09765625% chance (we can round this
off to 0.1%).

This means the odds of all these things working out seems to be 0.1% for it
working out, and about 99.9% that it won't.

That's the ugly trouble with risk - as any insurer will tell you: it's all cumulative.  Just like noise in the
front end of a radio or an amplifier is cumulative along various stages of amplification,
the odds on how the world's future will work out are cumulative, too.

So what will we do?  I agree with your optimism,  but every time I go into a
casino looking for 9 rolls going my way on the pass line, I get my ass
kicked. So I'm edging toward the exits while making little pass-line bets.

As one scholar noted on one of the newsgroups this week: History is about not-very-nice people and how they use power - usually without regard for the rest of us.

Write when you get rich...

George

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