End Of The Bubble Bailouts

[FRED]

End Of The Bubble Bailouts
August 30, 2006 (A. Gary Shilling - Forbes Insight)

For a quarter-century, Americans’ spending binge has been fueled by a declining savings rate and increased borrowing. The savings rate of American consumers has fallen from 12% in the early 1980s to -1.7% today (see chart below). This means that, on average, consumer spending has risen about a half percentage point more than disposable, or after-tax, income per year for a quarter-century.

The fact that Americans are saving less and less of their after-tax income is only half the profligate consumer story. If someone borrows to buy a car, his savings rate declines because his outlays go up but his disposable income doesn’t. So the downward march in the personal savings rate is closely linked to the upward march in total consumer debt (mortgage, credit card, auto, etc.) in relation to disposable income (see chart below).

Robust consumer spending was fueled first by the soaring stock market of the 1990s and, more recently, by the housing bubble, as house prices departed from their normal close link to the Consumer Price Index (see chart below) and subsequently racked up huge appreciation for homeowners, who continued to save less and spend more.

With soaring stock portfolios now ancient history and leaping house prices about to be, no other sources, such as inheritance or pension fund withdrawals, are likely to fill the gap between robust consumer spending and weak income growth. Consumer retrenchment and the saving spree I’ve been expecting may finally be about to commence. And the effects on consumer behavior, especially on borrowing and discretionary spending, will be broad and deep.

AntiSpin: A. Gary Shilling, not to be confused with Mr. Irrational Exuberance, Robert Shiller, has been on this line about an asset bubbles driven economy almost as long as iTulip. Along with the rest of the contrarian crew, Gary also asks what's next after the housing bubble ends, and goes on in this Forbes piece to eliminate, one by one, every asset held by Americans that might in the future form the locus of policy efforts to sustain asset inflation based consumption.

Much as Bill Gross suggests in The End of History and the Last Bond Bull Market that the Finance-Based Economy will end along with the collapse of the housing bubble, Gary also appears to see the housing bubble as the last bubble in the 30 year Bubble Cycle-based economy. Gary also takes an End of History view of the asset inflation based consumption model of the US economy: savings will increase, consumption will decrease and presumably economic growth will stagnate or decline.

Our hypothesis is that as the housing bubble ends, the US goes into a relatively brief period of deflationary decline followed by a longer period of inflationary stagnation before the economy reforms into a production based economy. Here it's important not to under-estimate the resilience and inventiveness of American people and their country and look ahead to what the Right Economy might look like. To paraphrase Winston Churchill, America always winds up doing the right thing, but only after exhausting all other options. It is the coming period of exhausting bad options that iTulip is here to guide us through. But we also need to think about what the right options are, and readers can expect to see hypotheses about a positive long term future for America developed here as well.

[javacat97]

Re: End Of The Bubble Bailouts

Bill Gross has another excellent new article out http://www.pimco.com/LeftNav/Late+Br...ember+2006.htm

[Charles Mackay]

Re: End Of The Bubble Bailouts

End Of The Bubble Bailouts
August 30, 2006 (A. Gary Shilling - Forbes Insight)

AntiSpin:
Our hypothesis is that as the housing bubble ends, the US goes into a relatively brief period of deflationary decline followed by a longer period of inflationary stagnation before the economy reforms into a production based economy.

brief deflation, followed by stagflation, followed by good times? Boy that is not how I've been reading your Ka-Poom theory to date. Why the kinder gentler outlook all of a sudden?

[Charles Mackay]

Re: End Of The Bubble Bailouts

Bill Gross has another excellent new article out http://www.pimco.com/LeftNav/Late+Br...ember+2006.htm

Good one... but which line do we cut in front of? gold? euros? house in Argentina? Canadian Energy Trusts? New Zealand Bonds?

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[EJ]

Re: End Of The Bubble Bailouts

brief deflation, followed by stagflation, followed by good times? Boy that is not how I've been reading your Ka-Poom theory to date. Why the kinder gentler outlook all of a sudden?

Ka-Poom is a 2006 - 2015 cycle, more or less. Just as I prognosticated in 1999 that Y2K was going to be a non-event, I've been consistent on the idea that at the end of this painful Ka-Poom transition period we'll come out the other end in good shape, not digging up burried cans of tuna fish from the rubble and hauling them around in ox-drawn SUVs. There are technology trends which, combined with strong leadership, can get us out of this mess.

A few that will be a big help, in no particular order, if properly applied:

- Pebble bed nuclear reactors
- Nano technologies
- Bio technologies

On the latter, poor leadership is thwarting progress, at least here in the US. For example, the current administration's Fatwa against stem cell research means huge license fees will be paid to pharma companies in Asia and Europe, much as GM finds itself paying royalties on hybrid engine technology to Toyota. So one of the constructive things the federal government can do with all the money they're going to have to print to keep unemployed young people off the streets is to send them to college, GI bill style. Meanwhile, immigrants will need, as Gross points out, to fill in the future demographic gap of non-technical labor.

Anyway, iTulip isn't a doom and gloom site. The picture looks gloomy now and there will be times during the Ka-Poom cycle when conditions will appear hopeless. So, my thinking is that while this clever group is busy riding out Ka-Poom, let's keep in mind that bad times don't last forever. Call me an optimist, but in my view these tough periods more often than not the crucibles in which the next great period of growth and prosperity for human kind are forged. We can contribute to creating a better place as we nagivate the crisis we must go through first.

[qwerty]

Re: End Of The Bubble Bailouts

Good stuff! Let's get some backbone here!

I guess I was thinking along the lines that the US (govt) will indeeed try to exhaust all the wrong possibilities first but will it have enough time to do so before it loses the "seed-corn" as it were? Indeed, politically, the right leaders have to time their run so that they arrive at a time when enough bad attempts have been made that the populace is willing to listen to the right but tough choices. The 2008 candiate will arrive too soon and inherit a poisoned chalice. 2012 might be the right time for a new broom?

Where are all the college professors going to come from? Well they should need a lot fewer mathematicians on Wall St ... ;)

Maybe the iTulip community should crank up the Prosper warchest and get ready to start funding a few mom and pop companies who want to produce capital goods in the US.

[Charles Mackay]

Re: End Of The Bubble Bailouts

There are technology trends which, combined with strong leadership, can get us out of this mess.

A few that will be a big help, in no particular order, if properly applied:

- Pebble bed nuclear reactors
- Nano technologies
- Bio technologies

On the latter, poor leadership is thwarting progress, at least here in the US. For example, the current administration's Fatwa against stem cell research means huge license fees will be paid to pharma companies in Asia and Europe, much as GM finds itself paying royalties on hybrid engine.

Along with patents from stem cell research, it also appears that China/Asia will be the leader in pebble bed technology ...we're just too far behind. We'll probably invent most of the nano tech and then Japan will use it to make money. How much did the US benefit from Bell Labs inventing the laser that led to CDs and DVDs? How much did we benefit from James Fergason inventing LCD technology?

A couple of decades ago, Buckminster Fuller said “The entire human species had already earned a living for everyone through the total accumulation of our inventions and our inventiveness” In other words if we just put to work the technology that we already have we could all go on welfare and be involved in the creative projects of our choice.

Fuller made the estimate that the total energy consumption on our planet (cars, factories, air conditioning)...everything needed for one day on earth is the equivalent to 1/ 6,000,0000 of 1% of the energy income we receive from the sun daily.

We have a resource allocation problem, not a resource shortage problem. Even with new technology it will only flow into the hands of the few. That's the real problem we have.

And I'm a libertarian...not some leftist. Aaron Russo's movie "From Freedom to Fascism" outlines why it will stay that way until we make major changes in our fraudulent money system. That problem has to be solved before trickle down will work again....

CM

[Jim Nickerson]

Re: End Of The Bubble Bailouts

edit: And that's why I think the crisis at hand is far worse than most people assume. It's a revolution.

I am camping with wife, dog, and two cats, and a camper right across from us has two dogs that he brought over to meet my dog Rio. Turns out he is a 55 year old semi-retired physician who practices acupuncture up around Santa Fe, NM. He lives out in the country, far enough that he only has modem connectivity and eratic cell phone service. His home someway is "geared" in the majority to basically run from 32V electricity, which he collects from solar panels and a wind turbine, and is built into the side of hill. He says his utility bill is about 50$ per month and he spent $50 last winter on heating. He has a well, but also collects rainwater, and just went to El Paso so buy a mobile solar energized still to distill water to the extent is can turn muddy water into potable water. Take whoever on this forum is most concerned about the financial future of this country, and this fellow, Jerry, is just as concerned about what will be the fallout of bird flu WHEN it hits this country.

He talked about WHO and CDC failure to communicate the seriousness of H5N1 flu and likelihood of bird flu becoming pandemic, how the emergency plans in the US are to shut off highway exits of cities so that people cannot get out and spread the disease, how those overseeing the electricity grid have plans to have workers living at critical sites to tend to breakdown problems until they too may become too sick to do so, how hospitals will fail because all the workers will become sick. His answer is to store about three years of food supplies and ammunition to protect it. He thinks the flu will go around the world in waves so that after the first there will be another and yet another. He further suggested that people in the 20-40 year old group will be most susceptible to dying from the flu, for reasons I immediately forgot because I ain't in that age group.

During his visit of over an hour, he expressed NO concern about the economy.

I do not know if this guy is "crazy" or not. Despite the conversation he did not strike me as being rabid on the subject, but rather someone who sees a pandemic as inevitable during his life expectancy, and about which he is serious with regard to trying to survive.

Were he to prove correct in his concerns, there is little doubt in my mind that those of his ilk are more likely to survive than are those in large population centers, and whatever happens to the dollar, precious metals, oil, bonds, stocks, bubbles, etc. will all be way down on the list of concerns.

For reference he mentioned http://fluwikie.com/

[Spartacus]

Re: End Of The Bubble Bailouts

It all sounds good - except TELLING EVERYONE, FAR AND WIDE, that you have all these resources.

Maybe he's HOPING hel'll have to use that ammo?

become too sick to do so, how hospitals will fail because all the workers will become sick. His answer is to store about three years of food supplies and ammunition to protect it. He thinks the flu will go around the world in waves so that after the first there will be another and yet another.

I do not know if this guy is "crazy" or not. http://fluwikie.com/

[Jim Nickerson]

Re: End Of The Bubble Bailouts

It all sounds good - except TELLING EVERYONE, FAR AND WIDE, that you have all these resources.

Maybe he's HOPING hel'll have to use that ammo?

He lives about 200 miles from where we are and 5-600 miles from where I have a home, and he did not offer us his address, so I think he is safe, at least from us. He did discuss how some people in New Orleans last year who were prepared by having stocks, and who would not share them when converged upon by neighbors, were later run out of the community because they had not shared.

He did not seem the type who would relish shooting anyone, but if push came to shove, I expect he would.

[Spartacus]

Re: End Of The Bubble Bailouts

From your orignial post I thought you were camping near where he lives & he was out walking his dogs, and he regularly shares this info.

Rang some alarm bells in my head.

prepared by having stocks, and who would not share them when converged upon by neighbors, were later run out of the community because they had not shared.

Would it be easier to keep something like this secret in a city where no one cares what anyone else is doing (mostly) or in the wilderness, where everyone living near you gossips about you and spies on you, and trucks full of cured meats would be noted.

[EJ]

Re: End Of The Bubble Bailouts

I am camping with wife, dog, and two cats, and a camper right across from us has two dogs that he brought over to meet my dog Rio. Turns out he is a 55 year old semi-retired physician who practices acupuncture up around Santa Fe, NM. He lives out in the country, far enough that he only has modem connectivity and eratic cell phone service. His home someway is "geared" in the majority to basically run from 32V electricity, which he collects from solar panels and a wind turbine, and is built into the side of hill. He says his utility bill is about 50$ per month and he spent $50 last winter on heating. He has a well, but also collects rainwater, and just went to El Paso so buy a mobile solar energized still to distill water to the extent is can turn muddy water into potable water. Take whoever on this forum is most concerned about the financial future of this country, and this fellow, Jerry, is just as concerned about what will be the fallout of bird flu WHEN it hits this country.

He talked about WHO and CDC failure to communicate the seriousness of H5N1 flu and likelihood of bird flu becoming pandemic, how the emergency plans in the US are to shut off highway exits of cities so that people cannot get out and spread the disease, how those overseeing the electricity grid have plans to have workers living at critical sites to tend to breakdown problems until they too may become too sick to do so, how hospitals will fail because all the workers will become sick. His answer is to store about three years of food supplies and ammunition to protect it. He thinks the flu will go around the world in waves so that after the first there will be another and yet another. He further suggested that people in the 20-40 year old group will be most susceptible to dying from the flu, for reasons I immediately forgot because I ain't in that age group.

During his visit of over an hour, he expressed NO concern about the economy.

I do not know if this guy is "crazy" or not. Despite the conversation he did not strike me as being rabid on the subject, but rather someone who sees a pandemic as inevitable during his life expectancy, and about which he is serious with regard to trying to survive.

Were he to prove correct in his concerns, there is little doubt in my mind that those of his ilk are more likely to survive than are those in large population centers, and whatever happens to the dollar, precious metals, oil, bonds, stocks, bubbles, etc. will all be way down on the list of concerns.

For reference he mentioned http://fluwikie.com/

He's not crazy, but preparing to hide out for three years may be taking things a bit far. In my Quick Comment from June 6:

For vacation reading, I relaxed with "America's Forgotten Pandemic: The Epic Story of the Deadliest Plague in History" by John M. Barry. It's long winded and repetitious, but a few chapters make it worth wading through. To sum up, between 20 and 40 million people died world-wide, the scientific community didn't understand what was causing the pandemic and local governments and the federal government lied about what little was known because of an unwillingness to divert resources from the relentless drive to prepare the U.S. to enter WWI. The result was hundreds of thousands of unnecessary deaths. Barry concludes that a pandemic is going to happen again but no one knows when.

I bought the book for research after hearing a panel of VCs at a Churchill Club event in San Francisco a few months ago wax apocalyptic on bird flu. A month later on a show on the Boston NPR station, virology experts from several leading Boston hospitals were interviewed on a show about a potential influenza pandemic. All the experts say more or less the same thing: by the time human-to-human transmission of a deadly influenza virus gets reported, a global pandemic similar to 1918 is likely already in play.

The good news: More honest and immediate communication of the risks today (except here), a better understanding of what to do and more effective treatments. The bad news: Relatively poor public awareness, still no cure or vaccines, modern transportation will spread the virus more quickly and our global just-in-time supply chain for food and energy raises the risk of social breakdown. Sounds alarmist until you read the sections of the book where it's explained that for several days before you feel any symptoms you are contagious, that the virus can live for days in lethal quantities on a dry seruface (e.g., a doorknob) and healthy 25 year old victims can feel fine in the morning and die a very unpleasant death in the evening.

The most salient question to the experts on the NPR show was, "What are you doing personally to prepare?" They unanimously answered that they'd already stocked their homes with several weeks worth of supplies. "Stay home," was the consistent refrain. Fair enough, but who's going to fill in for Homer to watch the meters at the local nuke if Homer's hunkered down at home with Marge and the kids?

On my flight home I happened to sit next to a bio-chemist professor on his way to Cambridge to give a lecture at Harvard today on a related topic. I asked him if the Boston medical crowd sounded as survivalist to him as to me. He responded that his family also had a few weeks' supply of stuff. A national medical community survivalist cult?

My two cents from some additional reading since then...

The truth is, as is often the case, somewhere between the doomsday and the blue sky view. Your camping neighbor is correct, that the influenza virus evolves by moving in waves through the population over a period of years, optimizing itself -- V1.0, V2.0, and so on -- until it has perfected its lethality. It shows up, seems to dissappear, then returns in a more dangerous form later. Those who are too young to have gotten a genetically related flu will have no immunity and so are more likely to get very ill or die, verus older people who will have at least some relevant antibodies from a childhood infections caused by some distant relative of the virus that eventually mutates into a pandemic strain. The opposite is the case in a typical influenza outbreak; those hit older people harder.

Unlike during the last pandemic, this time around, when human-to-human transmission is discovered, the whole world will know in minutes. The US government will not lie about it and will not be packing soldiers together in crowded barracks or allowing large public events. Also, survivors of the flu will not be allowed to make contact with the public until several weeks after they fully recover because the flu kills all the epithelial cells in your lungs and many who didn't die from the flu died from pneumonia later because this wasn't known.

There's a something of a Y2K element to the bird flu pandemic discussion. Like Y2K, no one benefits from a bird flu pandemic and a lot of effort has gone into planning for one for many years. Check out the Australian Dept. of Health and Aging site to get an idea. I have a hard time getting worked up about potential disasters that are well broadcast years ahead of time. They usually don't happen. The opposite is true of asset bubbles. Their dangers are vehmently denied by those who are benefiting from them; denial, miscomprehension, and lack of planning send the economy and financial system full steam ahead into the iceburg.

Anyway, http://fluwikie.com/ looks like a solid bird flu resource.

[Jim Nickerson]

Re: End Of The Bubble Bailouts

From your orignial post I thought you were camping near where he lives & he was out walking his dogs, and he regularly shares this info.

No, we and he are rather isolated about 16 miles east of Alamogordo, NM up in the mountains at a small RV park.

Would it be easier to keep something like this secret in a city where no one cares what anyone else is doing (mostly) or in the wilderness, where everyone living near you gossips about you and spies on you, and trucks full of cured meats would be noted.

The problem in a city were things to shut down such as utilities, supply to grocery stores, filling stations and if exits from a city were to actually be closed in order to attempt to quarantine an outbreak is that there will be more desparate people likely willing to go to extremes to loot any place that appears to be prepared to stick out a period of extremely bad circumstances. To my thinking, if anarchy ever develops I had rather be where there are fewer people rather than more people, that way my ammo will last longer.