Scenes from a Global Recession...

[GRG55]

Random anecdotes and observations from the week past:

• A friend and close business associate is on the Board of one of the largest US-headquartered independent petroleum Exploration and Production companies. This company has a very strong financial position and a well diversified international and domestic asset base. He told me that the company is planning for a US depression [yes, they are using the same word EJ's been using recently] based on their view that the current unemployment forecasts are far too optimistic, and there is unlikely to be any material economic recovery for 2-3 years or longer. Corporations can often be legitimately criticized for being overly optimistic since management gets rewarded for "growth", and perhaps this particular example is now overly pessimistic, but this is the reality of the most probable scenario that this company is now using for business planning, capital allocation, employment decisions, and so forth.
• This same company also thinks the probabilities of a future supply-shock are becoming quite elevated. My associate remarked that the Board spent quite a bit of time at the January meeting reviewing project cancellations, downward budget revisions and other data, across the global industry, and have a ranked survivor/casualty list for their industry with the intent of becoming aggressively predatory if the situation deteriorates further, as they expect. Drilling for oil on Wall Street is cheaper than using a rig. Not a healthy situation...for anyone. .
• Got an unverified report from a friend in the Gulf that the Dubai airport parking lot is filling up with abandoned cars. If you are an expatriate in the Middle East your residency permit is tied to your employment status [an iTulip member who resides in the UAE recently posted more details about this; perhaps he/she can verify this rumor?]. In typical Middle East fashion many people are losing their jobs [often unable to collect their back pay or severance], have to leave the country within a few weeks, and cannot sell their car into a zero-bid market. The cost of living in Dubai has skyrocketed to such a degree that once laid off, thus losing any employer provided housing & other allowances, most cannot afford to stay around for very long, even if they were allowed by the authorities. Also got a report that one can now drive from Shaikh Zayed Road in central Dubai to the airport in about 20 minutes...something that was impossible for me to do for most of the last 5 years of frenetic growth and construction. :eek:
• There are three competing building supply companies near my bunker construction site, including a Home Depot that opened just last October. I've noticed that inventories of common building components are depleted and are not being restocked. Yesterday I ended up driving to all three of them before I was able to secure a sufficient quantity of plywood clips to finish sheeting my roof. Now plywood clips are not an exotic bit of hardware, nor would one expect inventories to be depleted because customers rushed the stores last month and cleaned them out to give as Christmas presents to loved ones. This is not the first time I have had difficulty finding common materials for the project.

[jk]

Re: Scenes from a Global Recession...

is there seasonality to the consumption of plywood clips?
perhaps you're the only person crazy enough to be pounding nails in the deep freeze?:rolleyes:

[GRG55]

Re: Scenes from a Global Recession...

is there seasonality to the consumption of plywood clips?
perhaps you're the only person crazy enough to be pounding nails in the deep freeze?:rolleyes:

Guilty as charged!

[Updated avatar coming soon]

[metalman]

Re: Scenes from a Global Recession...

thanks for the depressing report

seriously, i'm seeing the same thing here in nh. the shelves of local dept. stores are thinning out, the fire sales are on. maybe ej got the process right but the timing wrong? at this rate we're out of 'stuff' before the end of q1 09...

US consumer swan song: Cheap now, cheaper later, then expensive -- it’s all about supply

Early next year expect a Great American Consumer Fire Sale to follow on the heels of the Great American FIRE Economy fire sale of financial assets that began in 2006. While the FIRE Economy fire sale was in houses, stocks, and all bonds but US Treasury bonds, with particularly heavy depreciation in securitized debt, The Consumer Economy Fire Sale starting in Q1 2009 will be familiar to anyone who lived through the 1980 to 1983 recessions when the Volcker Fed slammed the economy in a three years of contraction with rate hikes that created double digit unemployment and brought inflation down from over 12% to under 0% -- yes, resulting in a brief episode of actual deflation. Ask any old-timer coin dealer that survived it. Armageddon for them, nirvana for the FIRE Economy.

The major difference between the 1980 to 1983 recessions and the one that started in Q4 2007 as iTulip alone forecast in Oct. 2006: the Fed created the 1980 to 1983 recessions on purpose. This one is running on its own, out of control, with no apparent obstructions – fresh sources of credit, cash, or income -- to brake the fall.

Many retailers, especially discount chains, have already cut prices to cost. Shopping with the wife at a nearby Mall this past weekend we spotted tumbleweeds rolling down the isles of full price, brand name retailers while discounters offered goods Made in China, Indonesia and other lands at absurdly low prices.

The shoppers marveled. They felt rich, no doubt, as they snapped up the well crafted goods using cash and credit earned at an exchange rate value they may not see again for many years, unaware of the ephemeral quality of the precious purchasing power they wield this holiday shopping season in the final act of a 35 year consumption fantasy financed by other peoples' savings.

The spectacle evoked images of ill fated vacationers picking fish up off the exposed sea floor at Bali resort beaches before the tsunami waters rolled back in to drown them, and the story of the young girl who happened to learn about tsunamis in school the week before and, recognizing the danger, talked her family into running for higher ground. I could not help thinking that a year from now many shoppers, blissfully unaware of the economic calamity that awaits them, will wish they’d understood the perversely low prices as a warning of economic trouble ahead and saved their money for later.

The holiday retailer strategy: those left with the least inventory after Christmas live to fight another day. Then the first half of 2009 goes like this.

1. After Christmas sale 20% to 50% off
2. Liquidation sale 50% to 80% off
3. 30% to 40% of retailers go out of business

Advice to readers: take advantage of the early 2009 Great American Fire Sale and go out and buy all the generators, chain saws, washing machines, fine linens, and other durable goods you’re going to need for the next few years because by the end of 2009 most of the inventory may be sold through, many retailers will be shut down, and replenishment of stocks of the survivors will likely be meager; our models say that the goods import supply will decline more precipitously than the supply of money available to pay for them. That spells severe stagflation.

[santafe2]

Re: Scenes from a Global Recession...

There are three competing building supply companies near my bunker construction site, including a Home Depot that opened just last October. I've noticed that inventories of common building components are depleted and are not being restocked.

In a deflationary economy, parts in inventory are a liability. As turns slow, vendors try to get ahead of the curve by slowing the manufacturing process, the delivery process, the choice of parts. We're beginning to capitulate and shortages are starting to appear.

[FRED]

Re: Scenes from a Global Recession...

In a deflationary economy, parts in inventory are a liability. As turns slow, vendors try to get ahead of the curve by slowing the manufacturing process, the delivery process, the choice of parts. We're beginning to capitulate and shortages are starting to appear.

That's deflationary if the prices of the remaining inventory and replacement inventory are falling. Are they? That's not what readers are reporting.

[santafe2]

Re: Scenes from a Global Recession...

thanks for the depressing report

seriously, i'm seeing the same thing here in nh. the shelves of local dept. stores are thinning out, the fire sales are on. maybe ej got the process right but the timing wrong? at this rate we're out of 'stuff' before the end of q1 09...

Metal - You pointed this report out to me the other day and the cheap now, cheaper later part is happening quickly. Businesses are moving through inventory as fast as possible and at as much profit or little loss as they can manage. But there is a sudden stop with regard to ordering. No one who cares to be in business in 2010 is ordering product they can't sell for more than they've paid.

We appear to be entering a period of renegotiation. Manufacturers would rather shut down than lose money on each part. Distributors and retailers are in the same camp. Consumers will find less choice and more out-of-stock situations than they'd like while markets re-balance.

The other day I saw a long list of US cars that will no longer be manufactured. This appears to be typical of what will happen in all industries. We're beginning to go through the weeding out of companies, products and services we don't really need.

From Dubai to Dubuque there are big changes under way. And while it's not fun, it is amazing to experience and learn to navigate. As a business person, I was thinking about Sullenberger the other day and how all of us are going to deal with a slow motion version of birds in both engines. The metaphor of landing safely in a freezing river instead of your desired destination is haunting.

[santafe2]

Re: Scenes from a Global Recession...

That's deflationary if the prices of the remaining inventory and replacement inventory are falling. Are they? That's not what readers are reporting.

For us, yes. Prices are still ratcheting down but my industry could be a special situation. As I'd reported almost a year ago, we've had a shortage of product for three years. Manufacturers were finally ready to meet demand so the timing for manufacturers could not have been worse. The ratchet down will last for a few more months.

[GRG55]

Re: Scenes from a Global Recession...

A global real estate bubble is a global bubble...no place is immune from the splatter when it bursts. Not even that ultimate tax haven, eastern hemisphere play-ground & money laundering centre known as Dubai.

[AED is short for Arab Emirates Dhiram; One US Dollar buys approximately 3.67 AEDs]

Khaleej Times,
Money Maze column by Matein Khalid
January 26, 2009

WHAT NEXT FOR DUBAI PROPERTY PRICES?

If the history of past property cycles everywhere from London in the early 1990's, Mumbai in the mid 1990's, the Gulf in the 1980's and Silicon Valley six years ago are any guide, real estate values fall by 60 to 70% from their bubble peak over a protracted four to six year period. It is therefore futile to expect a quick return to the stratospheric valuations we witnessed in summer 2008 or even a deceleration in the bearish price momentum. In retrospect, the parabolic price rises since 2008 are a compelling argument that the Dubai property market was dominated by leveraged off plan speculators whose "irrational exuberance" had reached almost surreal dimensions. Bankers in the UAE played a critical role in financing the market's speculative mania, with many commercial banks choosing to become real estate developers themselves, with predictably disastrous results.

The daisy chains of phony, legally unenforceable MOU's, fraudulent "50% guaranteed returns" by go go developers who did not even bother to hide their resemblance to Charles Ponzi (in fact, advertised their fraudulent deals in the media and on billboards on Jumeirah Beach Road) and investment clubs promising gold, platinum and kryptonite returns on post-dated cheques created a speculative financial Frankenstein in the Dubai property market. This speculative tsunami was the reason the market crashed with such traumatic scale and speed since September when the financial markets pendulum swung from greed to fear almost overnight.

I am doubtful if real estate prices bottom in the second half of 2009 or even 2010. A property bottom requires, at a minimum, the end of a supply glut, a return to affordability, positive currency trends and a vibrant home mortgage finance market. The supply glut will actually get worse since 80,000 units will hit the market in 2009 and again in 2010.

This supply glut will result in a virtual crash in luxury villa and apartments rentals, as layoffs in the executive class in banking, construction and services accelerate due to the global recession. This process has already begun in the high end expat enclaves of say, Dubai Marina and the Arabian Ranches.

Affordability is a lot harder to define in a market with such a bewilderingly diverse spectrum of offerings, investors segments and demographics. Yet affordability is also a function of mortgage rates, financing costs and ease of access to bank credit. With mortgage rates as high as 10% (Hong Kong rates are 3%, the US offers thirty year mortgages at 6%) and near tripling of service charges to as high as 35AED per square foot, I believe there is substantial downside in affordability metrics. In fact, I travelled to Britain in November to sniff out investment properties and was amazed to find that I could buy a three bedroom flat in Edinburgh's Georgian New Town for half the price of a comparable property in Palm Jumeirah even after the brutal correction in prices since last November. I would only consider Dubai Marina "affordable" (given the current finance, servicing cost and the macro economic zeitgeist) if prices fall to the 500 – 600 ARD per square foot range. The market clearly vindicates my views with talk of 800 AED offers by distress selling.

The foreign exchange market will depress, not inflate, the affordability index. After all, the dollar has surged 20 – 40% against the Indian rupee, the Pakistani Rupee, the British pound and the Russian roubles, the home currencies of so many expat investors in Dubai real estate. This seismic shift in currency markets has hit affordability from these four critical offshore investor segments, pricing them out of new property market offerings. The surge in the dollar, moreover, transmits a deflation shock to the UAE economy, stock market, banking system and property values due to the exigencies of the dirham-greenback peg. This is only accentuated by the reluctance of banks to finance home mortgages since they are unable to access offshore funding in the Euromarkets or increase their local loan books. With Amlak, Tamweel and foreign banks frozen out of the market, the banks will not resume "normalized" mortgages lending for at least the next twelve months. In fact, the mass job losses in banking suggest balance sheets will contract, not expand. This is only rational as loans to deposit ratios above 80 per cent are the kiss of death amid a global recession.

The commercial property market had gone to absurd levels, with developers actually expecting a one to two year payback rate during the speculative frenzy of 2006 – 08. However, 25 million square feet of office space will hit the market in the next year just as the demand curve softens. This will trigger a fall in rentals and office tower values, a process that has already begun. The office market will stabilize when Sheikh Zayed Road rents return to 60 to 70 AED levels that existed five years ago.

What are my relevant macro themes for 2009? One, a higher dollar, possibly as high 1.20 Euro, 1.10 sterling and 60 Indian rupees. Two, even lower oil prices as China follows the West into recession, possibly to as low as $25 (a level predicted in this column last summer when prices were $140). Three, recession in the Gulf economies, which are highly cyclical and leveraged to the global business cycle because, unlike Russia or Mexico, they cannot devalue. Four, continued confidence issues due to private investor/developer defaults and scandals triggered by "skipsters", speculative middlemen. Five, a deepening credit crunch in the banking system as the recession hits NPL, credit growth and profits. Six, acceleration in distress selling. Seven, a quantum increase in new supply. Eight, continued job losses in private and state owned companies. Nine, vicious bear markets in global and GCC equities, with the consequent negative wealth effects. It is premature to bottom fish, despite ostensible deals galore. Winston Churchill's insight after Dunkirk is valuable. It is not the end. It is not even the beginning of the end. But it is the end of the beginning.

[Guest]

Re: Scenes from a Global Recession...

What are my relevant macro themes for 2009? One, a higher dollar, possibly as high 1.20 Euro, 1.10 sterling and 60 Indian rupees.

Spot on. This notion has been introduced on these pages a few times in recent days. Until now I would wager 99% of the iTulip community has been of such a like mind on this question that they have all regarded this notion as preposterous. Gradually the idea dawns that it is in the realm of the possible.

[GRG55]

Re: Scenes from a Global Recession...

Short note from the Arabian Gulf:

Had dinner last night with the Managing Partner of the local office of a prominent [read: "expensive" ] UK law firm. Told me he had walked away from his rather substantial deposit on a $1.2 million home in a new golf course development in the desert. The developer is a client of his firm, and he said many others were also forfeiting their deposits instead of closing.

"Nobody saw this coming..." :rolleyes:

[GRG55]

Re: Scenes from a Global Recession...

Still in the Gulf. Spent part of Friday with an old colleague. He's the co-founder and President of an international energy advisory firm headquartered in D.C. [been around more than 2 decades]. Said he's getting resumes from friends and associates who are nearing 70 and retired several years ago, that now have to go back to work. Told us that most don't have mortgages, or carry any major debt, but their [formerly] "diversified investment portfolios" have largely evaporated. While the financial advisors keep repeating "stay in for the long term", in the short term they don't have enough income to put Corn Flakes on the table.

This is a very well educated [Wharton graduate], well connected [including Washington], and well travelled person. But from the tone, body language and discussion we had, it's clear that only now is it dawning on people that something really different, and really serious, is going on...

"Who coulda known...." :rolleyes:

[Sapiens]

Re: Scenes from a Global Recession...

Still in the Gulf. Spent part of Friday with an old colleague. He's the co-founder and President of an international energy advisory firm headquartered in D.C. [been around more than 2 decades]. Said he's getting resumes from friends and associates who are nearing 70 and retired several years ago, that now have to go back to work. Told us that most don't have mortgages, or carry any major debt, but their [formerly] "diversified investment portfolios" have largely evaporated. While the financial advisors keep repeating "stay in for the long term", in the short term they don't have enough income to put Corn Flakes on the table.

This is a very well educated [Wharton graduate], well connected [including Washington], and well travelled person. But from the tone, body language and discussion we had, it's clear that only now is it dawning on people that something really different, and really serious, is going on...

"Who coulda known...." :rolleyes:

Was offered $1 Billion in MBS for $60 Million USD cash. You bet this is the Mother of All Disasters. Armageddon.

[Digidiver]

Re: Scenes from a Global Recession...

So the USD is the best bet?

[Sapiens]

Re: Scenes from a Global Recession...

So the USD is the best bet?

The best of a very ugly set.