The Economy.

[Generalissimo]

Stock markets are falling. We're overdue (in business cycles) for a tumble, last major one being in early 1990s. So is this actually that start of a recession or just a small fluctuation or something more on par with the economics of the early 00s rather than a proper recession?

One of the first things that money stops being pumped into in recessions is advertising - we could be hit bad. Would be interesting to see how our CPMs change over the coming months.

[paul]

Change always creates opportunity too. For example, all the news about problems in the sub-prime housing lending industry has some folks I know anticipating profits from buying & selling an abundant supply of private notes and mortgages, created because institutional financing has dried up.

If the advertising market slows there will be more opportunity to buy failing sites from sellers with a liquidity problem or who don't know how to monetize them.

[Chris]

Nah. People just need to learn not to buy what they cannot afford. You had all these idiots seeing real estate prices go up and up and decide they could buy a place they cannot afford and rely on appreciation to pay off the mortgage, when the values stop going up so much all the people who basically gambled money they didn't even have end up screwed. No wonder their credit rating stinks.

That doesn't mean the economy as a whole is in a bad way. I wouldn't worry.

As for the stock market, now is a good time to buy.

[demosfen]

In my mind there is little doubt we are headed for a major recession. Too many bubbles, FRB is printing money like crazy, and Central Banks actively dumping dollar for euro

[Cutter]

Here is an interesting article I ran across today:

http://www.reuters.com/articlePrint?articleId=USL1470530620070314

Jim Rogers, who co-founded George Soros's Quantum Fund is quoted as saying "It's going to be a disaster for many people who don't have a clue about what happens when a real estate bubble pops. Real estate prices will go down 40-50 percent in bubble areas. There will be massive defaults. This time it'll be worse because we haven't had this kind of speculative buying in U.S. history."

He also goes on to say that he expects the problems to spread, with some emerging markets to crashing 50-80 percent, China as much as 40. I tend to agree with that. US companies, with exceptions, are doing pretty damn good right now. Cash holdings are at an all time high, profits and revenue growth have been doing incredible. Leveraged buy outs are driving up stock prices.

The problem is you have to look at the fundamentals. Debt is a great way to grow an economy short term, both on personal and government spending level. But, that debt has to be serviced. That can make the true cost of a $1 billion construction project become $2 billion or $3 billion once the bond is paid off. The same goes for federal deficit spending. Thus, there is a big incentive for all governments to have an inflationary money supply... this is great for the stock market, housing, and so on, but it also creates wild bubbles.

Long term, the stock market and real estate will keep heading upwards as the money supply continues to increase. Bubbles can be a fun ride for some, others not so much. Just focus on your business, save money, and keep your profit margins high, you'll end up a lot better off than spending all day obsessing over stock market day trading or real estate flipping.

[demosfen]

Good article, although in my book Rogers doesn't qualify as 'investment guru', I don't think he did much besides writing books and being friends with Soros.

I just finished reading a book about it, "America's bubble economy - profit when it pops" (americasbubbleeconomy.com). He predicts multiple bubbles popping (real estate, dollar devaluation, DOW down to 8000) and suggests getting out of dollar so that you'll have liquid assets to buy for pennies on a dollar when prices are depressed. He recommends gold, euro, and yen, in that order. He says that capital goods and discretional spending will be hit the hardest. I remember former FRB Chairman Volcker making a prediction in 2005 that there is 75% chance of dollar collapse within 5 years, I started diversifying away from dollar around that time. These may be distressing times for many (especially "would-be real estate investors"), but also during Great Depression and, to some degree, reccession of 1970s there were people who made a fortune waiting on the sidelines and then buying cheap stocks, other assets, or real estate from struggling or bankrupt owners.

And with the new bankrupcy laws I wouldn't want to be in place of some of these people, it's not as easy to walk away from bankrupcy as it used to be

[Generalissimo]

Alan Greenspan is predicting America will enter a recession by the end of the year.

Even if this is a bubble based on speculation in the housing market, it will lead to a slow down in our business as so many people will be effected and shopping for luxuries online might be one of the first things they stop doing...

[Chris]

I don't understand Greenspan, we was supposed to be retired but he keeps holding press conferences or whatever. Can't the guy go fishing?

[Generalissimo]

Not that I don't agree with you on that Chris, I'm no fan of him either, and you have to question his motives in what he's saying - but the point remains that he's saying a recession may happen, and that carries some weight. I'm not sure myself, I think it's just a speculative bubble like the dot com bubble which at worst will last a few years, but won't be anything like 1990-92 recession. However if China suddenly decided that the US wasn't the best place to put it's money and withdrew or confidence in China's growth stopped investors then it's very likely a recession would happen.

[srjcstud]

Nah. People just need to learn not to buy what they cannot afford. You had all these idiots seeing real estate prices go up and up and decide they could buy a place they cannot afford and rely on appreciation to pay off the mortgage, when the values stop going up so much all the people who basically gambled money they didn't even have end up screwed. No wonder their credit rating stinks.

That doesn't mean the economy as a whole is in a bad way. I wouldn't worry.

As for the stock market, now is a good time to buy.

Chris, you nailed it right on the mark.

As for the economy, I'm not worried, a recession only means the feds will loosen interest rates which will increase borrowing and spending which is great for advertising. In the long run, the feds got our backs, it all turns out good!

[Doug]

I would pay close attention to what China is doing. We have now become dependent on them and I sometimes question their motives. They are developing at an amazing rate. Should the decide they do not need us anymore, we would be in trouble.

I would worry about hyperinflation too. Suddenly it could take a wheelbarrel full of paper money to buy a loaf of bread, it happened in Germany.

[Todd W]

I would pay close attention to what China is doing. We have now become dependent on them and I sometimes question their motives. They are developing at an amazing rate. Should the decide they do not need us anymore, we would be in trouble.

I would worry about hyperinflation too. Suddenly it could take a wheelbarrel full of paper money to buy a loaf of bread, it happened in Germany.

We send a lot of stuff to China to help them develop too... cement being a big one they can't just 'drop us'.

[Doug]

They can't yet but they are becomming more independent of us. We are also sending barges full of scrap base metals such as copper and nickel which they are stock piling for whatever reason.

[Chris]

Without US consumers China would have rampant unemployment.

You really don't have to worry about quality of life dropping, it all comes down to natural resources. So long as your country has sufficient natural resources your quality of life cannot drop that much.

[Doug]

As I said, I'm more worried about the hyperinflation of the U.S. dollar than anything else.

Dow Jones jumped over 100 yesterday and is in the green today but that means nothing. The last hour of trading is where the action is.

[srjcstud]

The US Is definitely becoming independent abroad. It is most likely our outsourcing of everything that can be outsourced. You can tell we are hooked to everyone else because the stock market has essentially become a tag along of the markets abroad.

[Doug]

Right, look what happened when China had a bad day with the stock market, Dow Jones fell 416 points.

[demosfen]

New Century, a major lender to subprime borrowers, just filed for bankrupcy and fired most employees. I bet many of these newly unemployed will limit their spending to necessities and sell their assets, like stocks, helping to drive the consumer spending and stock market down.
(They should've hired me as CEO, I have a rule not to lend money to anyone. :ladysman: )

http://news.yahoo.com/s/ap/20070402/ap_on_bi_ge/new_century_bankruptcy

[Generalissimo]

New Century, a major lender to subprime borrowers, just filed for bankrupcy and fired most employees. I bet many of these newly unemployed will limit their spending to necessities and sell their assets, like stocks, helping to drive the consumer spending and stock market down.
(They should've hired me as CEO, I have a rule not to lend money to anyone. :ladysman: )

http://news.yahoo.com/s/ap/20070402/ap_on_bi_ge/new_century_bankruptcy

That won't have that much impact on the economy as a whole, but if it's part of a trend. What was interesting about their logo is that it is quite similar to the international squatting sign - strange for a mortgage company.

[demosfen]

That won't have that much impact on the economy as a whole, but if it's part of a trend.
I read that they are 44th high risk mortgage lender that went bankrupt. There is going to be many more of course.
A realtor company near me now sells insurance and offers driving lessons. Last time I walked by I don't think they even had a list of properties they have for sale displayed in the window, like they used to. The economy will have to absorb a lot of people left without source of income

[Cutter]

A lot of this stuff is going to be regionalized. California and South Florida are already getting hammered. You have brokers who have gone from $200k a year, to nothing overnight. Everyone who was "investing" in housing and depending on a short term flip, and does not have other income to cover rising payments, is toast.

Excess supply (thats growing) and government over-reaction resulting in tightening lending standards (the fed was loosenging lending standards just last year) -- the fundamentals have reversed in a very big way.

Basically the reason the sub prime lending industry worked is because the loans were packaged and sliced up -- and investers were demanding them. You have investment securities that are AAA rated coming from some random person who took out a sub prime ARM and they may have lied on their mortgage application.

On the positive side of things, it appears that much of this risk was absorbed by hedge funds. $500 billion could be wiped out and quite honestly its not that big of a deal.

[Chris]

On the upside... good time to own rental property. People who aren't buying houses still need a place to live afterall.

[paul]

The news reporting on things like sub-prime lending problems really needs to be taken with a LARGE grain of salt. In particular, people, especially reporters, don't understand that correlation and causality are NOT the same. Experienced investors in any arena, be it sub-prime, real estate, stocks or whatever, simply adjust their techniques to fit the circumstances.

I am reminded of the old joke about immediately shorting the stock of any successful company who's CEO makes the cover of Time, since it has obviously peaked :).

[Cutter]

Sure, I think there is a way over-focus on the economy in general. This is ironic because most people have a very minimal understanding of what is really going on (thanks partially to horrible college courses.)

That being said, things can happen that mess up the economy. Namely, reactionary government interventions.

The biggest irony is often the people who end up worse off are the lower and middle class. Agile investors simply shift capital around and absorb cost increases which are minor to their income (that can be devestating to the lower classes.) Long term though, everyone suffers.

[demosfen]

The thing I like the most about this whole thing is that Congress is considering spending a few gazillion dollars to bail subprime borrowers out. (I guess they really want to bail corporate subprime lenders with powerful lobbies, but anyway). Blame the taxpayer for the errors made by misinformed 'investors' with poor judgement. From each according to his ability, to each according to his needs.
Then when recession speads beyond real estate market, they'll just pass similar law to bail the rest of us out. :idea: Simple. We have nothing to worry about.