Pardon the language in advance, but this crap is seriously starting to piss me off! How many times do we need to get burned until we just lose the stupid smile of blind hope and accept the fact that the economy is FUBAR? Look, I'm all for optimism, especially in times like these when there really isn't too much to be hopeful about, but unbridled optimism in the face of an ever-growing body of evidence that suggests the next year or two are going to be quite unpleasant serves to both postpone the inevitable pain while magnifying its extent.
Step #1 is admitting you have a problem, which in this case is that the entire global economy has been, and still is completely predicated on the use of unsustainable amounts of leverage. This, in turn, drove up the price for virtually all assets, financial or otherwise. Does anyone really think Oil got up to $140/barrel because some schmuck spotlight-craving Analyst from Goldman or T. Boone Pickens "prognosticated" that it was destined to go $200+?
Please, gimme a break.
While it was certainly not the only cause, leverage-induced speculation played no small part in the spectacular run-up, and subsequent crash in the world price of oil when/as said leverage dried up. This is but one small example used to prove a point, one which I expect every single person reading this site should know like the back of their hand: Leverage kills.
So where does this leave us now, you ask?
Let us not kid ourselves, this is no startling revelation: we need to commit to a massive deleveraging on every single level, from the Federal Government all the way down to individual families and businesses. Most efforts thus far have for the most part focused on coming up with ways to delay this necessary and inevitable process, which, while politically expedient, not only fails to address the underlying issue, actually adds to the eventual pain.
A gradual, measured effort to reduce leverage across the board will infringe on most everyone, however, by doing so we avoid the otherwise inevitable collision course (to zero, and beyond!) which we seem so intent on taking. No one ever said its going to be pleasant - it won't be - however, denial never works out in the end, and the sooner we fast-forward to the "Acceptance" phase, while perhaps counterintuitive, the better-off we'll be for it.
(One, small) Case-in-point, I've been reading a recent report on consumer Credit Card ABS from the brain trust over at Moodys, and to be honest, its taken me the past 2 weeks to figure out how to deal with it. From the very beginning, the thing just screams "professionalism", with an incomplete/incoherent sentence on the very first page (pg 2 in the pdf), and a general lack of attention to detail throughout. Their numbers and commentary just don't seem resolve with each other, or with the pile of evidence presented elsewhere, to the point that it might as well be from the National Association of Realtors (masters of economic projection alchemy that they are).
Their 2008 unemployment estimate is 5.7%, which is well and good in whatever alternate universe these guys reside, however, back in the realm of reality, the most recent unemployment data show the actual number is 7.2%, which makes their # only what, ~25% off the mark? They've settled on a 0.0% change for total retail sales in 2008, despite the fact that the numbers have been revised downward after the fact of late, and not insignificantly so, which is to say nothing of the fact that the recent sales #'s from the Census are themselves not exactly inspiring, to say the least. To be fair, Moodys' figures aren't totally off-the-mark, however, even as "base-line" values, they appear to be too optimistic to us.
A foundation of questionable assumptions upon which to base one's analysis and associated conclusions is never a good start, but no, the over-achievers from Moodys build upon it with questionable methods, circuitous logic, and the sort of reasoning-by-hope seldom seen outside the most delusional cult compounds. Let me translate (loosely):
"Oh, well as long as x, y, and z don't all happen, which they usually don't generally speaking, your ABS notes will retain their ratings...unless of course, these things, which we acknowledge may happen, well, actually do, in which case you're probably screwed, but, as we said, historically/generally speaking, everything should be totally copacetic, k?"
Take a gander at the report, its really not that far off from the above, I mean, hell, where did predicting the future based off the past ever come back to bite anyone in the butt? To their credit (no pun intended), they actually make a few good points, but fail to really connect the dots, so-to-speak. I mean, its not like anyone can seriously make the case that consumer ABS is comprised of "prime" credits go the way of oh, residential mortgages, for example, right?
Of course, its little/no surprise that a Ratings Agency would be more focused on finding a way to keep the crap they're paid to rate Grade-A certified, instead of, oh I dunno, providing an honest and frank opinion as to how aforementioned crap will be affected if (read: when) shit really starts hitting the fan. Heaven forbid institutional investors have to alter their charters so as not use "Big 3" Ratings to determine what they can and cannot hold, alas!
When taken out further though, we're lead to an interesting yet altogether unsurprising conundrum:
Besides Roubini (or any of the other "Dr. Dooms"), the "financial media," and perhaps Jim Chanos, who has any incentive to tell it like it is, or very likely will be? Surely not anyone whose living depends on functioning capital markets, that;s for sure. Nor should we expect any politician to commit assured career suicide and tell the American people that 1 out of every 10 of their friends is going to be out of a job for the next two or three years, 1/30 will be kicked out of "their" house, but its all OK, because its only temporary, and after that, things are going to be better than ever. Not an ice cube's chance in hell, not even from the Great Messiah Obama, Himself (although to be fair, I'm guardedly optimistic that he won't do anything profoundly stupid, but I digress).
So, what the hell are we supposed to do then, once we do accept the facts? How does the U.S. Government (and Governments of the World) come together to attempt to execute the largest, most massively complicated deleveraging in the history of the term?
Frankly, I haven't gotten that far yet, however I stand by my above point, that postponing the inevitable will be a massively painful and horrifically catastrophic course of action. In terms of the mechanics of an alternative solution, I leave that to you, our readers. Go ahead, drop a comment, enlighten me.