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Recessions - The Economy's Laxative

Recessions, which admittedly suck, do tend to have a cleansing effect. They flush out lots of bad business thinking as desperation sets in and no-brainer ideas that could get no traction before suddenly seem brilliant. An example...

"General Motors Co and eBay Inc (EBAY.O) said Monday that they launched a test program in California that will allow consumers to negotiate with dealers and buy vehicles online.

The car shopping website -- gm.ebay.com -- marks a departure from the way new vehicles have been traditionally sold in the United States and is aimed at helping GM gain ground with consumers a month after it emerged from bankruptcy."

This is not a new idea. eBay has been approaching auto manufacturers with this for years. The auto companies have toyed with, and killed, various proprietary attempts to do so. Channel conflict being the most used excuse but, really, it's just that they were big, arrogant, and as a result, stupid. So, finally, the auto industry is meandering towards the 21st century by taking advantage of technology to make it easier for consumers to purchase from them. That's part of this that is so welcome...GM is going to allow people who wish to hand it money to do so with greater ease. Makes sense they were so opposed to the idea.

The Wheels On The Bus Go 'Round and 'Round

The Wall Street Journal is reporting that the housing market is cooling off. So, I guess that makes it official.

While housing prices are still at or near record levels throughout the country we are seeing greater divergence between asking and purchase prices (in favor of buyers...meaning they're paying less than the asking price) and longer sales cycles. The good news is that it ain't crashing. Not yet, anyway.

Everything in economics is inter-related, so it's kind of pretentious to say "x is causing y" when, in fact, you could probably make an equally good argument that "y is causing x". Nonetheless, there are relationships.

Here's what a cool-down in the housing market likely means. Given our ongoing "jobless recovery" (yes, I know that unemployment is down but I think largely because people have bailed out of the search...and even if I concede that is not the case we are seeing job creation but at nowhere near the levels one would expect given the state of the economy...it's one of the reasons that "jobless recovery" pisses me off...who's recovering?) income is stagnating across most demographic sectors (except about the upper 1%). What, then, keeps the economy going? How is it we're continuing to shop until our hands are bloodied by cuts from rapid fire credit card flashing? Home values. Specifically, home-equity extraction. As the values of homes have skyrocketed we have been sucking those gains out, either through selling said homes or, increasingly common, home-equity loans. The truly dark scenario is that the market doesn't just cool, it plummets, in which case those folks who have borrowed against equity are essentially carrying debt against a value that no longer exists. But it doesn't have to get that dicey. Nope...all that has to happen for broad ripples to shoot across the entire economic pond is that this cooling off results in fewer home sales and a plateau in home values. Meaning that we see fewer people sucking out equity increases 'cause the increases aren't so dramatic anymore. Bear in mind that home equity accounts for 1/3rd of households' net worth. Bottle up the growth and you will see a major pullback in consumer spending across the board. Economy slows, debt starts getting called in, bonds ain't worth as much, rates have to go up to get anyone to buy the debt, companies with high debt ratios cut back on employees, unemployment goes up meaning fewer people can buy houses, housing prices drop further, etc.

All in all, you might want to prepare for some rough sailing ahead. If you've got debt of any kind look for ways to aggressively reduce it. If you've got a home mortgage that's variable, get that mother fixed. If you have borrowed against your home prepare yourself for the value against which you borrowed to decrease...meaning pay that loan off as fast as you can. If you have a job with a stable, financially sound company, particularly one that is not carrying a high debt load, and are considering jumping to a more exciting but far riskier firm...depends on where you are in your life but you may want to consider staying with staid and boring for the time being.

Note: I got wind of the WSJ article via the weblog The Big Picture. If you're an econ geek you oughta check it out. It's well-written and loaded with links to cool econ-geeky data sources and articles.

Rational Markets - Redux

Inflation Worries! Shocking, I tell you. Shocking!

Rising energy costs are causing Americans to pay more for such diverse products as cat litter and express delivery services, sparking concerns that protracted inflation might be returning as a primary threat to the U.S. economy for the first time in more than a decade.

Signs of higher inflation are beginning to multiply across the economy. Clorox Co. said this week that it would boost prices on almost half its products, on top of increases already announced for its food containers, trash bags and liquid bleach.

Read the rest of the article in the LA Times here.

I ranted about this topic at length back in March. Click on the link to read the whole post if you're so inclined. A brief summary follows...

Back in March markets and economists ,etc., were saying they didn't see inflation on the horizon. This was at a time when a barrel of oil cost roughly 40% more than it had a year prior and it's shot up since then. Sure, some of it has to do with refineries getting jammed up from the Hurricanes on the Gulf Coast. Nonetheless, if you take away the price spikes directly related to refining capacity you still have what has become around a 55% increase in the price per barrel.

This ain't just about gasoline, although that's a huge component of it since everything we buy is transported using a petroleum product. But it goes deeper than that...the computer you are reading this on is primarily a petroleum product. Kitty litter as mentioned above is a petroleum product. Petroleum is a factor of production in EVERYTHING. Really. Whether it's a core manufacturing component or a rapidly expanding transportation cost it is a factor of production in EVERYTHING. The tires on your bicycle? Petroleum product. It's in everything.

And it keeps getting more expensive.

So inflation is rising.

And media, pundits, investors and even economists who should know better are acting surprised.

Duh.

When a factor of production increases in cost the price goes up. When a factor of production that hits everything we buy goes up all prices go up. When the cost of a factor of production goes up supply goes down. When supply goes down, price goes up as a commodity becomes more scarce. As supply goes down and demand decreases at a less rapid pace, price goes up even more.

Viola! Inflation.

Yeah...markets responding to this is in fact rational. But they're seven months late, minimum, to the dance.

Efficiency. See how it works for you.

The short term news is ghastly. Ongoing upward movement in energy prices will hurt everyone. Long term, it's likely a good thing (NOTE: This does not in any way make the short term easier to bear). If  we do not artificially hold prices down through subsidies and tax breaks but let the competitive horizon remain nuetral, rising petroleum prices will make alternative fuels more attractive to investors and consumers. Given that even if we open ANWR to drilling it will cut the price per gallon of gasoline at best $0.06, and given that the countries that have the most oil are generally politically or economically unstable (Middle East, Venezuela, Russia) alternative fuels finally becoming competitive in the market place would have a long term stabilizing effect for the US economically and politically.

But getting there is gonna suck.

UPDATE: Read the whole thing here...

Wall Street on Wednesday suffered its worst one-day drop since April, as a potent mix of worries over the economy, inflation and corporate earnings drove more investors to the exits.

One trigger for the sell-off was a report showing that the services sector of the U.S. economy slowed sharply last month, while many services companies said they were facing rising costs because of high energy prices.

The report raised the specter of growing inflation pressures amid a weaker economy — potentially a recipe for the "stagflation" that characterized the 1970s, a dismal decade for financial markets.

Most economists say it's too early to fear a return of stagflation, but many agree that energy prices pose a big enough inflation risk that the Federal Reserve is certain to continue raising short-term interest rates.