The Great Shrinking Economy

In these economic times, I am reminded of the common refrain from Alfred E. Newman, "what, me worry?" As I look at the economic landscape right now, the Mad Magazine Poster Child's words come back to haunt me. But instead of "what, me worry?", it seems I only hear one word, over and over again..."worry."

We are witnessing some pretty amazing economic events here. We have watched an industry basically disappear before our very eyes (Investment Banking), another major financial services engine beg for government assistance or foreign loan assistance (Life Insurance), and a third major sector of the economy come to a screeching halt (automotive).

The Government is trying to react to the facts on the ground, but the facts on the ground are moving faster than anyone can keep up with. By the time TARP was underway, and the Treasury could even figure out whose bad mortgage-backed securities to buy out, the landscape had changed. By the time AIG got its $40B bailout, it needed three to four times that. The American Car makers are begging for a solution today that may solve today's problems, but the Government is trying to get smart enough, fast enough, to think of every major pot hole in the road to success in the future. It may be just about impossible. I give the Congress points for trying to force GM, Ford, Chrysler, et al, to at least come up with a plan for success before asking for a bailout, though.

Unfortunately, the bigger challenges still lie ahead. What are they?

1. Stock Market--Sorry, folks. The worst isn't over. There are a few terribly powerful forces working against this current market. Here they are:

a. Price to projected earnings--many of these S&P 500 companies still haven't reduced their expected earnings projections for next year. As companies continue to provide the analysts and The Street with numbers, the stock market punishes these companies, one at a time. Look for that trend to continue for a while.

b. Retirees pulling money out--these next 10-15 years will see a seemingly never-ending drive upwards of people retiring, and pulling money out of their 401k's to live out their golden years. Remember, at the most basic level, Stock Markets go up when more people are buying than are selling. This demographic shift is like a permanent brake on the momentum of the upward buying pressure of the market. It can be overcome, but not when there isn't a very attractive reason to jump into stocks.

c. Tax loss harvesters--This is a more short-term phenomenon. Smart investors are pulling money out of the market before the end of the calendar year, in hopes of at least salvaging a tax benefit for holding such lousy-performing stocks until now. See point b above. Selling pressure on the markets results in a lower market.

In all, seeing a Dow Jones at half of what it was at the beginning of the year (6,500 vs. 13,000) wouldn't be a major surprise. It could result in some horrible depression on the part of the Pragmatic Pundit, though.

2. Motor Companies--Sorry, but even a bridge loan of $25B won't last more than a year or so, if the current economy continues. Even if GM is making the best cars out there, and they are world-beaters, a bad economy and the threat of Chapter 7 (Liquidation) hanging over the company like the sword of Damocles, will put enormous pressure on the business to stop the bleeding. I don't know how that can happen, if no credit is available for people to buy these new Chevy Volts for $40k a pop. GM is going to have to be restructured in either Bankruptcy courts, sold off in pieces, or just plain old liquidated. Game over.

Whether the government bails it out or not (and it looks increasingly like it will do so, according to Chuck Schumer today on the Sunday Morning Talk Shows), I am worried that we are using our last tourniquet on a dead man here. Perhaps no amount of $$$ will save them. Along with the disappearing of the auto makers goes the upper mid-west's economy (or whatever is left of it!). Not quite the economic recovery we are looking for, when 1-2% of the Country's employment workforce suddenly finds itself out of a job. That's not just machine shop folks, but parts makers, local industry support, real-estate, and most importantly, car dealerships country wide, who are now without a car supplier. That's a workforce in the hundreds of thousands of small business owners. Scary.

3. Government Pensions--If you thought GM was bad. Wait until you see government workers start to retire in droves here, and begin to draw on their defined benefit pensions, promised to them by State and Local Governments. What do you tell the government worker, at age 65, that they don't have health care, and have to take a 50% haircut on their pension, if they're lucky? Talk about a catastrophe.

4. Medicare Recipients--My worry is that any improvements to the economy the Obama Administration can muster may be absolutely destroyed by one thing--the year 2010. The absolute day of reckoning. The year when Baby Boomers start to file, en masse, for Medicare. This is the time when people will truly start to retire in droves, and you may see an absolute meltdown in the US economy.


Man, that's all enough to make me worry about my family, friends, neighbors, my town, my state and my country. But there is a silver lining to every cloud. I have some thoughts of hope. And I will discuss them...tomorrow. Unfortunately, the word of today is this: WORRY.