Green Retirement

Everyone is by now, very painfully aware, that world stock markets are crashing.  There is a tremendous amount of fear, and near panic, from Beijing to Moscow, London, Paris, Frankfurt, Dubai, Mumbai and Washington.  Hardly a corner of the planet exists, that is not feeling the effects, of a world economic meltdown.   What is going on?  How did we get into this mess? Will the stock market keep collapsing? How do I survive an economic collapse?  What do I do after the stock market crash?

A year and a half ago, March 17, 2007 to be precise, I wrote a warning to Americans.  “…the U.S. economy is about to tank. A painful plunge into recession in the United States is about to occur. Starting with the over inflated values in real estate, and an over valued stock market, the United States may be facing a prolonged recession.” It was not only housing values that were over inflated, the stock market needed to correct as well.

Why is the stock market crashing?
A housing bubble in the United States, brought about by cheap and easy credit, fueled a consumption binge by the American people.   Because the United States economy is a consumption based economy, this extra consumption translated into greater profits, and higher corporate stock prices.  At the same time, the trend of out-sourcing American manufacturing and technology jobs, also added to corporate profits by keeping labor costs low. The United States’ extra consumption led to super high growth rates in emerging countries, such as China, India, Brazil and parts of Europe.

When the housing bubble burst, in August of 2007, the stock market bubble should have burst as well, instead it went on to reach record levels only a few months after the sub-prime mortgage crisis began.   Why didn’t the housing and stock bubbles burst at the same time? Why now?

Two reasons, one their is a lag between when events occur, and when their economic effects are felt.  So, a drop in profits by a company due to higher prices, may either be initially absorbed or not reported until the next quarterly report.  And the second reason, and more important reason the stock market continued to climb and stay higher, even with the housing and credit crisis, was because the world has been economically bailing out the United States with massive infusions of capital.

The World Loses Confidence in the United States
For over a year, the world had been pumping hundreds of billions of dollars into the United States, buying parts of failing banks and investment companies.  Buying U.S. Treasury bonds, and U.S. backed government securities, such as were offered by Fannie Mae and Freddie Mac.   While the world bought over a year of time for both the United States Government, and the Wall Street Markets to take the necessary actions to prevent a crisis, both Wall Street and Washington did nothing.  In a hallmark moment of ineptitude, and possible thievery, the U.S. Government allowed Wall Street to continue playing balance sheet games.

Wall Street investment banks such as Bear Stearns, JP Morgan, Morgan Stanley, Lehman Bros. were not fully reporting and writing off their toxic sub-prime mortgage assets.   Instead, every quarter since the crisis began, Wall Street investment banks would report billion dollar losses.  This went on for a full year, or four quarters to be precise, and investors lost confidence in the integrity of the institutions.  Foreign investors were seeing their investments, made under duress from the Fed, continue to dramatically decline in value.  The Chinese lost billions of dollars in the Bear Stearns collapse.

At the same time, while the world was bailing out the United States, the Bush administration committed a series of political blunders.  War talk against Iran sent the price oil up to $150 a barrel, causing world wide inflation, hunger in Haiti, work stoppages in Europe, the collapse of the U.S. auto industry etc.  Also, while the U.S.’s primary lender the Chinese, were celebrating the opening of their Olympic games touting world peace and unity, the U.S. slapped the Chinese in the face by allowing it’s puppet regime in Georgia to attack the Russians.

The world finally lost confidence in the U.S. and in July of 2008 stopped investing in the U.S. economy.  For a few weeks nothing changed.  Then on September 15th 2008,  Lehman Bros. filed for bankruptcy, sending shock waves through the credit market.  The Maui Ritz Carlton residences, would no longer be getting $35 million dollars a month,  from a $380 million construction loan underwritten by Lehman Bros. Construction that was 80% complete may never be finished.  And the Lehman collapse affected lives of lower income Americans - not just the rich.  The county of San Mateo was hit by the Lehman bankruptcy, losing $155 million in funding for San Mateo Community College as well as funding for it’s school districts.

Why did Lehman bros. collapse?
Treasury Secretary Paulson did what he had been doing all year, when Lehman Brothers was going into a tailspin,  he picked up the phone and called the world.  This time though, no one answered his call, patience had run out and the world was not going to allow itself yet again to get robbed by Wall Street bankers - Lehman collapsed.  The failure of Lehman Brothers, caused investors to question the wisdom of holding bank stocks, and a massive sell off of banking shares ensued.  Technically, the crisis began a year ago, however the stock market crash began when the world refused to bail-out Lehman Brothers and continue bailing out the U.S. Government.

When will the Stock Market and economy recover?
As we all know now, the run up in the stock and housing markets over the last 8 years, was due to phoney baloney accounting gimmicks and did not represent the real asset value.  Only when housing and stock values, return to their year 2001 levels will the economy stabilize.  Median home prices still need to drop further, from the current $200,000 price, down to a year 2001 price of $165,000.  The spectacular recent stock market collapse brought the Dow Jones down to 8000, where it was in 2001, and so a stock market recovery may be possible.

However, real growth in the world economy, including the United States, will not be possible until oil drops to it’s 2001 levels as well.  Credit is the oxygen of American consumption based capitalism - oil is the blood.  Until we see a sustained period of $20 per barrel oil, the world will suffer from inflation, and very low growth rates.  The point in time when you know the world has regained confidence in the United States, is when the price of Gold drops to it’s 2001 price of $350 dollars an ounce, currently gold is worth $850 an ounce.

What happens next
Layoffs.  Massive layoffs.  In all areas of the economy, from banks and technology companies, to retail stores and state and local governments.   In “Economic Collapse Winners and Losers“, I list industries and sectors of the economy that will be hurt by a recession, and industries and careers that will actually benefit from an economic collapse.

If Washington and Wall Street take the correct, and immediate actions necessary to restore confidence in the United States, we will have a 2 year recession.  If not - a ten year depression.