The Schizophreniac Economy

Some say the days of reckoning are coming, and some say the economy will be as strong as ever.

If it ain't broken, why fix it? Well, it is sort of broken yet not quite there.

Why such a diverse opinion?

To be Continued

The Dusk of Boomernomics

The old adage "when it rains it pours" is befitting of the perfect financial storm besieging the mighty US economy. One may wonder the freakish coincidental alignment of so many rare events, but perhaps there is a perfectly understandable cause at the root of all these.

Consequently, we may be witnessing the beginning of the end of Boomeronomics.

Was it a mere coincidence that a financial disaster of historic proportion happened at the same year when boomers officially reached retirement age? On Feb 12, 2008, the first baby boomer Kathleen Casey-Kirschling, born one second after midnight on January 1, 1956, became also the first to receive a Social Security retirement benefit.

Boomers are strength in number, with a little help from postwar economic booms, and are now ready to retire. They are progressive, highly educated, and they have a sense of entitlement and optimism unlike all previous generations. They have amassed an amount of wealth not likely matched by following generations. All policies since the 50s, political or economic, are essentially made from the boomer perspective for boomers.

But the booming Boomernomics came with a darker side. It is no secret that the ultra American wealth is created via rising national debt, a strong US dollar as world currency, and the ability to wield its clout in garnering cheap resources from around the world. Each successful gain brings forth more wealth trickling down to make Americans more prosperous, and a stronger economy can repeat the same process to reap further wealth. This feeding-cycle has been happening for decades often at the expenses of other economies, and it seems the god-bless US has always risen above all challenges to emerge victorious.

Perhaps the fall of the the Soviets the mighty counterpart was the culmination for the righteous Americans, proven democracy and free market are what is working for America and right for the wold. But the 80s showcased the first of the challenges when the Japanese "shut up and work" attitude created a super-economy that rivaled the US, and Toyota became the poster-child of anti-Japanese bashing. Although Americans continued to upgrade their bigger and better lifestyle, there were obvious changes that moved farther away from the basics. Cheap labors were partly and slowly replaced by illegal immigrants for many jobs too menial and low-paying for the American youths, personal debts were rising to finance an increasingly expensive and materialistic lifestyle, national productivity shifted from basic manufacturing goods to become increasingly dependent on financial market and monetary policies, and Americans became increasingly reliant on cheap foreign imports. Up to now, the boomer-dominated politics have been resistant to change the easy-money spigot. The sense of superiority and entitlement persists, for as long as cheap oil and enough money support the urban sprawl, long commute, and job security, there is no issue important enough to change the comfortable lifestyle many see as the representation of the American ideals. Frugality and prudence is no longer the fundamental values, and in fact antagonistic of the "spend and waste" economy.

Entering the new millennium, Russia largely the former Soviets has recovered due to a booming oil industry, China and India with the world most abundant laborer resources are on pace to dominate manufacturing industries, and Brazil leads the emerging Latin American economies once thought fitful only for occasional market trades. Europe has not been lagging behind, and the united Union is now the world's most productive economy, relegating the US to second seat. Even Africa is breaking out of it perpetual poverty-stricken economies, with countries such as Ghana turning into a net producer much to the dislike of a meddling International Monetary Fund. The rest of the world, for the first time, is growing at the expense of the US economy.

Yet despite the the changing world, the optimistic and confident Americans held on to the same Boomeronomic psychic in belief of continuing prosperity. Over promised entitlements and benefits burden the system further, and rising debts riddle Americans underneath the wealth exterior - still there has not been much of willingness to reflect upon the needed change. The good time projected by boomers has entrenched into the American psychic too deep, and the belief in the supremacy of the US is taken on face value without adequate assessment and in the proper context. Generation X as well as Y with similar optimistic and entitlement psychic are facing a greatly different reality, most notably life has become too expensive beyond the reach of average young middle class'ers to start a young life with the same easy as their parents. America is now suffering from its own Boomernomics success, and arguably its negligence.

In perhaps the final Boomeronomic act, the US economic policy of the past decade switched to an overly heavy monetary stimulus, which, appropriately, also magnified its vulnerability. While even greater debts and risks may appear ludicrous in retrospect from the perspective of future generations, just about all gloated in easy money while the party lasted. Stimulating the economy with easy and easier money has turned into an addiction, and the easiest instant scheme for the politicians and the businessmen.

The heart of the US economy is still arguably strong, but the embedded flaws are emerging through the cracks. Ironically the well-situated boomers are the lucky ones likely to escape the consequence, but X, Y and later generations will certainly have to shoulder the burden. While it can easily be argued that the Boomeronomic values are not fundamentally representative of American ideals, the result of that admission will necessarily require a new construction from the later generations to steer straight again the political, economic and energy issues.

The Role of US in the New World Order

The US is still world's number one, but the rest of the world is visibly crowding into that position once-thought unshakable. Brazil, Russia, India and China, collectively called BRIC, are gaining in political and economic clout to which the even mighty US needs to take conceding steps at times. The US economy as a percentage of the world has shrunk from 30% in 1998 to 25% in 2007, and the expected continuing shrinkage has given rise to the "decoupling theory" that the rest of the world, in particular Asia and China, no longer needs a strong US economy to function independently. As a whole, the European Union has overtaken the US in nominal GDP, thanks in large to a stronger euro.

In 2007, Toyota Motors officially dethroned General Motors to claim the crown of the world number one automaker, much to the continuing chagrin in the heart of America that started in the early 80s. Boeing, another perennial US power house, has been facing strong challenges from France's Airbus, and Brazil's Embraer is the third largest plane maker and the dark horse to make more interesting the competition in the world airplane builder industry. The latest setback come from the unlikely source of US Air Force who awarded the $35 billion aircraft contract in favor of KC-30 tanker of Nothrop Grumman and EADS (maker of Airbus) for being "better perfomer" than the Beoing-build KC-135 it is set to replace. Perhaps these events are merely symbolic in nature with little immediate economic consequences, nevertheless they are indicative of US businesses loosing a little bit more of edge.

The 2007-08 credit crunch exposed a great vulnerability in the core of the US financial system - too much debt, too much leverage and too much risk. ???To the dislike of Congressional members, the sovereign wealth funds from Abu Dhabi, China and Singapore, have dished out multi-billion capital to help the like of gargantuan US banks like Citigroup and Morgan Stanley. Brazil is now a creditor of US and its Brazilian real is one of strongest currencies. In an ironic role-reversal, the strong-arming US economy is now the prey being caught by the cash-loaded emerging nations at a moment of weakness.

More than about maintaining world supremacy, the greater concern is about functioning correctly in the new world order which the US alone can no longer dictate. Once dominant and supreme, the US will be forced to face the new reality and to reassess its changing role as the world's reigning number one.

The Emergence of New US Lifestyle and Infratructure

Although social changes have always been a natural part of human progress, but the latest oil price surge is bringing about a change that just seems uniquely different. Rather than issues of human rights, ideals or spirit, it is simply about a limited natural resource dictating the necessary adaptation. No logic, clever scheme or strategy can maneuver away from the eventual decline of oil.

Human beings became dependent on oil, and thus will have to find a way to prepare for the change without it. Before the end-of-oil alarm sounds too loud, the burden of escalating cost of this precious fuel is the immediate backlash.

For decades the prospering middle class has grown accustomed to living in the suburbs and long commutes, and the popularity of SUVs in the past decade underscores the belief that affordable gas will continue to be the norm. But the prelude of the change came abruptly at the beginning of this year, when the US financial crisis triggered a price run in the commodity. Crude oil broke above $100 per barrel and marched nonstop to $130 - the national average gas price reported by AAA stands at $3.83 per gallon just before the Memorial weekend.

Our government is no longer able to flex the political muscle around the world to import cheap gas entitled to us. Interestingly, US still has one of the lowest gas price in the world, but it is our lifestyle and the long-distance commute that is punishing us for the choices we made.

As usual the king of the hill is never willing to concede the change - the big oil and the auto-industry are resisting, and continue the usual lobbying to maintain status-quo. But falling they will for certain and the auto-industry is already ailing, forcing to abandon gas-guzzlers over the more fuel-efficient models for the survival of its business. The rising gas prices have impacted the behavior of the motorists, and SUVs are the latest big ticket discretionary to join the long list of retail graveyard.

The big oil still makes record profit, and may continue to do so until the last drop after which a sudden death may become of oil industry. Whether that is 50 or 100 years from now, the current reality of the high cost hitting the wallet is what drives the change in consumers.

Hybrid cars can only be a part of the solution. The continual high cost of living will eventually make owning a car economically unsound regardless of its fuel-efficiency. A "Green Tightening" will result in opposite of the urban sprawl.

The change will be slow and painful, but will necessarily come.

The Financial Monster Will Spawn New Financial Species

The policymakers are doing all they can, risking their reputation against growing angry constituents. Dollar is devalued, oil is kept high, rebate checks are out, FED is propping up the market and more bailouts are coming.

The health of the ECONOMY has become the central issue in 2008, dominating the platform of presidential candidates.

When all pieces are placed together, one can only shudder to contemplate the seriousness and the magnitude of the financial crisis. They are doing so much, and doing so in panics, churning the free-money printing press with unprecedented speed. ACT 1 the aggressive rate cuts and liquidity measures from supposedly omnipotent FED may are seemingly and unbelievably dwarfed by the credit monster; Act 2 the $300B stimulus rebate program appears to be falling into a dark abyss without so much as a making a sound, and now in ACT 3 the $300B Congressional housing-bailout effort is deemed likely dead on arrival. Yet we are probably only one-third complete in the rippling effects, a view also supported by Warren Buffet, George Soros, Bill Gross and others sharp-eyed gurus.

On May 21st, 2008, the Inflation Genie roared its way out of the bottle in a convincing fashion- the core-price inflation gauge the consumer-price-index (CPI) rose twice more than expected to 0.4% in April. Now the FED, Congress and the White House really have their hands full. In addition to an already high gas and food prices that have been hitting consumers and businesses with little relief in sight, the rising wholesale price puts another damper on the attempts of the policymakers to get a handle on the slippery credit crisis. Too much money dumped into the system too fast has consequences that simply cannot be swept under the rug, and now the consumers and the entire economy are necessarily bearing the grunt.

It appears that the credit monster has been playing musical chairs with the panicky policymakers, morphing away from clever financial contraptions designed by PhD economists, turning itself up elsewhere in different forms. Ironically it is the easy-FED and the gluttonous self-serving Wall Street who had nurtured this beast now potent enough to take down the US economy. For years they have been too complacent and too negligent of the risky financial steroids that also fed the beast. Greed and irrational exuberance took over for far too long.

Here is a scary thought. Can it be tamed?

For some fleeting moments the market appeared to have regained some control, until the inflation genie delivered the surprising blow to knocking down the market for 200, 227 and 146 points down for three successive major losing days to send the investors home for the long Memorial weekend.

The Doom and Gloom crowd is out in force again, with good reasons, they claim. What makes this time around a little more interesting as well as much more frightening is that many top thinkers and decision makers, FED chair Barnanke included, concede the possibility of a disastrous outcome.

Have Big Money players escaped the doom this time?

In his latest book "The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means", George Soros expressed his same critical view of the structure-finance with a little more updated insight:

"Both the financial markets and the financial authorities have been very slow to recognize that the real economy is bound to be affected. It's hard to understand why this should be so. The real economy was stimulated by credit expansion. Why should it not be negatively affected by credit contraction? One cannot escape the conclusion that both the financial authorities and market participants harbor fundamental misconceptions about the way the financial markets function. These misconceptions have manifested themselves not only in a failure to understand what is going on; they have given rise to the excesses which are at the root of the current market turmoil."

Housing slump is expected to worsen, unemployment is expected to rise, recession may be stronger then expected, inflation genie is gaining strength, and oil and food cost are hitting consumers and businesses with little mercy. The Monster is standing tall and strong amidst all.

It is market Darwinism in its fullest glory. The long-time roaming and dominating Wall Street dinosaurs and related kins have shaped the financial ecosystem into their own personal playground- yet the very same comfort eroded away the basic defensive instincts to survive drastic changes. Little doubt this financial meteor will wipe out those financially unfit, and the era for new financial species may soon begin.

The Ailing US Leadership

As if it is not already enough of a show to that oil executives were summoned to be grilled, the House, in another act that defies logics and rationality, voted 324 to 84 to pass a legislation, commonly referred to as Nopec, to sue OPEC as a monopoly for price gouging under the Sherman Antitrust Act.

The five oil titans, shown left to right in the photo, BP America Chairman Robert Malone, Shell Oil President John Hofmeister, Chevron Vice Chairman Peter Robertson, ConocoPhillips Executive Vice President John Lowe and ExxonMobil Senior Vice President J. Stephen Simon, showed their own grit by firing back that government intervention can only make the matter worse, and took the opportunity to press on Congress to allow more domestic drilling, such as in the Arctic National Wildlife Refuge.

There is no shortage of commentaries and editorials labeling the latest acts as "hypocrisy", "idiocy" and other descriptive nouns. It is of wonder to anyone what the House think they may be fooling with this asinine song and dance with the big oil executives, and why they would even think they have the policing authority to subject a world organization operating on non-US land to American justice for not giving the entitled cheap gas to the US motorists to fill up their SUVs. Ironically, US champions the cause of free market.

The arrogance is nowhere near as embarrassing as the stupidity and the ignorance. Our leaders should look at themselves in the mirror, and really understand who are most deserving to be on the stand.

But maybe, there is another explanation better reflects the political reality and closer to the mind of the 324 representatives.

That is, our leaders have become impotent to effect any more changes. NOTHING, other than to put on the only show they know how, point the fingers, and sing to us voters how they are still the people-caring powerful leaders with the same clout as ever to subject the rest of the world into submission.

This is after years of military operations in Iraq costing taxpayers trillions, as well as the reputation and the moral leadership of the US for the rest of the world, in our fooled-on-one plan to go after the world third largest oil reserve.

During a Democratic debate, Barrack Obama responded to John Edward and Hillary Clinton's criticism of human rights issues of other nations with the rebuttal "US has lost its moral leadership."

Policymakers have exhibited even poorer leadership domestically, examplified by a failing system in the aftermath of Katrina, and for turning a blind eye to a housing bubble and Wall Street's ethic-less profit-frenzy that escalated into an economic disaster of historic proportion. In a continuation of this foul leadership, the policymakers opted to awash the system with more easy-money hoping to stabilize the system in the form of even more easy capital and government bailouts, thus transferred the burden to middle class consumers once again with inflation and expectedly higher taxes that will eventually come. The middle class just became a little smaller and its burden just grew a little heavier. In stark contrast those ultra-rich involved in the reckless greed escaped one more round of a much needed and deserved financial punishment.

They are still citing the natural market cycle and expressing the same confidence in the strong US economy to recover. Yet something underneath is clearly rotting away. Even when the oil under the Iraqi sand starts to flow in the westward direction to save the US economy back to even greater glory, our leadership has already become a lost art for far too many years. The transparent strong-arming oil-dependent regime does not bode well with basic human spirit, and it is a false belief that a strong economy can sustain without trust. They are failing to understand that leadership more and more.

The policies which now intertwine nearly exclusively the national security and military operations to oil have created misguided priority. Sadly but truthfully, the US is providing more convincing support to the testimony that history repeats, and that US is no more different in its use of power and politics than any other once-strong superpowers throughout history.

The 2008 Presidential Election will show the choice of the American people for which direction US should take at this crossroad.

Thr US Financial Crisis of 2007 and 2008

The snowballing came swiftly in July of 2007 when the collapse of two billion-dollar Bear Stearns hedge funds shocked Wall Street into panics that rippled for seven months or so, appropriately marked by the end of Bear Sterns itself in an arranged bailout deal sold to JP Morgan backed by a spooked Federal Reserve on Monday March 16th, 2008. The initial negotiated price was $240M, or $2 per share, a far outcry from the $170 high in Jan, 2007. JP Morgan later raised the price to $10 per share to ensure the merger and to appease highly displeased Bear Sterns share holders, and CEO James Dimon looked like the smartest man on Wall Street. In contrast, the former Bear Stearns CEO Jimmy Cayne, stepped down in Jan, 2008 shortly after the fiasco, liquidated his 6 million shares stake for $61.3M in a concession gesture of the end of the company that he had been a part of for nearly 40 years. The tenure of the hapless new Bear Stearn CEO Alan D. Schwartz lasted merely 2 months.

I remember very well that captivating weekend.

It was very clear to me that Wall Street follows a system of lies and deceits for as long as it can get away with. At first the incident were claimed to be isolated, then the junk-rated subprime-based securitized assets vanished from the market, followed by all subprime-based assets of all ratings, then the short-term commercial papers were jammed, which crushed big banks' secretive off-balance sheet structured-investment-vehicles (SIVs) despite Treasury Secretary Henry Paulson's attempt to built a rescuing super-SIV, and the chain effect went on non-stop to commercial real estate market, supposedly-safe municipal bonds, etc, and it hasn't stopped.

These days, leveraged-buy-out loans and auction rates are permeating through the headlines, along with credit-card debts default, student-loans, etc. It appear that there is nothing that is not in question. Vellejo, California became the first casualty for US municipalities embattled by housing bust, lost revenues and the credit crisis. Prime mortgage defaults are also edging up higher around the nation, and that strikes fear into holders of prime mortgage securitized assets. They said that institutions can face continuing rippling effects, and money-market, pension and bonds can face more losses. So far banks and institutions have written down $300B of losses, and while some cry the end being near, there still remain over $700B of assets to survive the crisis.

I watched all these in total amazement as well as bewilderment, never heard of just about any of these financial instruments - SIV, ABCP, MBS, CDO, CLO, CFO, and on and on. The media and the commentators use phrases such as "the contagion has spreaded into...." to express the view that isolated causes are the root of the disaster that went out of control.

Perhaps MBIA, ABK etc the boring no-one-noticed bond insurers provided the greatest comedy of during the crisis, desperately fighting to keep its triple-A rating from the rating agencies Fitch, Moody's and S&P, after having squandered billions of investment capital in the high-yielding but toxic securitization. William Ackman of Pershing Capital built a little legend for himself for having gone after MBIA with relentless vigor. Laughably, as their stock price hovering around the low of $10, down from $70+ just 7 months prior, MBIA and ABK survived the rating blow and managed to keep its AAA rating from Moody's and S&P, who themselves are the targets of scorns and criticisms.

After months of following the news and reading anything I can get my hands on, I have a better grasp of reality - the ENTIRE FINANCIAL SYSTEM has been polluted and abused beyond reasons by anyone who had access to maneuver within the system, namely the bankers, the lenders, the rating agencies etc, and the fire contagion simply started at the weakest point. With that view, I have little to doubt that the contagion will necessarily spread to where ever funny-money are hiding.

The Washington bailout attempts add one more interesting different dimension with a political tint. Beyond the Bear Stearns deal, the FED resorted to openly providing virtually unlimited capital at very generous terms to financial institutions cling on to capital, and Congress, not to be outdone, is cooking up its own version of bailout rescue disguised in a housing-bill, which, fortunately, President Bush vowed to veto on the premise that it bails out the irresponsible.

But I always know of the simple consequences for the ordinary citizens, voters and consumers - inflation and higher taxes are coming for certain.

Once again there is no magic balance sheet that does not required some payers - it will be us the tax payers having to pay for these bailouts that is already adding up close to a TRILLION dollars, that is one-thousand billion dollars, or one-million million dollars, that is 1 followed by 12 zeros. Imagine gathering up the wealth of 1 million millionaires; or we can pay $30K per person in the US.

The financial landscape has warped, perhaps for the better back closer to the norm, and the "free-money" era has ended with a loud thud. There is little doubt that there will be lots of digging itself out of the pit for years before new norm emerges from the mess. All the while we should expect the usual suspects, notably taxes and inflation, to reign over the market and the consumers in this time of uncertainty.

After the recovery, we should expect a gentler, nicer and more humbled Uncle Sam and Mr. Wall Street.

If not, expect history to repeat, and get even worse.