Monday, July 7, 2008

An October Surprise (Part Three)

In my opinion, the only way that a truly historic crash in stock prices, house prices and all the associated anger and fear associated with a collapse in social mood towards negativity, is to have most of your population living in a state of supreme denial or have their mental "wetware" programmed and maintained in such a way that the masses behave in a manner extremely divorced from the underlying reality. The crash comes with the CollapseShock - the recognition that the absurdities that were only news stories or tiresome rants by "permabears" were actually reality.

"Every time I saw a car towing a motorboat this holiday weekend, I wondered what was going through the head of the towee. Did they have a sense that darkness was falling on their careers in motor sports? Did they have an inkling that an oil-and-gas crisis is upon us and just not give a shit? Or were they just going through the motions, following some implacable rote programming induced by, say, forty-odd years of TV addiction and a diet based on corn-syrup byproducts?" - James Howard Kunstler, 7 July 2008

I have harped and will continue to harp upon this fact. I think Kunstler is closer to being correct than most any economist you can name. Mood makes the news. You can take the exact same events and play them at different times in history and depending upon the temper of the times, you will get vastly different responses.

"There is a tide in the affairs of men, Which taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat. And we must take the current when it serves, or lose our ventures.” - Shakespeare

Most people behave as if this was 1985. The tide was rushing back in for America back then. Most, but not all, look out over the horizon towards what appears to be a sunny dawn, when in fact they are waking up after a week-long bender, still drunk but feeling the onrushing hangover, standing on a platform with rotten supports, looking at the sun setting on an era of consumption and greed unlike anything witnessed in all of American history.

Sure, people acknowledge there are lot's of problems, but most, I wager, will tell you that "things will work out." Which is true - but not in the way the probably expect. Strike up a conversation with five different people over the course of the coming week. Start off with gas prices and move the convesation towards just the headliner Riders of the Apocalypse headed our way - an insolvent Federal Government, a collapse in credit tied to the crashing house market and Peak Oil. Then try to get one single proactive way to deal with any or all of the problems from them. See what happens.

There are plenty of people amongst the financial and political elites who will continue to tell you that all is well.

...Strategists at Deutsche Bank, Lehman Brothers and UBS are the most bullish and expect the benchmark for American equities to climb to a record in the second half. Binky Chadha, Deutsche Bank's New York-based chief strategist, says the S&P 500 will end the year at 1,650, up 29 percent from June 30.

Ian Scott, Lehman's global strategist, is predicting an advance of 27 percent to 1,630, while David Bianco at UBS says the index will increase at least 25 percent.

The S&P 500's rebound "is going to be one of the greatest roars we've seen,'' Bianco said. "The market has way too many fears baked into the valuation right now. The fear out there is the earnings are about to collapse and interest rates are about to surge on inflationary fears. Neither is going to happen...''
- from Bloomberg, 7 July 2008

You might want to write down that comment from Messr. Bianco, who neglects to mention from where these profits are going to come, or from whom he is buying his crack cocaine. The consumer, for the first time in decades, is watching access to credit contract. No more housing ATM. HELOCs are drying up. Credit cards are pulling back.


October 2008

The DJIA was at 7,253.23 when they shut down trading for three days. A "National Cooling Off Period" is how the shiny and well-scrubbed media flacks described it to the news-readers and press-release printers.

The fact that this locked up the banks, along with cascading effects into the bond market was ignored until the banks had to be shut down as was all trading in U.S. Treasuries. The bank decision came as a surprise to about 45% of the population - the ones who had believed all the pronouncements from the Fed that no such action would be taken. The others, the cynical ones, had pulled out a little cash just in time.

No one was sure how to handle the checks for rent, taxes, food, car payments (the ones still making payments on their cars) and the million transactions a minute that kept Consumer Nation humming along. Renters or house "owners" could prove to their landlords or the banks that the checks were good (well, most of them, at least...) by showing them a bank balance. But the checks couldn't clear. Some landlords chose to bounce the checks and demand cash. After the first reports of assault and battery, such demands died down.


The First Mover Disadvantage

There were a lot of "crazy" plans talked and about and a few even implemented as October bled its way into November. The markets reopened, but with a microscopic trace of previous volume and tight controls on the volatility allowed by exchange rules. The trend was down, with a week or two here and there lit up by a ferocious rally, which would only flame out in a burst of selling. Every rally that flamed and died eliminated more and more of the permabulls, until finally, on CNBC, there was talk of the "death of equities." Few noticed Warren Buffet began doing a few quiet deals as the value of the DJIA stocks vaporized down into the low thousands...

The downturn was manna from heaven for some groups - at least at first. All these ex-hippies and Peak Oil doomsters were ready to jump in and build up "sustainable villages" and "resilient communities." In several communities, activists took over manufacturing plants or gasoline stations, vowing to start them back up as cooperatives just like what happened to Argentina back in the early 2000's. With most of the facilities in some stage of foreclosure, the legal battles turned into street fights as police went in to evict the squatters.

Food distribution was a serious problem. Many called for "victory gardens" and "urban farming." The fact that it was late fall caused many of the more aware to sober up quickly. It was going to be a long road from seed to table. And winter was just around the corner.

The bando problem grew exponentially. Squatters took over entire subdivisions. A few exurbs were completely taken over and entirely new communities sprung up in a week. With gasoline rationed after the disastrous fallout from the Israeli bombing campaign in Iran, these new communities were able to get established, complete with greenhouses, generators and makeshift walls to guard against the the various gangs that couldn't make a living slinging drugs any more. The bloodshed that would follow in the spring as the banks and private equity groups that were the legal owners sent in mercs to reclaim "their" property from the bandos was still a distant storm on the horizon. The mercs were mostly unopposed in those first waves. But that was before the troops started returning home from Iraq in large numbers to an economy in shambles.

Then those former exurb communities became hubs of resistance instead of easy pickings. When a group of ex-Marines routed a force of Sherriff's deputies and mercenary troopers outside of Denver using hunting rifles, blackpowder IEDs and tactics learned from the long years in Anbar province, the bankers and private equity boyz began to realize that this wouldn't be quite like the Great Depression after all.

The devastation was too vast. The populace too angry. And they all had guns. Lot's of guns.

It would a year before Texas and Ohio took the lead in legalizing the squatters, proclaiming the former ex-urbs the new frontier as part of a big micro-farming and "back to the land" push by governments. The fact that such a move was well underway already made the decisions by the legislatures easier than the might have been, especially since most of the PAC money had dried up long before and there were fewer special interests to piss off.

"There's something out there waiting for us, and it ain't no man." - Billy Bear, Predator, 1987

Billy's right. It's a bear market. A grizzly. The meanest bear to strike America since the War Between the States.

Are you ready?

I'll reiterate - this hypothetical October Crash is not the end of the world, just the end of Consumer Nation, which may feel like the end of the world at first. Until you, and me and our neighbors build something better on the ashes, one community at a time.

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