A Nightmare On Main Street

The Freddie Krugers on Wall Street are again looking at their old nemesis--volatility. The market fell three consecutive sessions, with a dip below 100 points on one occasion, then suddenly rebounded with a nifty 200 point rally on Thursday, Oct 29th, spitting in the face of the dread anniversary of the 1929 crash. As if to apologize, however, it promptly gave back all those gains the following day with a 250 point drop on Friday. This is the sort of volatility that characterizes a market that has played out all it has to give on the upside, and has definitely topped. The stunning persistence of the "bear rally," up 62% from the bottom at one point, has defied all logic. While the traders were bidding up prices, the companies that actually issue the stocks were all busy laying off workers. We lost 2.5 million jobs during the rally, creating a nightmare on Main Street that Wall Street will eventually have to sleep with as well.

All the "fundamentals" scream that this market is wildly overbought, with P/E ratios above 140 on the S&P 500. Insiders have long since taken their profit from the rally and made a stealthy exit. The smart money went to T-Bills or commodities, or moved to cash or gold in spite of all the gloomy talk about the dollar.

Truth be told, we are still in the early innings of a deflationary depression. In spite of trillions thrown at the banks, credit and lending continuies to contract. The money is not reaching Main Street, and the phony sales rally in housing and autos was entirely created by free cash from Uncle Sam in the $8000 tax credit and 'cash for clunkers.' Housing and auto sales will now resume their crash. This market rally will eventually bow to reality and stocks will be forced to reflect the reality of the painful fact that companies are going to have a harder and harder time actually selling things to a consumer who is out of work and deep in debt. As markets for products fail, profits will thin, and the government simply cannot continue to shovel free money into the economy to produce a manipulated positive GDP.

The nightmare we are now beginning to clearly see is Deflation with a capital D. Prices will decline, but credit will contract even faster. Incomes will eventually erode as well. The velocity of money in the economy is already perilously slow. Cash is king, and will be for the foreseeable future, no matter what the dollar does, yet people will just not have much to spend. The dread specter of deflation simply cannot resolve until the massive debt at every level of our society is somehow accounted for. And if banks think they have a problem now with people walking away from over-bloated mortgages and defaulting on their credit card debt, they ain't seen nuthin' yet.

Th Nabob Hath spoken.

Main Stream Blues

NBC, that paragon of financial advice, has finally begun to reap what it has been sewing this last year. They couldn't call the onset of the recession, then foolishly cheered any sign of "green shoots" they could find, and stupidly embraced the recent pronouncement that the recession was "over." Their coverage has been consistently wrong-headed, and it views the world exclusively through the lens of the wealthy "investor" class, forsaking Main Street and Average Joe. As real unemployment mounts up to the 20% mark in many states, men and women in the unemployment line, and Boomers watching their retirement portfolio wither away, have lost their enthusiasm for the quick stock trade and pithy advice on how to "play" the market. There's not a lot of fun and play going on out there in the real world.

The result? A massive drop in viewership with shows like Squawkbox down well over 60%, Street Signs off 50%, Closing Bell down 57%, Fast Money down 60%, Cramer's Mad Money and Kudlow's Report down 67% as well. Squawk about that for a while!

Viewers seem to be fed up with the nonsense, and they are voting with their feet. People have clearly perceived the vast disconnect between Wall Street and the Main Street economy. In fact, the whole notion of shows titled "Fast Money" and "Mad Money" is offensive in this economic climate where so much suffering plagues the nation, with record foreclosures, massive job loss, and banks like Citibank's throwing salt in the wounds with nifty 30% interest rates on credit cards. This mindset of making a quick buck is what led to all the rampant speculation in housing and stocks in the first place, causing the inevitable crash we are now dealing with. NBC is well behind the curve with it's show spin. It's as if the Home and Garden channel were still airing "Flip That House" in their prime time lineup.

TV has never been about providing its viewers with real useful information, or truth about the world, for that matter. While not the worst of the three big networks, (FOX News wins that one hands down), the NBC clan must eventually realize that Kudlow's myopic optimism, Cramer's buffonery, and all the other Squawking by a legion of analysts that are consistently wrong can result in nothing but further ratings declines if they keep at it. Viewers are already fleeing in droves. Advertizers can't be far behind. The axe that cuts non-performing TV personalities cleanly across the throat is sure to follow numbers like those NBC has turned in recently. It serves them right.

Here's a novel idea. Replace all these bothersome TV personalities with people who actually know something, and tell the truth. Imagine a network where the key personalities were MISH Shedlock, James Kunstler, Karl Denninger, Barry Ritholtz, Charles Hugh Smith, Martin Weiss, Jim Quinn, Ilargi and Stoneleigh of Automatic Earth, and Juan Cole on the foreign desk? Read these blogs daily, and a handful of others, and you might actually learn something about the economy, the real causes of the crash, and what we might do to correct the whole mess.

Why Housing Is NOT Recovering

The Case Shiller index ticked up in recent months, showing that the average price decline for housing in 20 key cities has slowed, and in some cases reversed. This has been touted as a housing "recovery" by the mainstream media. But here are four reasons why the pain in the housing market is far from over.

1) Inventories of unsold homes remain very high. There are presently 8 months worth of housing on the market, and another 12.9 months housing still OFF the market, not being actively listed for sale. This is two years worth of inventory that remains unsold.

2) If that were not reason enough, there is another huge "shadow inventory" of housing in foreclosures that have been held in abeyance by the banks. There are numerous stories of people who receive initial foreclosure notices, but end up remaining in their home for months, many over a year or more, making no payments and living essentially rent free. The bank is reluctant to foreclose and go to the short sale because of the fantasy accounting system they use which allows them to carry the home as an asset at its initial loan value, even if the loan is in default. The moment they complete the foreclosure, however, the house reverts to its real market value, which creates a big loss on the bank's books. For this reason, there are some seven million homes being held off market in some stage of unrealized foreclosure. This extra bad inventory of unsold homes will all hit the market at rock bottom prices, dragging comps down in the process and further depressing prices.

3) The "Pain Pipeline" that has caused all these foreclosures is far from over. In fact, we are presently in a convenient trough in the Option ARM reset cycle, which is a key factor that has been supporting these better housing number Case Shiller reports. Look at this chart. The months ahead will see us return to loan resets equal to or greater than the big sub-prime resets that nearly swamped Wall Street and pushed the banking system to insolvency. The reset cycle will begin increasing from this point, and not peak until 2011.



4) The real housing market is flat out dead. Current sales are being driven by the $8000 government tax credit for first time buyers, and bottom feeders with cash who mistakenly think real estate has indeed "bottomed." It has not. Withdraw the government tax credits, or the FHA guarantees for housing loans these days, and you would have virtually no real mortgage activity in this country. The government cannot continue to underwrite the entire housing market. At some point the patient has to be taken off life support. The very fact that this government support is essential now tells you that the real market for housing is not recovering at all.

This, added to the fact that banks are very reluctant to lend these days, means we will not see a return to a robust real estate market for years to come. In fact, houses are now at 1999-2001 price levels. Expect housing values to decline further in 2010 and through 2011.

Showdown In Chicago

A big rally is underway in Chicago for Oct 25-27. To quote the organizers of Showdown Chicago: “The same financial institutions that caused the economic crisis and took billions in taxpayer bailouts are back to earning incredible profits. Meanwhile, Americans face shrinking pensions, rising foreclosures and unemployment, state budget cuts, predatory lending, outrageous overdraft fees, and sky-high credit card interest rates. The American people want oversight, accountability and common-sense financial reform NOW. This is the classic David vs. Goliath fight, with Wall Street spending millions and millions on lobbying to defeat reforms that would protect the American people and our economy.” Here’s the link.

Thousands marched carrying signs reading: SAVE OUR HOMES - PUT PEOPLE FIRST - STOP THE ROBBER BANKERS - HOLD BANKS ACCOUNTABLE. Of course, CNN, MSNBC and FOX didn’t cover the protests. They had more weighty news to deliver such as: “Polygamist Sex Trials Set to Begin....Man Arrested With Half a Beard...Bow Wow Pups Don Halloween Duds... " (All front page news items on MSNBC). The #1 story on FOX was about a bogus meteorite strike hoax in Latvia. "The New" CNN web site, (brought to us by the new 2010 Lexus), featured a video about the "Mad Men" TV show front and center on their home page. Even the home town Chicago Sun Times ignored the protests and led with a story about city traffic lights in huge front page lettering, and some nonsense about Michael Jackson. Chicago Tribune led with this story about city demographics: "Newly developed personality maps indicate extroverted people cluster on the South Side, while those with neurotic tendencies live to the north." (???) Other top news items featured were: "Chances of Receiving A Parking Ticket Shoot Up...Boy Dies After Lighter Accident...Grandmother Recalls Last Time With Teen Shot In Head." But tucked away beneath these there was a glimmer of hope: "Suburban Bank Charged In Money Laundering Scheme." And in a corner on MSNBC was: “US Eyes Reining In Too Big To Fail Institutions.”

Don’t hold your breath.

Is it any wonder that readership in the nations big newspapers is plummeting, down another 10.6% nationwide in the last six months? They waste our time with nonsense stories while ignoring vital issues that we, as a nation, must face and fix if we are ever to recover from this "Great Recession."

Imminent Systemic Trouble

My post title today comes from economic blogger Karl Denninger, who recently reported on "gotcha" letters that are now sallying forth from embattled Citigroup to raise interest rates on credit card accounts to roughly 30%. Denninger's take on this is that it is a self defeating move on the part of Citigroup, and will cause cardholders to either 1) transfer any balance away from Citigroup instead of accepting this onerous interest rate, or 2) piss off the cardholder so much that they will run their card up to the max and then default. He dismisses the notion that the bank is simply getting out in front of imminent rules changes by this move and instead sees it as a whisper of "imminent systemic trouble," the sort of systemic trouble we saw last fall when credit flows froze up and Paulson was screaming about the end of the world in congress.

Even as President Obama announces a move away from bailout programs for the big banks, the intrepid Mr. K isn't buying it. He sees more pain in the pipeline, and points out actions being taken by banks that seem suicidal--unless they have foreknowledge of something about to occur, which is what Denninger implies. What's up?

I recently deposited a couple of checks at my bank and took a small "less cash" on the deposit. I was quietly handed a note, in fine print, stating that as of Monday, Oct 26, such "less cash" transitions will no longer be possible. The checks have to be deposited and go through a clearing period before the money can be accessed. Apparently the banks smell something in the air and are getting worried about the checks we'll deposit with them from other banks. I'll tell you what they smell, and what Denninger alludes to as well--the odor of insolvency.

They made their bed, of bad securities bets, wild leveraging, insane derivatives exposure, usurious and punitive credit policies, and unfortunately we have to sleep in it now. And they have the gall to brand you and I with their little FICO scores to see how well we all follow their rules. Well, Denninger put out calls to high FICO folks to see if they were also getting slammed with that 30%, take it of leave it, interest rate by Citigroup. They were.

Are we seeing yet another sign that the banks will soon be forced to face up to the truth of their own insolvency--a self-created mess that has wreaked havoc in our economy? Yes, my friends tell me I rant too much about the banks. Mea culpa for taking these issues on in my blogs and articles. Sorry, but they are simply the salient issues of our day. Like most people, I've suffered my own measure of bank inflicted pain in the past but, as Michael Corleone might say, "it's not personal--strictly business" when I write about the shenanigans of the fat men with their cigars. You can read my latest at this link.

So are we headed for more for "imminent systemic trouble?" Of course we are, for truth is truth and, as much as the Fed, Congress, the Treasury Department and the off balance sheet wizards want to think otherwise, the big banks remain insolvent. That fact will manifest. It is indeed inevitable.

This Writing Life

I had the opportunity to attend the 100th anniversary meeting of the Central Coast California Writer's Club last evening, an eclectic band of 30 to 40 diligent writers all eager to celebrate their craft and share with others. A number of authors had their work on display, "between the dignity of two covers," as we say when it finally reaches book form. Others were eager to read brief passages from their material to a friendly audience. (All writers love to read their material to any captive audience they can find.)

Face it... you don't get much appreciation as a writer in this world. It is very difficult to "break into print" with a traditional publisher, and the new options available with "Print On Demand" leave all the cost and know how of marketing to the writer. Authors realize that they must suddenly become writer, editor, publisher and marketing wizard all in one, which is why I assist new authors with services like editing, book block and cover design, and web site design so they can showcase their baby to the world.

With tens of thousands of new books flooding into the market, getting sales isn't easy either. But brother, little moments like this club meeting reminded me of the wonder and magic that one gets swept up in when they romance the language and get absorbed in a major writing project. I have written many novels myself, with six of them published, so I know how one can vanish into that timeless space at the keyboard where, as Annie Dillard wrote, the writer labors to "magnify and dramatize our days, illuminate and inspire us with wisdom, courage, and the possibility of meaningfulness, and press upon our minds the deepest mysteries, so that we may feel again their majesty and power... What do we ever know that is higher than that power which, from time to time, seizes our lives, and reveals us startlingly to ourselves as creatures set down here bewildered?"

This night's offerings came from breathless writers rushing through four minute reading segments on a wide range of topics: inspiration and finding one's genius in metaphors, chronicling world travels, relating Asian cultural mores, visiting a Ziggurat in Iraq, bungee jumping from the space needle in Seattle and catching a robber in the process, struggling in love with a mate doomed by cancer, fighting off a mountain lion at Ft. Ord, recovering from a stroke to find a new life, and finally, relaxing at the Big Sur Inn, where each room includes a journal for guests to leave their thoughts, muse, reflections.

The writers used every last second of their four minutes, some so excited to be reading that they continued on well past the timing bell. It was a good time of food, fellowship and creative fun. I even won a raffle prize! :)

Now... about that next novel...

The Foxes Guarding the Hen House

Another fox has been selected to guard the Hen House. I'm speaking of Adam Storch, a 29-year-old former employee in Goldman Sachs Group Inc.’s business intelligence unit, who has just been hired as the Chief Operating Officer of the SEC. I guess the folks at Goldman Sachs, who received $64 billion in public funding, which they just used to finesse a $10 billion in revenues, can get on with "business as usual." Storch joins all the other former employees of Goldman Sachs who have held key government and regulatory posts, like Hank Paulson, former Goldman CEO and US Treasury Secretary, and a host of others. In fact, it would be hard not to find a former employee of Goldman Sachs nested in the heart of any key government or regulatory agency these days. There have been numerous articles written on this subject, so the curious may consider the following links:

How Goldman Sachs Took Over The World (The UK Independent)

The Guys From Government Sachs (NY Times)

Does Goldman Sachs Run The Government? (Washington's Blog)

And you can Google up the rest if you are so inclined. The point of all of this is obvious. There is an entrenched power elite that pretty much runs everything these days. They have so much power that they make sure it continues from one generation to the next, with key operatives occupying essential corporate and government positions. This is no "conspiracy theory," it's just the way the world works. Orwell said it best: "Some Animals are more equal that other Animals." But when has it ever been otherwise? It is simply our modern day equivalent of dynastic rule, only instead of blood lines we select our big chiefs based on financial connections.

What should be also obvious about this is that all the high sounding talk about democracy and the land of opportunity here in the US is basically a myth. It makes us feel good, like a bedtime story told to kids each night. We make a big deal about it on July 4th while we are watching fireworks and stuffing our mouths with hamburgers and hot dogs. Nobody much thinks about how Goldman Sachs used $64 billion in public funding to make a train load of cash so they could do it all over again next quarter. Americans may as well write "Goldman Sachs" on their next check to the IRS. But most of this is beyond the awareness or concern of most Americans. Too much thought about that would just give them heartburn. So the world goes merrily on.

Occasionally a story breaks, like the appointment of a 29 year old kid from Goldman to a powerful regulatory post overseeing the activities of investment firms like...Goldman Sachs. (???) This just passes quickly through the news pipeline with a few complaints from bloggers and an occasional journalistic outcry from a newspaper. Otherwise it's just business as usual. It gets lost in all the other bewildering stories of the day: like the exemption given to 8000 of the 8200 US banks by the House Financial Services Committee--they will be exempt from oversight by a new agency created to protect consumers from abusive or deceptive credit cards. The lobbyists are quite happy with that little victory. And curiously, next comes First Premier Bank of South Dakota, now issuing credit cards with an annual interest rate of 79.9% (No typo...that's a whisker under eighty percent). I guess they always did things big in South Dakota.

He that hath an eye, let them see.

About That Fire

It should be clear by now that the decision has been made by the powers that be. It is over, decided, a done deal. The basic choice was, for those in charge, a simple one. The men that now run our country do not hold forth in the Oval Office. They belly up to their desks at the Treasury Department and the private consortium of banks we now call "The Fed." They were born and bred in the banking system, made their fortunes there, and now are entirely beholden to the industry that spawned them. It is therefore no surprise to find they have decided that the large financial institutions where they cut their teeth must survive as the basic pillars of our economy.

Think of JP Morgan, Citigroup, Bank of America and Wells Fargo as four great steel beams at the core of our World Trade Center economy. The investment banks like Lehman, Bear Stearns and others were the truss system that was strung between these four great pillars. All the other smaller banks, thrifts, and S&Ls are like the floors of this great financial edifice. Now, when the first subprime airliner struck the system and ripped apart three of the four major investment houses, immolating them in a thousand degree fire of overleveraged securities, Custodian Hank Paulson, ran to congress in a panic and said that if something wasn't done to put out this fire the central core pillars would collapse and the entire building would come crashing down.

It was therefore decided to do whatever was necessary to prevent any of these four large banks from failing. They were simply deemed "too big" to fail. And what was done was one of the greatest exercises in duplicity, denial, and sleight of hand the financial world has ever seen. Put simply, all the regulations governing how assets were valued and accounted for were suspended or changed so these big banks could value mountains of dead securities, swaps, and CDOs at their nominal issue value instead of current real market value. And it was all quietly swept "off balance sheet." The rest was trucked off to the balance sheet of the Fed, in exchange for big bucks, and the TARP trucks came and went with ready cash from Uncle Sam.

Yet the problem is that the fire from that first calamitous crash was so hot that it seriously weakened the steel in these four big central columns. Their eventual collapse may be unavoidable now. The dire condition of the banks cannot be denied, or simply explained away with accounting tricks. The beams are sagging, bending, and the truss system strung between them to support the floors is slowly failing. The FDIC firemen have run out of water. The smoke and ash of insolvency is everywhere, choking the streets of the real economy as "business as usual" is now a thing of the past for our banking system. Credit continues to tighten, foreclosures reach all time highs, millions of short sales are still pending, and unemployment continues to mount up month after month.

Bernanke and his banking friends announced they saved the world but, with each passing month of mounting debt, the situation just gets worse. Air traffic controllers say there are other airlines out there heading toward the heart of the financial system. Commercial real estate and Option ARM loans are careening for the perdition of default. Credit card portfolios are equally distressed.

Meanwhile, Goldman Sachs, the Larry Silverstein of the system, is quietly booking big profits on all the other losses. After all, they took out big insurance policies through AIG, and got paid in full when the fire started, all courtesy of you and I, the taxpayers who funded the big AIG bailout. Profits margins are fine at Goldman, as are bonus payouts.

Yet the big question remains: how long can we pretend this building will stand and survive this fire, let alone those that will engulf it when a few more planes come home to roost? I labor to extend this metaphor, but isn't 9/11 the perfect symbol of what has since happened to our economy? And who will deny the basic insolvency of the "big four" banks if the bad securities now had to all be written down at current market values? Add in the fact that the Government has basically taken over the entire mortgage business through Fannie, Freddie and the FHA. Remove this support and where would that industry be today? How far would housing values really have to fall?

The answer to these questions is quite obvious, and what has happened is equally transparent, in spite of the secrecy at the Fed. The banks created a wonderful game of easy credit, ratings fraud, securities swaps, and trick accounting. And when it all blew up they sent the bill to you and I. We're supposed to go without jobs and homes now so the fat cats on Wall Street can continue their shell game of trick finance.

This is what was decided. Save the banks. Pass the bad debt on to Uncle Sam and the taxpayers, and the country be damned.

Isn't capitalism wonderful?

But about that fire... It isn't going out. The stock markets will realize that soon enough and react accordingly. Then this whole fantasy we call the "end of the recession" and "jobless recovery" will come to an end. You know what happens next.

Minority Report

I was away at Yosemite for a few days to clear out mind and soul. It was grand to walk in the "incomparable valley," and even moreso to take the road up to Glacier Point and look down on it all from over 8000 feet of elevation. A visit to Mariposa Grove, and standing beneath the awesome "Grizzly Giant" was a truly humbling experience.

One thing about the visit was that I saw very few "fellow Americans" at play. Almost everyone I saw was from Europe, Southeast Asia, India, China, and I heard at least four other languages spoken. Where were the US tourist crowds? My partner commented: "They are all home without jobs watching TV." And that leads me to something very silly I saw on the boob tube that weekend.

On the morning of the second day I caught a segment of MSNBC at the hotel, gleefully announcing the recession was "over." The assessment was based on the NABE sampling the majority opinions of 44 economists. Let me give you my own "Minority Report." It won't be based on silly technical definitions of what a recession is, but instead on plain old common sense. The recession is not over. It is simply transitioning to something more severe, a bona fide depression is now almost inevitable. I do not base this call on the assessment of 44 economists, most of which failed to see the first recessionary collapse coming a year ago when I and so many other bloggers were writing about it. Instead I base my call on the stubborn facts I laid out in my most recent article. The short version is that people without jobs and income do not spend money. If 70% of our economic GDP depends on consumer spending, good luck with your "end of the recession" call when we have actual unemployment (U-6) over 17%.

But hooray! The Dow hit 10,000 today! This means nothing. Think of the stock market as a bunch of rich folks all off on vacation at Las Vegas. It's just a place where "investors" gamble their money--a casino. And it is more heavily manipulated than any casino the mafia ever ran, believe me. The Dow is entirely disconnected from reality. When one of its major companies collapses, that company is quietly removed from the index so as not to spoil the fun. So while the NABE and these economists think happy times are here again, the Nattering Nabob thinks otherwise. Do they actually expect we will soon get back to the good old days of house flipping? Guess again. We are now beginning the process of defining a new "normal" in this country. It will be a place where the gulf between rich and poor has never been wider. Employment will take years to come anywhere close to where it was 18 months ago. The housing market has yet to bottom and house values will not suddenly begin skyrocketing back up to 2005 levels again. The housing market will bounce, but remain flat for many, many years. Even a dead cat will bounce if dropped from the third floor....But it won't ever catch mice again.

Sigh... I miss the Grizzly Giant. There it stood, where it has lived since the time of Christ. A segment of its flanks were scorched black by fire, but it still remained the great lord of the forest. It's massive branches exceed the girth of any other tree species on earth, except Redwoods. A tree over 1800 years old understands that things change, and they sometimes take a while. This Recession-Depression is a time of great change in our history as a nation and, believe it or not, it is not ending. It's just beginning. We are now learning what it is like to live without easy credit and an ATM machine in our house. Millions are learning what it is like to live without a job. Soon we will learn again how fragile our energy model really is. These are hard lessons that the price of a share of Citigroup simply cannot cure.

The Nabob has spoken.

Commercial Blues

The chain of pain in the economy is slowly putting more and more pressure on the enormous $3.4 trillion dollar commercial real estate loan tally. Put simply: people lose their jobs and businesses, they stop shopping at strip malls and renting shops and office space, vacancy rates explode, mall owners don't have sufficient income to service their debt, and loan defaults begin to hit the banks. Homeowners who cannot sell but must move are forced to rent their property, saturating the rental market and driving up vacancies there as well.

Statistically, the national vacancy rate for commercial space is now 16.5%, and rents have fallen accordingly. In key markets, the average rent is now 10% lower than a year ago. (Off 18.5% in key urban centers like NYC). Apartment vacancies have now reached a 23 year high according to Reuters.Tenants have a lot of space to choose from, and leasing companies that are not offering big incentives and lowering rents are seeing their business come to a standstill. Landlords have to get this through their heads, and fast.

Beyond this, prices have fallen for commercial property even as they have for housing. Many commercial centers are also "underwater," now worth less than the loans that are financing the building. This market dwarfs the "sub-prime" housing market that caused such turmoil and distress in the banking industry. The Fed now estimates that commercial loan losses could reach a staggering 45% next year.

All this said, I was walking over to the local Farmer's Market last evening, and was surprised to pass the bare wood framing and concrete slabs of a new building going up. The sign read: "New Retail and Office Space." What in the world was this developer thinking? The entire street, a main shopping and commerce district of my town, was already littered with vacant office and retail space!

It occurred to me that people just do what they do, habitually, and heedless of the realities that should now be glaringly apparent in this economy. We are in a long phase of contraction in commercial sectors all over the nation. It will get worse...before it gets worse. To survive in this market you have to abandon the old models of doing business. The old "Credit Check, First, Last and Deposit with a 1 year lease" is history for the foreseeable future. Landlords and leasing agents have to aggressively market their available properties at cut rate rents and offer strong incentives. Beyond this, they have to start thinking about the space more creatively. How can vacant commercial/office space be utilized in a different way? I explored that extensively in this article. Written in November of 2008, it shares the visions of several key social "prophets" and darkly predicted the path we are now on. The relevant passage concerning commercial real estate is repeated here:

"A possible solution will require realtors to begin innovating and evolving their business models to reflect changing economic circumstances. Those who hold fast to the old habit of credit check, first month’s rent, security deposit and a lease will see their property sit empty. And buyers will be few and far between. Even the few who do step forward to buy will have difficulty obtaining financing and more escrows will fail than those that close. But what if the space could be used to stimulate the new local economy that will inevitably grow to replace the old? Creative use of the space could turn it from an empty liability to a profit center for forward thinking brokers and agents in the badly depressed real estate market.

What if all the vacant commercial space in the business parks could be turned into co-ops open to anyone to come and utilize space and resources for business purposes? Each building could cater to a given area of the economy. There could be a computer co-op where people offering PC skills, graphic artists, web designers, writers, photographers congregate to offer their services in otherwise vacant office buildings. There are thousands with skills but without the money to open and finance a business along traditional lines. And there are thousands more who will be losing traditional jobs—people who have a wide range of skills. A commercial co-op creates a business community center focused on its defined skill set. People can come to the center to take advantage of the space for meetings, to use computers and other peripherals, to find other talented artists, image specialists or designers, locate a network guru. They could sell, trade or barter services, and the property owner just charges a set fee for daily or weekly access to the entire co-op.

Imagine a center like this focused exclusively on clothing, where women could come and make their own clothing, buy the necessary cloth, access sewing machines, or just sell or trade items from their own wardrobe. The way women love to dress, shop, and network with one another would see a place like this explode with activity in no time at all. Now expand the idea to include maintenance services in the blue collar sector where all the laid off construction guys can come and join mechanics, plumbers, electricians in a co-op. Imagine an electronics bazaar where people can bring their TVs, audio equipment, cameras, iPods, cell phones, computers, Playstations and then buy, sell or trade. Our households are overflowing with this stuff anyway, and because they won’t have money to buy new, people will adapt and “make do” with existing products. The idea of planned obsolescence, constant upgrading, and throwing the old away will give way to frugality, reusing the old, making do with what you have. Imagine a food co-op selling home made everything: pastries, pies, jams, home grown and home canned foods. Imagine a place like the existing antique stores one usually finds in the more distressed parts of most towns, co-ops where people can come to sell or barter anything.

How does the property owner make money? Instead of collecting rent from a single tenant, he uses the realtor and his agents and brokers as property managers for the co-ops. They collect revenues by just issuing access passes to anyone using the facilities, either day passes, or weekly or monthly passes--in amounts people can easily afford. The idea is to get the space thriving with activity, for it is this activity that will generate the revenue return for the agent and owner over time. Americans are already familiar with the shopping club concept. They have membership cards to large warehouse stores where they look to buy new goods cheap. The same idea can be applied to buying, selling or trading existing goods when people don’t have money to even to visit “Price Club” any longer. Think of it as a local eBay, right in your otherwise abandoned business park. The Property manager deducts their fee, and the rest goes to the property owner. The more active the co-op is, the greater the revenues, which could easily exceed amounts collected under a more traditional lease/rent agreement."

Innovate or stagnate. That is a key phrase to take away in this economy, which will continue to be depressed for the next 5 years, minimum, in my humble opinion.
- J. Schettler

Foreboding Consensus

The Internet is like one huge mind constantly ruminating on events and news and coming to conclusions. Its cerebral cortex is the blogosphere, where you will consistently find the most enlightened and accurate views of what is really happening in the world. Far from being siomple op-ed opinion sites, the bloggers simply tell the truth about the world as they see it, which is something the mainstream media cannot do, being so constrained by their corporate owners. The word "spin" is exclusive to the media. Bloggers simply tell it as it is, and they are amazingly accurate in predicting what is likely to happen next. Bloggers made the call that we were headed for deep recession and financial crash months, even years before the events we have lived through in the last year. So for my money, the simple fact is that if you want to be informed, you have to read the blogs.

Lately I have witnessed the discourse on the wire dismembering the notion that there is any real recovery underway in the Main Street economy. These opinions, well backed by analysis and statistics, appear weeks and months before they finally percolate down to mainstream news outlets. Now I am starting to see a new emerging thought trend in the blogs, and it is not encouraging where the economy is concerned. The next point of crisis they see is another round of bank losses and tremendous downward pressure on the dollar. The consensus is forming that the dollar is now doomed in its role as a world reserve currency. "Secret" meetings are already being held by the Arabs, inviting in Russia, China, Brazil and others. They want to ditch the dollar as the official exchange currency for oil. What does this mean? In the not too distant future we could be facing a massive devaluation of the US dollar. If this happens, the only thing "the Fed" could do to defend the dollar is raise interest rates, and with that we get a gear shift out of deflation and back to inflation. The bloggers cannot time such events to precision, but they see a darkness in their crystal balls that bodes ill for the life styles of the rich and famous here in the US.

What's going to happen when we get a real "flight from the dollar?" The blogosphere is worried, and you should be too.

A Picture is Worth a Thousand Words

So I'll only write a few hundered here... I was reading a local tabloid and ran across a cartoon by artist blogger Bob Rogers. His topic was the recent G-20 summit, where world leaders met to discuss the near collapse of Western Civilization and impending world wide depression, all brought to us courtesy of men like Ken Lay, John Thain, Angelo Mozillo, Bernie Madoff, and so many others--supposedly the best and brightest, the Alpha Plus of our society. These men gambled away the solvency of their banks with wildly over leveraged securities schemes where fraudulently rated bonds were sold through hedge funds to investors, insurance firms, municipalities, and soverign wealth funds the world over. When the scheme went bust, and the wealthy stopped their gentlemen's game of easy money and credit, the whole system nearly collapsed.

You and I got the bill, and it will be passed on to generations in the future as well. The bankers? They got lavish public support, healthy bonuses, and comfortable severance packages. A few got a four walled jail cell as well, but the handful of successful prosecutions barely scratches the surface of the astounding criminal legacy the Wall Street wizards left the country. I have been saying for years that the banks were doing more harm to the country than a thousand Osama Bin Ladins. If I were Obama I'd cancel the proposed surge of 40,000 new troops in Afghanistan and put 40,000 new prosecutors on the trail of financial malfeasance on Wall Street. But it appears law enforcement still applies only to those earning less than $100,000 per year in this country.

Rogers cartoon summed it up in one concise image. A G-20 street protestor exclaimed: "I broke a window and got pepper sprayed, handcuffed, and arrested." Standing next to him a portly banker in a pinstripe suit exclaimed: "I broke the global economy and I was bailed out and got a huge bonus!"

That's life today in a nutsehell, neh? You can see the Rogers cartoon here.

Los Desaparecidos

"Los Desaparecidos" is a Spanish term that gained particular meaning during all the insurrections in Latin America and South America in the 20th Century. Translated to English it means roughly "those who have disappeared." Wikipedia has an entry defining the term thusly: "A forced disappearance occurs when force is used (by, for example, agents of a state) to cause a person to vanish from public view, followed by a refusal to acknowledge the deprivation of liberty (and/or by concealment of the fate or whereabouts of the disappeared person), thereby placing the victim outside the protection of law."

In America, this very moment, nearly a million former contributors to society have suddenly become "Los Desaparecidos," just last month! They have vanished from official public view, made invisible, statistically assassinated by the officials at the Bureau of Labor; simply dropped from the labor force so the BLS would not have to report the real level of unemployment in this country.

The statistics, cleverly masked and watered down by the Bureau of Labor, tell the cold hard tale in mathematics if looked at honestly. The BLS has been omitting people from the unemployment rolls who are “discouraged” and have stopped looking for work. In fact, they have removed them from the labor force entirely! Over a million were whisked away to limbo last month alone. So while the BLS reported only 263,000 lost jobs last month, if you dig deeper into their statistics and subtract the total reported employed today from the total reported 30 days ago you get an entirely different number: there are 995,000 fewer employed this month!

Blogger Karl Denninger does the ruthless math: “Civilian Labor Force: Aug, 2009=154,879,000 to Sep 2009=153,617,000 (according to BLS.) Employed: 140,074,000 down to 139,079,000 this month. That's a loss of 995,000 jobs, not 263,000, and the labor force contracted by 1,262,000 people!” That’s reality. Fudge it as much as you will, but those folks are sitting at home without jobs today as I write this. Six to nine months from now they’ll be on the street when their unemployment benefits run out. The psychological shock of a job loss in this climate must be devastating to these people. They don’t have a nifty $71 million severance package like BofA CEO Ken Lewis.

In a way, these unfortunate people have now become the invisible ones of our society. You know them when you encounter them on the street--a homeless person, someone begging change, or food. We have all developed a nifty set of blinders to help us pretend we don't see these people, and the thought that they are just pan handling money for drugs or alcohol makes us want to turn away or walk bruskly by, not seeing them, relegating them to the realm of the invisible, "Los Desaparecidos."

I met one last week at the local Farmer's Market. The place is usually packed with shoppers, with over a hundred booths selling produce, pastries, barbecue, and a whole range of tasty hot foods. A man approached me and asked for money so he could get something to eat. I decided to see him, make him visible, and not to walk away. But to insure the money was going for food and not drugs and alcohol, I instead walked him over to a nearby taco booth and let him choose anything on the menu he wanted. He ordered a Chile Relleno.

How would it feel, I wondered, to be among that crowd, seeing all the food on display, smelling it cooking, yet not have money to buy anything--to have to approach strangers in the street and beg for food. America--If we are ever going to turn this economy around we must realize that it starts on "Main Street" with us. We have to take care of each other, because Uncle Sam is too busy looking after the wellbeing of the big financial institutions to be bothered with us. And taking care of each other can happen a hunderd different ways. It could mean volunteering at your local school or church, or with City Hall. It could mean making a donation to a local food bank or homeless shelter. Or it could mean simply choosing to see those invisible people on the streets, Los Desaparecidos, and to smile and say yes to them instead of walking away. The rest of the cheery news about los desaparacedios is here.

String Theory

I had an opportunity to attend a lecture last evening given by noted physicist Brian Greene, author of "The Elegant Universe," where he walked the packed audience through the basic challenges of physics from Newton to Einstein to Quantum froth and beyond. When Einstein's breakthrough ideas proved Newton's notion of absolute space and time wrong, the quantum physics crowd came along and found a problem. Space, they asserted, was a chaotic broiling stew in the realm of the very small, so how could Einstein's ideas of smoothly curved space transmitting gravity work in such an environment? Greene's answer, and that of the string theorists, was that there were tiny filaments of energy at the heart of the very smallest quantum particles, and their vibration rate determined what kind of particle resulted. They also served to dilute and smooth out space, solving the conflict between Einstein and Quantum Mechanics. Elegant indeed, if it is correct.

Have I lost you yet? Find it hard to worry about the bumpiness or smoothness of space-time at the scale of 10 to the -35? I feel your pain. Most of us are too busy worrying about the bumpiness of our monthly budgets, the stock markets, or diminishing assets to think too much about these arcane subjects. But Greene asserted that any validation of the string theorist's ideas would constitute one of the most profound breakthroughs our species has ever made. The clan is eagerly awaiting the restart of the CERN super collider later this year, which will hurl particles against one another and attempt to observe the results. The mathematics of string theory hold that there must be ten dimensions in our universe, not just the four we are familiar with now, (Lenth, breadth, depth and duration). The theory posits that if there is less energy after a collision than before, then perhaps some of the particles got pushed into one of those other unseen six dimensions--a little like the bad assets held off balance sheet in the strange "Level three" dimension the bank string theorists have created with their own fuzzy math.

Gee... it all makes sense now! Run the housing and lending market through the credit collider and see if the amount of equity remaining is less after the crash. If so, the securitized loans must have been pushed into the dimension called "Level Three!" Newton's assertion that a property must be marked in accordance with its current market value has been stricken down! The Einsteins of Wall Street have clearly shown us that you can loose billions of dollars, receive billions more in government subsidies, and still claim you made a profit that funds billions in bonus money and ehxorbitant salaries! Quantum banking has been saved!

There I go again...

Well...the evening provided a fascinating excursion into the realms of speculative physics, with everything from the Newton's Laws of Motion to the Heisenberg Uncertainty Principle coming up in the 90 minute lecture. A good time was had by all.

All the talk about Heisenberg called to mind my own science fiction time travel novels dealing with the principle. Quantum mechanics couldn't even say, with any certainty, where a given particle in the universe was! One of my characters mused: "Dust in the wind... We want permanence, we reach for it, hope for it. Lord, isn’t that what heaven’s all about? But it doesn’t work that way—at least not in this realm. Nothing stays put for long. It’s all process; all change. We’re just surfing the wave now, that’s all. I don’t see what else could be done. I know how you must feel. It’s going to be lonely here—in the heart of it all. We’re sitting at infinity’s bedside now, and she’s quietly dreaming. At least we’ve got each other, if that’s any consolation."

So as I listened to Greene expound on the mysteries of string theory, wondering about the Heisenberg uncertainty principle, I felt a bit like that--sitting at infinity's bedside while the strange elegant universe kept on dreaming. And I was that dream as well. Was I even here, quantumly speaking, that is? I just put my hand on my companion's shoulder and thought: At least we've got each other.