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Subject:  Mishedlo Date:  2/24/2002  12:59 AM
Author:  harmy Number:  3628 of 6186

I'm not sure who follows Mishedlo but this is one great post IMO. He has finally got star billing on the TMF after thousands of posts calling attention to a potential collapse of the market. For this he was pilloried, castigated and generally rubbished. It's just great to see this sort of stuff on the headlines.

The Economy: Different This Time?

This feature presents the opinions and views of Motley Fool readers as posted on our discussion boards. Posts selected for this feature are likely part of an ongoing conversation. To fully enjoy the whole conversation, click into the discussion board linked at the end of this article.

By Mishedlo
February 20, 2002

[Editor's Note: With the economy in recession, many economists and market watchers are talking about the strength of the consumer. How long can consumers continue to rack up higher and higher levels of debt without something giving way? Many will tell you "it's different this time." Is it? Or, are we headed for a double-dip recession? Mishedlo's post below is an answer to a question posed on our Rat's Survival Alternatives discussion board.]

So you tell me, why does spending by the consumer have to slow down this time?

1) Because the pool of buyers that wants to buy things keeps shrinking, as 30% off becomes 50% off becomes 70% off, etc. To keep the public buying, the deals have gotten better and better. What's next, 100% off?

2) Because at some point, consumers deep in debt will just stop spending. It's happened in every recession so far. Your question above assumes that "This Time It's Different." Well I propose that this time is NOT different.

3) Because housing cannot maintain a torrid pace forever. It cannot do so, any more than the Internet bubble could continue forever. When housing stalls, it WILL be brutal. I think the top in housing is in. That does not mean the decline will be immediate, but I propose that this time is NOT different.

4) Much of this spending has been because of refinanced mortgages. People have pulled money out of the refinancing deals and spent it. What spending is going to replace this mammoth fuel?

5) Where are interest rates headed? I read that the fed funds ratio is now assuming a 75% chance of a 1/4-point interest rate increase this year. There will be good and bad points if that happens. The good point is the economy will be recovering if it happens, the bad point is that it could hurt spending habits, and could be the trigger to send us back into the double dip recession that is often talked about.

6) Although the economy seems to be recovering, and based on inventory reduction it probably is, how sustainable is that? Rate of unemployment filings have improved but month after month after month there are fewer and fewer people working. As long as corporate profits remain weak (and with 70%-off giveaways everywhere profits will remain weak), employment will remain weak. I see little help from this standpoint on the horizon. Rising unemployment means fewer people are spending.

8) The rate of growth of debt on both consumers and corporations is staggering. The only thing sustaining that growth of debt on the consumer end is the thought that things will get better. Well, they will eventually, but will we "pull a Japan" first? Although I do not think so, I really believe a deflationary spiral is possible. If that happens, why buy today something that will be cheaper next month? This eventually feeds on itself and is probably Greenspan's biggest fear. Everyone is looking forward to this recovery as if this recovery marks the bottom. One should look ahead of this recovery to what is further down the road. That something is the likely second dip of the double dip recession.

9) Consumer confidence numbers have turned down for the first time in months. That is not a good sign.

10) The stock market itself. All the brouhaha of the recovery has been turned into fears of more Enron's, Kmarts (NYSE: KM), etc. The DOW-30 has yet to crack. There will be more corporate bankruptcies. Quite a few companies are burning money faster than they bring it in. This does not bode well for a shaky market, or for consumer confidence.

11) You say people spend because "they have to," but we have seen pullbacks from more expensive hotels, more expensive stores, and trendy stuff. People are buying more at Wal-Mart (NYSE: WMT). This shows the start of a change in consumer habits IMO, equating to less money spent.

12) Reduction in business travel (yes that is a business expense but it has other ramifications) like less restaurant business and fewer tips to restaurant workers.

13) Credit cards are simply maxed out. The number of people buying stuff at a 25% interest rate and carrying huge balances is staggering. Again, this is unsustainable. Bankruptcy will be the way out for a fair number of these people. How many more card offerings have you gotten lately? I get offerings several times a week it seems. This indicates to me that there is simply no more business to be had as customers keep moving from one place to another.

14) What are the odds of a derivative blowup like JP Morgan (NYSE: JPM)? That has to be factored in as well. Fannie Mae (NYSE: FNM) is my derivative target blowup candidate. If not that, how about Tyco (NYSE: TYC) going under in its debt load? Have the ramifications of Kmart going under and reneging on bills been factored in yet? What else is out there we do not know about yet? What happens to consumer confidence when the next blowup occurs? Yes I am assuming there will be one, or several more. If nothing else, FEAR of another one of these will have a dampening affect on an already presumed weak recovery.

15) How long can the U.S. dollar remain strong? Already there is debate from US manufacturers about the strength of the dollar. If the dollar falls relative to other currencies, that will cause inflation. Much of what we buy is produced overseas. Yes, I am arguing inflation on one hand and deflation on another, but it could play out in order on the right triggers.

16) Adjusted for inflation, we have all-time low gas and energy prices. How long can that last? Upticks on those items could limit spending elsewhere.

17) The only time in the history of U.S. where there was not a strong recovery after two rate cuts was the great depression. We have now had 11. Hmmmm? In every recession so far, the consumer has pulled in his horns. Some might think this can go on forever, but others disagree.

I guess if you look back, the theme is similar on some of these arguments. Why will consumers stop spending? How about "just because," or if you prefer: it's the same this time. There is no "new economy!" Never was, never will be. The Internet build out is not much different than the railroad build out. Huge boom, huge bust. Roaring '20s auto build out, depression after. The Internet build out over-expansion is the largest over-expansion ever, yet on the basis of demographics, 11 rate cuts, "new economy thinking," productivity lies, or whatever, people assume "It's different this time." Well some of us contend it is not different this time.

[So? Is it different this time? Check out the rest of this conversation on the Rat's Survival Alternatives discussion board.]

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