Wednesday, November 5, 2008

A Change Is Coming

We have a new president America. He has promised you a change, and I assure you a change is coming. Let's talk about what we can look forward to.

Obama enters his presidency at a historic moment in time. Our entire country has experienced a 25 year economic boom fueled by credit and debt. Every year it seemed things could only get better, and every year the debt grew larger for Americans and the country as a whole.

Unfortunately, what goes up must also come down. A boom fueled by credit is what can be described as phony, for lack of a better word. The country experienced a glimpse of what our economy truly is in October, when the stock market fell over 20% in a single month. Many people who do not watch their accounts week by week will be opening up their statements in the mail this month to an unpleasant surprise. A change.

While the phony inflated stock market values of American's 401Ks can be ripped away in the blink of an eye, the real estate market works in a different manor. Astonishing surveys taken over the past few months show that about 75% of Americans think that their home has stayed equal or gone up in value over the past year. Many still feel that their homes will sell at 2006 prices, only to find out what their home is really worth when they put it on the market. I know this because I see it every day in my business. The true prices of homes right now are what they are selling at in foreclosure.

Coupled with this decrease in asset wealth will be mass layoffs over the next 18 months. These appear to be coming across the board in every industry, but real estate and finance in general are the true slaughterhouse. Unfortunately, those two industries were the main growth of employment over the past ten years. Where will those employees work when they're out of business and they realize that the housing and financial industry will not be back for many years? Very good question. They will feel the change as well.

As assets and wages fall, the real pain will come from the other side in the cost of living. The temporary pull back in oil has comforted Americans with the fact that the oil "bubble" has finally burst. Unfortunately, no one has told them truth about supply and demand. The global demand for oil this year will grow by about 1% and the supply is falling. To counter that punch, the number of dollars entering the system is surging at a rate almost unfathomable as the supply of oil falls. As I've said before, prepare yourself for some remarkable prices for oil over the next 18 months. A change if you will.

Oil will be teamed with its partner agriculture(food pricing) which will follow a similar pattern of supply and demand, only possibly more severe in the short term. The cost of food and gas will take away any available "free" spending money for additional goods. Our lifestyle will be put first onto the credit card as it is now, and as that is taken away it will leave nothing left for consumption, which makes up 72% of our economy. Remember, our economic model is foreign countries working hard to send us money so we can buy things. That will end after this crisis. A change in living standards is coming.

This will all have a snowball effect as home loans, credit cards, auto, commercial real estate, and business loans are all defaulting at the same time. It will begin to overwhelm the financial system with defaults. For these reasons, over the past few weeks all the banks have essentially been nationalized to prepare for this coming storm. If this had not taken place, the credit default swap market would be a weekly time bomb set to explode, which would have the effect of shutting down all the major banks who send billions to our politicians. This is obviously not acceptable and a change was needed fast.

So the banks will be saved and the cost will be sent to the already decimated American public. It will be sent to them weekly in the form of inflation. Every week they will be taxed with a higher gas price, food price, clothing price, ect. Obama will stand ready to send them additional stimulus checks to cover these costs. Of course, these additional stimulus checks will only increase the cost of living thus cancelling out any positive effect. They will send more, and more, and more. Then you can expect price controls, and then you can expect tax hikes, the two most destructive things any country can do to its people.

What will ensue will feel like a hyperinflationary depression. All remaining wealth will be transferred from the hands of the poor and middle class to the wealthy and foreign countries as our currency collapses in value. The wealthy will be holding assets that will keep their value, and foreigners will be holding currencies that have increased in value. All the cars, televisions, and homes that they lent to us on borrowed money will then be returned to them at incredible pricing. We will just be left with the debt for those products. Obama stands ready to take the fire that blazes across our country and send air crafts to dump gasoline. Yes sir, get ready for a change.

(I am not a McCain fan, and I believe that no one can stop the pain that is coming. A recession must always follow a credit boom to cleanse the system. Certain people, however, could positively affect how quickly we could recover, mostly by standing out of the way and letting the free market correct the mal investments)

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