“Worst Is Yet to Come:” Americans’ Standard of Living Permanently Changed

The Worst is Yet to Come

American’s standard of living is undergoing a “permanent change” – and not for the better

There’s no question the American consumer is hurting in the face of a burst housing bubble, financial market meltdown and rising unemployment.

But “the worst is yet to come,” according to Howard Davidowitz, chairman of Davidowitz & Associates, who believes American’s standard of living is undergoing a “permanent change” – and not for the better as a result of:

• An $8 trillion negative wealth effect from declining home values.
• A $10 trillion negative wealth effect from weakened capital markets.
• A $14 trillion consumer debt load amid “exploding unemployment”, leading to “exploding bankruptcies.”

“The average American used to be able to borrow to buy a home, send their kids to a good school [and] buy a car,” Davidowitz says. “A lot of that is gone.”

Going forward, the veteran retail industry consultant foresees higher savings rate and people trading down in both the goods and services they buy – as well as their aspirations.

The end of rampant consumerism is ultimately a good thing, he says, but the unraveling of an economy built on debt-fueled spending will be painful for years to come.

Posted Feb 17, 2009 EST by Aaron Task

Gold Jumps to $967, Nearing Its Record

MoneyBob Says "Buy GLD on Price Dips"

Treasuries and the U.S. dollar are not the only instruments benefiting from risk aversion.

Gold could be considered an even safer ‘safe haven’ if it weren’t for its susceptibility to speculative excess. But that didn’t stop strong demand for a safe haven and a store of value from pushing gold up to the $967/oz level on Comex more than 25% above its fair value assayed by physical supply and demand.

Uncertainty over the global economic outlook continues to send investors running for cover in cash-like instruments. But as sovereign credit risk rises around the world due to sharp increases of public debt, some investors are scurrying towards apolitical cash-like instruments.

Gold fits the bill as it is not tied to any particular country’s asset quality. In addition, rising inflation expectations (in the longer-term) have spurred demand for gold as investors worry massive government spending and possibly debt monetization will be inflationary, which would have deleterious effects on currencies as a store of value.

Despite likely pullbacks in the gold price this week as incoming data signals deflation, analysts believe gold will reach $1000/oz within 3 months due to ongoing uncertainty over the outlook for the global economy, inflation, sovereign debt and currencies.

Yet if there is a reduction of risk relating to sovereign defaults, gold could soften in the mid-term especially if central banks keep inflationary pressures under control, but once the economic recovery begins and the velocity of money picks up then comes the inflation.

We need a Nationalization of our Insolvent Banks

RGE Monitor

On Nouriel Roubini’s Global EconoMonitor, Nouriel Roubini argues that it is time for ‘Plan N’, namely a nationalization of insolvent banking systems. The very cumbersome U.S. Treasury proposal to dispose of toxic assets – presented by Treasury Secretary Tim Geithner – can be best understood as a combination of removing toxic assets off the banks’ balance sheet and also providing government guarantees to those private investors that will purchase them (and/or public capital provision to fund a public-private bad bank that would purchase such assets). Markets were expecting a clearer plan, but also a plan that would bail out shareholders and creditors of insolvent banks. Unfortunately that is not politically and fiscally feasible. It is thus time to start to think and plan ahead for Plan N (“nationalization” of insolvent banks). Check out: “It Is Time to Nationalize Insolvent Banking Systems”. Also don’t miss “Roubini Calls For Bank Nationalization – Latest Roubini Interviews on Bloomberg” and the discussion with Nouriel and Nassim Taleb “Predicting the Crisis: Dr. Doom & the Black Swan”

The Anglo-Saxon model of supervision and regulation of the financial system has failed. The supervisory system “relied on self-regulation that, in effect, meant no regulation; on market discipline that does not exist when there is euphoria and irrational exuberance; on internal risk management models that fail because – as a former chief executive of Citi put it – when the music is playing you gotta stand up and dance. Check out: “Roubini: Anglo-Saxon model has failed”

U.S. Lost 598,000 Jobs in January

Unemployment Rate Jumped to 7.6%

• Jan 2009: Payrolls fell 598,000 (biggest monthly decline since Dec 1974) after falling by 577,000 in Dec and 597,000 in Nov 2008, Unemployment rate rose from 7.2% in Dec 2008 to 7.6% in Jan (a 16-yr high)

• Payrolls have declined 3.57 mn since start of the recession in Dec 2007 (largest job losses during any post WW II recession); payrolls fell 2.6 mn in 2008

• Continued job losses in manufacturing (-207k), construction (-111k), residential const (-61k), non-res const (-47k), services (-279k) the sharpest 3-mo decline since 1950s; finance (-42k), auto and parts (-31k), real estate (-45k), business and professional services (-121k), leisure and hosp. (-28k). Job gains in health and education (+54k), govt (+6k)