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for larger version       Ads have a Patent Pending. Click Here for More Information The Rockaway Irregular When my son visited with us this weekend we got to talking. "Things are the worst I've ever seen out there," he told me with concern in his voice. We had been discussing anti-American feelings abroad and I asked how he could say that, since he hadn't been abroad lately. "I mean right here, dad," he explained and went on to describe the angry words he hears on the subway during his daily commute into the city each morning. "Everyone's upset and mad about something," he said. "They think things are getting worse in the country." Having lived through the seventies and studied the thirties and forties, I'm generally skeptical about such claims, but this time, I had to admit, the economic signals seemed worrisome. The reports, as I write this morning, indicate consumer confidence has fallen to record lows. At 64 percent positive, it's the worst since the Nixon administration and well below the 70 percentile range economists had actually been expecting. Writing in this morning's New York Sun, former Bear Stearns economist turned TV pundit Lawrence Kudlow adds that "existing median home prices dropped… down 14 percent from the peak two years ago… " and that "home sales are down 30 percent from the peak set in mid-2005." Housing prices, in fact, are now reported to have dropped more than at any time since these statistics began to be kept. The sale of a small home on my own street for about $650,000 (though it's valued for tax purposes by the city's Department of Finance at $742,000), recently fell through when the buyers backed away, another symptom of a collapsing market. According to Kudlow, "the so-called median home price [reflecting markets across the country] is $196,000, roughly back to 2004 levels." As if to drive the point home (no pun intended), even Kudlow's old firm, Bear Stearns, recently faced a liquidity crisis due to their trading in subprime paper. As a result the venerable Wall Street firm was forced to accept a low-ball takeover bid by J.P. Morgan at $2 a share. Its securities had been valued at $30 the day before. Ouch! Shareholders, many of them Bear Stearns employees, cried foul even as J.P. Morgan made it clear there would be downsizing of employees to come. Subsequent kicking by angry shareholders has prompted a revised bid by Morgan, which, at this writing, amounts to $10 per share and shareholders are still grousing (though it's not clear they can hope to do much better in today's environment). Financial firms are in the tank across the board, reflecting implosion in the mortgage industry (which began with sub-primes - mortgages provided to less creditworthy customers). This, of course, has impacted the overall stock market, which is now clearly in bear territory, prompting economists to forecast, and in many cases declare, a recession. As with most so-called market bubbles, the greed of lenders churned up some pretty heady froth, undermining creditworthiness and the lending capacity of the financial system. During the heyday of this particular bubble, I got almost daily cold calls from mortgage brokers seeking to convince me to refinance and, at one point, I even succumbed to the temptation - until I reviewed the work-up submitted by the broker, that is, and noticed he had built in close to 23 percent in fees! "Why would I want to give away such a large hunk of my money to do this?" I asked him. "Well you still come away with almost 80 percent," he assured me. Downturns aren't new, of course. We get them every few years, though we've recently gone for roughly six years without one. But between 2000 and 2002, we saw the results of the burst dot.com bubble, as tech stocks imploded and previously substantial corporations, like Enron and MCI-Worldcom, went under. Individuals' portfolios and pensions got smashed, too. People were mad and our politicians and media went looking for villains, as they usually do. As Main Street cried foul, companies were driven out of business (not always justifiably) and managers were investigated and, in many cases, charged with wrongdoing. Ken Lay, the former CEO of Enron, succumbed to a sudden heart attack after being convicted of corporate fraud, but others were hustled off to the hoosegow to atone. It's always tempting, of course, to heap the blame for these kinds of crises on a few, but bubbles are, in fact, caused by many. Frankly, I loved the idea of refinancing my home at a heretofore unimaginably cheap rate, until I managed to get the mortgage broker to finally fax me a breakdown of the fees, points and commissions. (Prior to that, he'd been cagey, maintaining that the workup couldn't be made available until the closing!) In my case, it probably wouldn't have had really adverse consequences, besides my having taken a loan against my home to hand the broker 23 percent of my own money, but what about all those folks who got sucked into mortgages they couldn't afford, overextending themselves to feed a real estate bubble which ultimately drove home prices to previously unheard of, and unsustainable, heights? It's not as if you couldn't see it coming, but as is always the case, most didn't. Today, listening to the financial media, we hear all sorts of financial and political second-guessing. The noise, though deafening, reflects real problems to be sure. Some are saying things are as bad as they were back in 1929 with the financial institutions of the nation on the verge of complete collapse. To combat this, the Fed has sharply lowered interest rates and introduced innovative lending mechanisms to shore things up while Congress and the Administration have collaborated to engineer an infusion of cash into taxpayers' pockets, kicking up the nation's future debt load, in the process, and weakening the dollar. The other day, Treasury Secretary, Hank Paulson, was on one of the Sunday talk shows and I eagerly tuned in to hear his take on things. To my surprise, this very knowledgeable and experienced Wall Street hand seemed to be stumbling over his words, gulping nervously and sweating as his eyes darted around the studio while he fielded questions from Fox's Chris Wallace. Paulson looked scared, I found myself thinking, and if he was, shouldn't we all be? My son says the people he overhears on his daily commute are. Still, it was 19th century financier Baron de Rothschild who remarked that the time to buy was when blood is in the streets. Abit extreme, to be sure, reflecting (one hopes) the problems of an earlier era when political differences in European capitals frequently spilled over into violence and revolution - not at all the sort of thing we're likely to see in America today! But he had a point and, as if to confirm this, a famous contemporary investor who has made some prescient calls in his career, Jim Finucane, told Barron's magazine just this week that he's actually turned bullish, arguing that the kind of fear we're seeing in capital markets today is more typical of bottoms than tops. It's hard to believe, when you think of a heavyweight like Paulson looking like a deer in the headlights, but the fact remains that things do look their worst at real bottoms, just as we tend to see blue skies ahead forever at the tops. In the end, the hardest thing to do is go against the crowd because we're herd animals at heart, susceptible to the "wisdom" of those around us. Still, I told my son not to take what he was hearing on the trains too seriously. There are certainly some real economic problems besetting us and, of course, there will always be those who only see difficulties, their voices loudest when they actually seem to be right. And sometimes, of course, they're going to be and then the sound of their voices will seem especially compelling. But that noise is all part of the process, while the storms producing it have a way of passing - even the big ones. Herds, on the other hand, have been known to run blindly off of cliffs.
rockirreg@aol.com
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