Hunker Down, Baby

I love a good fact-based rant, especially when it has an apocalyptic tone with overtones of hellfire and brimstone. It doesn’t get much better than this ! Hats off to Mr. Quinn. I had not read him before, but he is a formidable analyst. In an earlier piece , he wrote:

The materialistic frenzy that has been the hallmark of the Baby Boom Generation is coming to an end. It is being forced upon many, but will be the choice of many more. The worldwide deleveraging will lead to a new mantra for this generation, frugality and living beneath your means. The psychology of the whole world has changed in a fortnight. Our leaders are so consumed by their own agendas that they have not realized the implications of this psychological change. Chaos and turmoil reign in the markets today. The population of the U.S. will turn inward and seek comfort in more simple pursuits. This will ultimately be a beneficial change for our society. But, the immediate result will be wrenching for the country.

I’m not big on making predictions, but this strikes me as quite plausible. How bad can things get? Mr Quinn is quite detailed in his forecast:

The coming Holiday season will be the worst for retail in decades. Most retailers generate 50% to 75% of their profits in November and December. Early in 2009, the avalanche of retail bankruptcies will begin. The big box retailers who built their expansion plans upon demand that was a debt induced fallacy, will experience tremendous losses. They will begin to close stores by 2010. Automakers will continue to see sales decline to levels never thought imaginable. All three major U.S. automakers could go bankrupt by 2010. House prices will continue downward. Two or three major homebuilders will go bankrupt by 2010, while hundreds of small builders will collapse. Mall developers and commercial developers have taken on billions in debt in the last decade. As tenants go bankrupt and the rents dry up, hundreds of large public developers will declare bankruptcy. These losses are not factored into the numbers of the 8,500 banks in the U.S. By the time this crisis is finished, we are likely to be left with 5,000 banks or less. The official unemployment rate will easily surpass 7% and possibly reach 8% by 2010. Based on the unemployment calculation used during the time of the Great Depression, we already have unemployment of 15%. This could conceivably reach 20%. The PE of the market is still above 20. Profits will plunge in 2009 and irrational pessimism could propel the Dow to its 2002 low of 7,200. That would be 28% below today’s levels and almost 50% below the all time high of 14,000.

Wow! Can things get that grim? It’s possible, but there are some mitigating factors. People are noting that companies are laying off people with remarkable speed. That’s because supply chain managment is much much better than in the past. Most companies aren’t carrying big inventories and can quickly recognize a downturn and react. Companies are also sitting on a lot of cash relative to debt, have relatively low debt levels, strong profits, and a high ratio of cash flow to capital spending. In short, companies are better positioned for a recession than they have been historically. The prospect of wide spread bankruptcy just doesn’t seem that strong to me. But the unemployment, and all that it implies, is quite real and painful.

What can we do? First, we need to recognize that government can’t fix it. There is no deus ex machina in this play. We will see a parade of politicians who peddle hope, just as FDR did, but government is powerless against broad economic forces. Our best hope is that government is slow to respond, otherwise it will just impede the recovery. On a personal basis, it would be wise to start learning about frugality – and practicing it. It might be bad for the economy, but it’s good for you. Hunker down baby, hunker down. If the dire forecasts prove wrong, you will, at worst, save some money.


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