April 16, 2016

The Process Of A Bubble Coming To Some Normalcy

A weekend topic on the economy starting with the Canadian Free Press piece by By Dr. Bruce Smith. “It was my great good fortune to be a son of depression parents. My mother and father were born in the early 1920s. They were observant, sensitive, thoughtful parents who took the time to tell stories. They reflected on and spoke of their early years often to their sons, sharing the hopes and fears of their upbringing as we grew up ourselves. They showed us how to observe the world around us. I began to read widely to understand how such a national calamity and such a brutal war could have happened. I wanted to know how my parents came to be the way they were, and how my world came to be.”

“Most of the accounts I read over the years attributed the depression to the ‘business cycle’ and the overproduction of goods in the 1920s. That didn’t explain much to me. Why was there overproduction of goods? Then there was a farm depression that started immediately after the First World War and worsened all through the 1920s. For my undergraduate work I read widely in historic newspapers from the Civil War era, the 1870s, the 1890s, the 1930s, and the 1940s. I looked for evidence of economic depressions in daily life in those eras, and I found it. Wars and financial panics often preceded the economic depressions of the past.”

“Because a depression develops gradually, people don’t realize it is upon them for some time, even years. Hardships filter through the levels of society at different rates. Certain sectors and regions feel the effects almost immediately, while others take longer, or never feel them at all. There is usually very little use of the term ‘economic depression’ in the press, and there is no definition circulated among economists or politicians to make it a topic of discussion. At best, media may focus on symptoms during an economic storm, occasionally pointing a finger of blame at a target of choice.”

“We have been told that the recession that began in 2008 ended in April of 2009. Everyone has noticed how the economy has been roaring back since then! But look around, and you will see, if you look past the clutter, that all of the indications of major depressions of the past are present in the United States today. One of the easiest ways to spot the failure to thrive is in strip malls and plaza shopping centers. It’s easy to find empty commercial property now. Depending on the surrounding area, vacancy rates of 10-40% are common.”

“Posh housing developments in popular retirement areas sit with their gates complete, but their weedy lots remain idle. Families struggle to maintain standards. Kids move back in with parents, or parents with kids. The dream of a vacation home or even a paid-for primary residence evaporates. Young couples keep renting as the demand for housing drives rental prices upward. In some areas, fine homes offered at a bargain go unsold, while nearby farmland is sky-high.”

“At the same time, there are parts of the country where boom times are manifest. Five of the six wealthiest counties in the United States border the District of Columbia, which shows that the federal government is doing quite well. Vast suburban stretches in Massachusetts, Connecticut, Pennsylvania, New Jersey, Maryland, Virginia, Kansas, Illinois, California, and around other major urban areas show every appearance of prosperity. Property values are at record highs, retail stores are booming, and traffic is heavy.”

“But it’s still a depression out there. The depression we’re currently experiencing is actually far worse than the depression of the 1930s. When that depression turned to an economic storm in 1931 and 1932, there were few methods for providing aid for those hardest hit. Some programs for ‘relief’ as it was called then, began under the New Deal, but even those were spotty. If a breadwinner lost a job, the family began to suffer the loss of income in very short order. There was no unemployment check, food stamp program, welfare, or SSI payment. There were no rent subsidy apartment programs, no FHA loan program, no food pantries, no chain of Goodwill stores.”

“Vast programs now exist to provide support for those in poverty, and they have been growing since the 1960s. Today, 45 million recipients use food stamps to help feed themselves and their families. Five million receive rent subsidies through HUD grants. Social Security old age, survivor, and disability payments are paid each month to nearly 60 million individuals. These did not exist in the 1930s. Try to imagine the visual impact of seeing these 110 million individuals on the streets, looking for food or a place to stay for the night. Support programs don’t mean that there’s no depression, they serve instead to mask the depth of the crisis we’re in, to hide it from us.”

From Business Day in South Africa. “A little tube of splendid colour could prove to be the hero when Statistics SA releases its retail sales data for the month of February. The ‘lipstick effect,’ coined by Estée Lauder chairman Leonard Lauder, is an unofficial indicator that in times of recession consumers will shy away from spending on big luxuries, such as new cars and designer dresses, and will splurge instead on less expensive indulgences, such as lipstick. Those who endorse this indicator trace it back to the Great Depression, when cosmetics sales jumped 25% in the US, despite the economy’s collapse.”

“At current prices, January’s retail data showed an 11.8% year-on-year rise in sales of pharmaceuticals, medical goods, cosmetics, and toiletries. This grouping of goods has shown steady year-on-year growth since August last year, never falling below 7.2%. Estée Lauder says it saw powerful growth in its make-up and luxury brands for its financial year ended-June 2015. Sales in emerging markets, excluding China, rose 26%, led by Turkey, Brazi,l and SA.”

“‘We saw strong growth in lipstick sales across our brands,’ says Estée Lauder.”

“Whether there is an actual economic correlation in SA between lipstick sales and the economy remains to be seen. A number of local economists were hesitant to confirm or deny the possibility of a link. ‘What I can say is that retail sales are unlikely to show a pick-up this year, regardless of how hot lipsticks sales are. My lips don’t lie,’ one economist says.”

The Tioga Tribune in North Dakota. “The news about jobs sounded pretty grim at the last Tioga City Commission meeting. Dennis Lindahl, economic development coordinator for the city, discussed how 30 rigs translates into only about 3,600 direct and indirect jobs in drilling for the entire oil patch. Meanwhile, rents continue to stay high, Lindahl said. This is hampering the growth of other businesses outside oil drilling and production, which can afford to pay workers much higher wages than a lot of other industries.”

“As that industry shrinks, there is a widening gap between wages and rents in Tioga. ‘We need the rents that are commensurate with a person’s wages,’ he told the commission.”

“Speaking after the meeting, Lindahl expressed some optimism about the economic outlook for the area. Opportunities are springing up in the wake of the slowdown that would not have arisen if oil prices were still at $100 a barrel. As an example of this, Lindahl pointed to 42 Grill, which will soon move to a new location with the new name 42 Bistro. The restaurant had been operating in a building that was thrown up in the early days of the boom and didn’t meet codes.”

“The owner found it difficult to afford the inflated prices of available commercial space. That all changed when the Bucking Buffalo abandoned its recently built space, and the company that manages it offered much more reasonable terms. Now a long-time Tioga establishment will continue to operate.”

“Recently, representatives of apartment developers asked the Tioga Commission to close down RV parks to help support tenancy rates at apartments, which have fallen considerably over the past year. Many expressed potentially dire financial situations as a result of their low occupancy rates. Lindahl said the area could see some foreclosures and boarded-up properties, but this is part of the process of a bubble coming to some normalcy. ‘The market has to figure itself out,’ he said.”

“While the collapse of rents and possibility of foreclosures looms, Lindahl said in discussions after the meeting this isn’t entirely a bad thing. While production has leveled out, it still hovers around 1 million barrels per day. Unemployment remains low. The demand for apartments is low among oil workers, but other businesses will find it easier to establish and grow if rents do fall to levels that meet area wages for more industries. ‘It’s what I call Bakken 2.0,’ Lindahl said.”

“This not only makes it easier for employers to reduce labor costs since employees can afford to live on less, it also means more affordable commercial space, such as the case for the 42 Grill. Lindahl said the new economic landscape will mean greater ‘local participation’ in the market. and possibly less out-of-state investment. This could pan out to a better quality of life for residents as businesses will be more invested in the communities they operate in. ‘It’s a great outlook,’ Lindahl said.”