Shopping 'zombies' offer US hope
By Julian Delasantellis
Like salmon driven upstream by instinctual forces beyond their control, there
is something deep down, probably at the core of our DNA programming, that
forces pundits to make predictions for the new year in early January. Here's my
economic prediction for 2008. The American economy may very well come to
resemble scenes from the two Dawn of the Dead movies.
And that's the good news.
First made in 1978 by horror maestro George Romero, as a sequel to his 1968
classic Night of the Living Dead, remade by Zack Snyder in 2004, Dawn of
the Dead tells the story of the
human race under siege from hordes of recently deceased risen zombies,
ambulating about with no higher brain functions, only existing to feed lustily
on the rapidly decreasing numbers of actual people still around.
In both the 1978 original and the 2004 sequel, a hardy group of human survivors
seeks shelter and security in an abandoned shopping mall, barricading
themselves from the zombies until some salvation for the human race can emerge.
But the zombies still come. They mill around aimlessly in the parking lot,
(making them fine sporting practice for the survivors, with their high-powered
rifles filched from the mall's sporting goods stores, shooting away what used
to be the zombies' brains) occasionally attempting to overcome the survivors'
improvised defenses to gain access to the mall. The survivors are astounded,
but then they come to realize their mistake in seeking shelter in a shopping
mall. The zombies, even with most of their brains decayed or shot away, still
carry an inherent memory of the malls as a place that once held a central focus
of their lives.
As one of the survivors put it: "They're after the place. They don't know why,
they just remember. Remember that they want to be in here."
Mindless zombies haunting shopping malls as if by instinct, for reasons they
barely know. You don't have to wait until the end of the world to see that -
you can see it all the time, including during the recently concluded holiday
shopping season, in any American shopping mall. And that just may be the
salvation of the American economy after all.
We're now coming up on what I consider to be the first anniversary of the
starter's pistol of the subprime crisis, HSBC Holdings' February 5, 2007,
announcement of the problems at its Household Bank subsidiary that first
alerted the financial world to the putrescent swamp that US housing finance had
fallen into over the past few years.
I started writing about the seriousness of the problems with subprimes in
March; slowly, a lot of the pundit community has followed suit. Many prominent
economic analysts and forecasters, among them former Federal Reserve chairman
Alan Greenspan, Economics Nobel Prize winner Joseph Stiglitz and Goldman Sachs
chief US economist Jan Hatzius, are now putting the odds of a US recession
(technically defined as two quarters - six months - of negative economic
growth) at roughly 50-50.
Maybe they're right. But as someone who has followed every twist and
tribulation of the subprime crisis since its inception, I'm starting to wonder
if subprime's hype has outrun its reality.
Subprime is one crisis with multiple manifestations. First is the effect on the
US housing sector.
A core reason why it is frequently so difficult to get a grip on just where
housing is at any one moment is the fact that there are so many varied metrics
that seek to provide snapshots.
You have reports on home sales. Home prices. Home inventories. New-home sales
prices and volumes, existing-home prices and sales volumes, new-home starts,
pending home sales, mortgages becoming delinquent, mortgages entering
foreclosure; all available for the nation as a whole, and, more importantly,
for the widely varied individual regional markets that, amalgamated, comprise
the national housing picture.
It is true that, for the past year, most of the indicators have marched in
lockstep in one direction - down. Still, you occasionally get outliers, reports
that indicate things may not be as bad as they seem. Among these was the report
on December 31 that sales of existing homes actually rose 0.4% in November. In
contrast to sales of new homes - those omnipresent cookie-cutters, New
England-style in the Arizona desert housing-development monstrosities that
despoil the virgin landscape like indelible ink spots around America's outer
suburbs - existing home sales seemed to have reached a plateau late in 2007,
stabilizing at around an annual rate of about 5 million units.
Home prices are falling in the US, but it is important to keep that data in a
geographical and historical perspective.
On all but the most superficial level of analysis, it is probably incorrect to
think of a unified US housing market. The housing picture in the US more
closely resembles an agglomerated average of all the different individualized
local and regional housing markets.
Thus, the current price declines in US real estate values are concentrated in
places such as the US Midwest, devastated by the continuing contraction in the
US auto industry, and southern California and Florida, where real estate
speculation was at its irrationally exuberant best up to the end of 2006. Most
other markets have real estate prices stable to only declining marginally; in
some markets, such as the Pacific Northwest and the area around Charlotte,
North Carolina, real estate price appreciations continue, albeit at a more
reasonable pace.
Here it is also important to look at the bigger picture. According to the
Case-Shiller Real Home Price Index, US home prices fell about 3.4% in 2007.
Even with the declines seemingly accelerating to around a 10% rate by the end
of the year, that should be looked at in the context of a 52% rise in prices
since 2001.
In other words, if you bought your home before, say, mid-2005, and unless you
borrowed away the appreciated value of that home with home equity loans, your
home can still be your piggy bank. You can still head to the mall with the
other zombies.
It's true that every month about a quarter of a million Americans are losing
their homes through foreclosure, and that number should continue through 2008.
The subprime "teaser" mortgage resets should peak in April, then taper off into
mid-2009. Still, if one is expecting the American consumer to go into spending
mourning over the fate of his poor foreclosed brethren, one has not spent all
that much time with American consumers lately.
Just before Christmas, the US television network ABC had on its Nightline
news program the most insightful broadcast report I've seen yet on how American
society is adapting to the subprime crisis. Far from being a dour and
foreboding account of sad homeowners gathering their paltry belongings in
preparation for foreclosure, the report showed happy, giddy prospective
homeowners on big tour buses, on an excursion, organized by a Stockton,
California real estate agent (who provided the snacks and drinks), to view
recently foreclosed properties.
The atmosphere on the buses was more approbation than Armageddon, more game
show than Gotterdammerung: "You wanna get a good deal off someone else's
life-wrecking misfortune - come on down!"
"It hadn't crossed my mind," one prospective homeowner replied when asked if he
was giving any thought to the misfortunes of the previous homeowner. "I look at
it as more or less an opportunity."
An opportunity to then join the zombies at the mall's home furnishing store, no
doubt.
The other side of the subprime crisis coin is what the subprime securities did
to the balance sheets of America's proudest and most austere names of
commercial finance.
Through much of the late summer and autumn, I elaborated on this site how it
was then being revealed how some of the bluest names of American blue-chip
finance, names like Bear Stearns, UBS, Merrill Lynch and Citibank, had treated
subprime-related and originated debt securities not as the highly speculative
investments they have now revealed themselves to be, but as hot dogs at the
quintessentially American "sport" called competitive eating, greedily stuffing
as many subprime securities down their fat portfolio gullets as their trading
desks could find.
When it became obvious just how little real value these securities actually
contained, the tumbrels rumbled down Wall Street and the heads rolled, most
prominent among them Merrill Lynch chief executive officer (CEO)Stanley O'Neal
and Citigroup CEO Charles Prince, along with roughly 100,000 other
finance-related jobs. So far, US financial conglomerates have "written down"
(ie admitted as most likely worthless) about US$80 billion of subprime-related
debt. Everybody knows there will much more to come; that the total amount of
writedowns may finally end up in the $250 billion to $400 billion neighborhood.
Still, as 2007 drew to a close, Wall Street seemed quite complacent with the
prospect of around another $300 billion or so of American finance capital being
wiped out of existence.
With the exception of mortgage insurers such as MBIA (who probably sang "Auld
Lang Syne" for themselves after learning that they will soon have a Warren
Buffett financed entity as a competitor), most of the stocks of America's
finance industry have held at the lows of mid-November, before Federal Reserve
chairman Ben Bernanke raised the white flag and indicated his willingness to
continue cutting rates. Some, like Morgan Stanley and Goldman Sachs, even show
signs of the beginnings of a rally.
Perusing comments from traders, I see some credit accruing to Bernanke from
this at least temporary respite from the long fall off the cliff that most of
the financial sector suffered in 2007. A lot more is being given to the real
heroes of the end of 2007, the sovereign wealth funds (SWFs) , the huge Asian
and Middle East pools of government capital that are beginning to fulfill my
prediction that, flying out of the sun like Han Solo in the Millennium Falcon,
they would save the day for plucky little American finance capital. ( I first
wrote of the likelihood of US finance capital being rescued by SWFs in my
August 21 ATol piece
When the big guns fail, call in China, and when the rescues actually
commenced, my November 29 ATol piece,
Selling the US by the dollar).
With the belief now pervading the markets that the SWFs are going to be buying
up American finance, US traders are commensurately less willing to sell its
stocks, figuring that it's better to hold on to them now in order to sell them
dearer to the SWFs later.
Am I saying that the subprime crisis is over, that its once again morning in
America, that all Americans can once more, after morning services at the
megachurch, settle down in front of the 50-inch plasma TV with rack upon rack
of baby-back pork ribs to watch Dallas defeat all comers in the NFL playoffs?
Not in the least. If it turns out that the total subprime bill is substantially
in excess of the current projected figure, say past $500 billion or more, the
bloodletting on Wall Street will resume, as it will should a major financial
institution actually shutter its doors and fail.
What I am saying is that for the first time since at least last spring, Wall
Street seems to think that it can see the far side of the subprime crisis. Yes,
there's plenty of bad news now, and plenty more to come, but bad news is an
essential component of rising stock prices - the time to worry is when the news
is all good, not all bad. An old stock market adage is that bull markets climb
a wall of worry. At least for now, Wall Street seems to think that it can at
last see over the wall.
Another old Wall Street adage, sometimes attributed to one of the barons
Rothschild, is to "buy when there's blood in the streets". Maybe Stan O'Neal
and Chuck Prince's headless corpses fit the bill for that.
What about the American consumer and homeowner, the other main actor in the
subprime drama? A backbone of conservative, free-market economic theory is what
is called the "rational expectations" school of economic thought. This theory
states that economic actors, be they investors, business owners, farmers or
consumers, keep tabs on the economic news of the day, make an informed
assessment of what the news means for their individual future prospects and
then act accordingly. They spend and/or invest more should they believe future
prospects are bright and cut back if things look less promising.
If rational expectations were right there is no way we would have seen the
roughly 3.6% rise in holiday retail spending that America saw for this just
concluded holiday season. This was less than in the booming years of 2004-2006,
but still, you only had to go back to 2002 to find a similarly "bad" holiday
season. If you listened to many pre-holiday economic prognosticators, you might
have thought that America was facing the worst holiday season since the soup
kitchens and breadlines of the Great Depression, maybe the worst shopping
season since the British burned Washington in the war of 1812.
Why didn't rational expectations work? Why did Americans ignore all the bad
news to once again be zombies at the mall?
One thing that the rational expectations theorists probably didn't factor into
their calculations as to why Americans ignore economic news is that Americans
just hate economic news. Whenever it comes on the TV there is a mad, desperate
scramble for the remote control to change the channel; anything, whether it be
meetings of the local sewage treatment committee on the community affairs cable
channel or Venezuelan soap operas, will get some viewing time in preference to
actually watching economics news on TV.
Had it not be for the fact that the viewers of business cable channel CNBC have
the most desirable demographics of all US television, in other words they're
rich, the meager ratings of business and economics TV in America would not have
survived past the 1980s.
So the reason that the news of the subprime crisis has not led to a greater
contraction of US consumer spending is that most Americans have little or no
comprehension or understanding of what the subprime crisis actually is. They
know it involves big words and complicated concepts, and in high school or
college they got out of their economics requirement by substituting another
elective, basketweaving or woodworking, maybe "Contextual Critical Analysis of
Bruce Springsteen-101".
What Americans do know is that they have jobs. At 4.7% the US unemployment rate
is still very low, just 0.3% off the low for this cycle set in March, 2006.
Former US president Harry Truman once said that Americans define a recession as
a neighbor losing their job, a depression as them losing their own jobs. By
that measure, with American employment still strong, Americans just don't see
that much urgency in cutting back spending.
And that's what's keeping the US economy humming. If they don't see a few of
the people they used to see in the neighborhood, because they've been
foreclosed on and are thus now living in a rental property in a far less
desirable location, well, that is sad, but look at the bright side. There's a
lot less wait for the swings on the neighborhood jungle gym, or to get a latte
every morning at Starbucks.
This is why it is so absolutely critical to follow the monthly US employment
reports, starting with the report for December due out on the morning of
January 4. As long as the US consumer has a job he is going to keep spending
("Saving? What's that, oh, I know, it's what the goalkeepers in soccer do!")
and as long as the spending spree continues there is a safety net as to just
how bad the subprime crisis is going to hurt the American, and by extension the
world, economy.
Americans feel more secure if they see the headline unemployment number still
low. A factor that is probably artificially keeping the employment numbers rosy
is the fact that the layoffs in the US construction industry don't really show
up in US employment numbers.
That is because it has been an unacknowledged but obvious fact that, for most
of this decade, the boom in US real estate construction has been populated by
America's signature reserve army of the unemployed, its undocumented, primarily
Hispanic, illegal alien workforce. These workers weren't really counted among
the officially employed during the boom, and, as housing construction
employment now evaporates, they're not now counted as among the unemployed in
the bust. (I wrote on the phenomenon of illegal immigrants building US housing
in my March 29, 2007 ATol piece
Exurbia-built on paradox and hypocrisy.) The hard-working builders of
America's homes and hearths are proving to be as disposable as tissue paper,
which, if you ever talk to the immigrants themselves, pretty much sums up how
they feel America always saw them in the first place.
Like many other observers, I have been astounded at the continuing prosperity
of the US economy during the latter half of 2007, a time when the nation's
financial system essentially became dysfunctional.
The financial sector and "real" economic sectors are supposed to work in close
tandem, with the financial system providing finance for investment and then
having the real economy place the profits from that investment back into the
financial sector to be turned into more productive new investments.
By all accounts, this transmission procedure broke down in the second half of
2007, as credit quality concerns arising from out of the subprime crisis caused
lenders to pull back from loans to even the previously most creditworthy
borrowers. Still, consumers kept spending, and the economy kept chugging along,
posting a very impressive 3.9% growth rate for the third quarter of 2007.
Maybe we need a new metaphor for the relationship between finance and the real
economy. Instead of being something like twin brothers working together in the
family business, the free-market ideologues' total deregulation of the
financial services industry in the early years of this decade has turned the
real economy into the sound, sensible brother capably managing the family
business, with the financial sector being the uncontrollably bipolar sibling,
prone to extremes of giddy elation (as in the credit creation orgy of 2003-2006
that stoked the subprime crisis) and suicidal despair (as in the current
crisis). Meanwhile, the real economy goes to work each day, earns a paycheck,
supports its family and the country.
Squeezing the metaphor until it screams, proper regulation of the financial
sector is like Prozac. In the colloquial jargon of psychopharmacology, the
financial sector needs to get back on its meds.
In what is, according to some media reports, the bleakest time in finance
history since the moneychangers were driven from the Temple, Americans keep
spending. How can they not? As that the French are justifiably proud of their
culture and cuisine, the Germans their engineering and manufacturing prowess,
what is it that Americans can be more proud about than their continued
willingness to exhaust 200 years of built-up treasure on cheap trinkets that
they will dispose of and replace in six months? No matter what the politicians
bleat on in the Iowa cornfields about the centrality of Jesus in American life,
the country's real unifying faith, affirmed no matter what race, color, creed,
gender, or sexual orientation, is mindless consumerism.
In this, the nation's 1,100 enclosed shopping malls are temples to this
national faith, with the 500-store Mall of America, in Bloomington, Minnesota,
the faith's new Vatican, its shining food court on a hill.
With the consumerist religion flourishing as it is in America, it will take
more than what we've seen from the subprime crisis so far to shake the
foundations of the faith. A moral philosopher or theologian might question the
value of the new creed to its believers' souls; then again, isn't the whole
point of being a zombie that you've lost your soul?
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
