Personal Finance QuickTake: Financial Market Mess

Leading Economists are saying the we are not only in a recession now, but probably a severe one. Most had earlier believed that this would worst case be like 2001. A drop an economic time that felt like a recession, the a nice bounce back once the economy shock off the doldrums.

Now with Bear Stearns and continued market turmoil they are convinced that this is not going to be swept under the rug quite so quickly this time.

From the report:

No less an authority than former Federal Reserve Chairman Alan Greenspan wrote this week that "the current financial crisis in the U.S. is likely to be judged as the most wrenching" since the end of World War II.

Other noted economists are also sounding alarms. Harvard professor Martin Feldstein, the former head of the National Bureau of Economic Research, said recently he believes the country is now in a recession and it could be a severe one.

What got people's attention was how quickly Bear Stearns, the nation's fifth largest investment bank, could go from a stock market value of about $3.5 billion when the market closed on March 14 to being sold at the bargain-basement price of about $236 million two days later.

"We can't afford to stagger from one day to the next without knowing what large financial institution might be the next to go down the tubes because of a lack of liquidity. That is way too dangerous a game," said Lyle Gramley, a former Fed board member who is now an economist with the Stanford Financial Group. "It is possible that we could be entering the worst recession of the post World War II period. The threat is certainly there."

I was just looking late this afternoon, even with Fed Rates at 2%, 30-year Jumbo loans are still at 7%+! This makes it tough to refinance in a time where at least that market should be moving.

Some have said for awhile that 740 is the new FICO-08 720. In other words, even those that can now make there payments and would like to get in a more tradition loan structure can't due to tightening at the banks. There is a fine line between a small night-night drink and a fire house in your mouth. They have just well over tightened. You can't blame them given that the Bear went under in less than 2 weeks!

One of the rallying cries had been that rates will reset on those with ARM tied loans and they needed to move, but given that those rates are dropping is only those that are trying to do the right thing are getting punished.

It reminds me of the old joke about a group of folk on a plane and the Captain comes on the intercom and says, I have good news and I have bad news." The bad news is...we are hopelessly helplessly lost...but the good thing is with this tail wind we are way ahead of schedule!"

71% of Economists Say We Are In A Recession

Fully 71% of 51 Economists of surveyed agreed the US economy has slid into recession according to Wall Street Journals online edition today.

Retail sales fell a pointed .6% in February as consumer spending tumbled. Consumers continue to grapple with high fuel prices, bad home value information and shrinking 401Ks due to market issues.

This is a big turnaround from just 5 weeks ago. 20 surveyed felt the economy would actually go backwards for the year and that unemployment would rise to 5.5%

The turnaround in opinion can be traced to the recent employment report that showed a loss of 63,000 jobs for the month. The second month in a row with negative job growth.

A better phrase is probably "recessionary" as the textbook definition of a recession is two consecutive quarters of GNP (Gross National Product) decline. However, I prefer the "Poor Richard" definition. "A Recession is when your friend loses his job, a depression is when you do!"

Unless some stability to home and gas prices (although in different directions!) can be found the public psychology is going to get tighter which could accelerate the slowdown. It is going to be a tough Election round in the US. As the sign said..."It's the Economy, Stupid!"

Personal Finance QuickTake: Bankrupt Brands

Sharper Image and Lilian Vernon announced that they were declaring bankruptcy today according to USA Today. Hit by slower than anticipated Christmas Sales as well as a lackluster year both brands announced separately that they have filed.

The real question is, Is this a one-off issue with poor performing brands, or the start of something big? According to the report some are predicting that this is the beginning of an avalanche of bankruptcies by companies.

From the report:

"You'll see a record number of bankruptcies over the next 50, 100, and 1,000 days," said Burt Flickinger III, managing director of the New York-based retail consulting firm Strategic Resource Group. "Consumers are cash and credit constrained. They're out of purchasing power."

The International Council of Shopping Centers projects 2008 store closings could reach 5,770 stores in 2008, the largest number of closings since 2004. Retailers as a whole reported their worst January same-store sales in almost four decades.

Flickinger said the problem is partly food and fuel inflation. While consumers used to pay 10 cents of every dollar for food and fuel, they now pay up to 20 cents per dollar.

What this means

As the Consumers go, goes the economy. The weaker die off first, but it is really the symptom of the larger issue that the economic boom of the last few years has been fueled by debt. Debt often obtained via Real Estate. That has dried up. Credit Cards are full. Where is the next wave of buying going to come from? And what happens if it doesn't.

What happens is, that we go into a recession. If we aren't prepared for it it will be twice as hard.