Tuesday, January 06, 2009

2009 – Year of Unemployment, Foreclosures, Bankruptcies and the Vicious-Cycling “PRIME-Bomb!”

The New Year is getting the typical treatment in the business media…

The Bulls are making the rounds with tales of second half recoveries and silly “Dogs of the DOW” theories.

Many, including some of the most strident free marketeers, are holding out hope for successful government intervention and stabilization of private markets while the new administration, with likely the highest reserve of political capital seen in decades, appears eager to get right to work “fixing” our economy.

Yet, soon the reality will overtake us all again.

The economy is in a serious bind and as we discovered in 2007 and 2008, there are no easy solutions.

This year, I will refocus my attention on Unemployment and particularly unemployment driven foreclosure and personal bankruptcy activity while continuing to develop a theme I call the “PRIME-Bomb”, the explosive force that will be felt as the immense cohort of typical “prime” households (households with prime jumbo, prime piggyback and simply prime conforming loans) face historic financial pressures and go bust in record numbers.

2006 marked the first year of the housing decline affecting mostly home sales activity, home builder operations and decelerating home price appreciation.

2007 brought serious housing price depreciation, steep foreclosures for weak borrowers with the most toxic of loan products, the sub-prime collapse and finally the initial leg of the credit market turmoil and the start of the current recession.

2008 was a spillover year where the housing decline and the larger credit deleveraging and crunch sloshed over into virtually every market and business trouncing historic financial institutions and eventually leading to the first phase of the employment downturn, stock market collapse and severe consumption and macroeconomic deterioration.

2009, I believe, will likely bring the most fundamental decline to American households (and firms by viciously-cycling proxy) seen in the post-war period driving the economy far deeper into recession than most anticipate.

We are now on the verge of a profound shakeout of American households… a market clearing of sorts where millions of Americans that made considerable financial progress during the 90s and 2000s are forced back down the socio-economic ladder by the crushing force of a decelerating economy and, for many, their own, self-imposed, debt burdens.

The two main stimulants of this portion of the decline will be the continued increase of unemployment and the decline in home prices.

House prices will continue to decline throughout the year, especially on the east coast where many regional economies (Washington DC, New York, the New England states) are only just now beginning to experience truly stressful economic pressures.

East coast and West coast home price declines will, in effect, equalize as all regional areas push well above 7% unemployment forcing distressed properties to swell inventory levels and the sales pace to continue to slow.

As for unemployment, it’s important to consider that even if this downturn were to bring a “garden variety” unemployment spike, we would still expect at least two more complete years of increasing unemployment… unthinkable for many but reality nonetheless.

This bout of unemployment will prove to be a vexing situation to address as no amount of “shovel ready” work projects will help those who have never lifted a shovel.

We are now firmly a nation of service workers with 42% of all private non-farm jobs seated in “Information”, “Financial Activities”, “Professional Business Services” and “Education and Health Services”.

We will see in 2009 that a large and growing percentage of the population of highly specialized college educated professionals will require significant retraining in order to successfully reenter the workforce.

This extra complexity will slow the transition of workers into other productive capacities and work to drive a historically high rate of unemployment (my current model sees unemployment reach at least 10% by the peak) and place a rarely seen level of pressure on traditional public services like unemployment benefits and even food stamps.

Many will simply not survive financially.

Foreclosures and personal bankruptcies will soar throughout 2009 while consumption continues to erode thus spinning the vicious circle around toward firms with declining profits, declining stock values and record corporate bankruptcies and back again to unemployment.