The myths get debunked
The demise of the belief system
Look back at what the pundits were trying to sell you over the past two years:
- That the problems in subprime would stay contained and not to worry about housing because it is a small share of GDP;
- That corporate balance sheets are strong, which should keep capital spending strong and act as a solid antidote to the real estate downturn (capex began to contract in the first quarter of this year);
- That the global economy would manage to “decouple” (France moved into recession before the US did) and that the banks were well capitalized in this post-Basel Accord world;
- That commodities were in a super-cycle, that we were in a new structural uptrend in inflation, and that a secular bear market in Treasuries had begun (remember the summer of 07?);
- That strong foreign demand would help shore up home prices – meanwhile, mmigration is down 17% YoY and the just-released Pew report showed that illegal immigration has dropped to 500,000 annually from the norm of 800,000 through the first five years of the decade.
- And finally, that we had no reason at all to be concerned over the US consumer because, didn’t you know, that the top 2% of the nation’s income earners do 95% of all the spending in the economy. What a nice handholding story. We can’t tell you how many hours we spent, not disproving this stylized fact as much as showing that, indeed, the beloved high-end, well-heeled Fifth Avenue shopper is just as cyclical as the rest of the population.
The tax bill that will be necessary to ensure the financial system remains intact is also going to take a very big toll on discretionary income in coming years – fiscal policymakers will be waging wars on all fronts: the war on the credit crunch, the war on terrorism and the war on entitlements. Top marginal tax rates could well end up going back to pre-Reagan levels because something tells us that it is going to be the American taxpayer, not some central bank or sovereign wealth fund in Asia or the Middle East that is going to be funding the rapid expansion of the budget deficit in coming years.
It also has to be understood that we have come off two gigantic asset bubbles that have burst in just the past seven years. This is epic. As our good friend and former colleague Dick McCabe just pointed out to us, the common talk after the 2000-2002 market decline was that people would have to work until they were 75 to replenish their savings/401Ks before they would be able to retire. The figure must be up to 85 or 90 now!