It's Only Just Begun

Economic news continues to dominate the headlines week-in-and-week-out. Sundays have become "dooms day" as bad news breaks before trading begins in the Asian markets.

This past weekend's bomb? Lehman Brothers and Merrill Lynch are collapsing. Standing in the wings is insurance giant AIG, which is warning of impending doom. Today AIG saw its stock drop 61-percent, the largest single-day loss by a major insurer.

In response, the DOW fell 504 points, the single worse day since 2001.  Wall Street pundits would like us to believe we have witnessed the bottom, it can't get any worse. Don't believe it.

Martin Weiss and Mike Larson writing for "Money and Markets" observed in an e-mail alert today,

• The Dow is still not far from its all-time peaks, with a lot further to fall. Our forecast is unchanged: 7,200 on the Dow.
• The recession is still in its early stages. Expect outright contractions in GDP in the coming quarters, and despite a lot of talk and some action, don't count on the government to turn it around any time soon.
• America's oversized debt pyramid has just begun to wind down. It could take several years to clean up the mess. (Emphasis added)

Until analysts and "experts" stop fooling themselves (and the public) and start to recognize the depth of the credit crisis confronting the country, we will continue to see false hope replaced by near panic as one giant after another falls.

China: Transformation at Light Speed

How fast is China transforming itself into the modern age? Consider these examples from the Money and Markets article, "The 6 Giants of Global Profits" by Martin D. Weiss:

China: "To Get Rich is Glorious"

When Chinese Premiere Deng Xiaoping spoke these words back in 1993, Larry Edelson was among the first to let us know.

And indeed, that's when China unleashed an economic force unprecedented in modern history. That single, but pivotal, change in philosophy marked the beginning of China's relentless march to prosperity.

And along the way, we are seeing a series of largely untold economic miracles:

• Chinese consumer spending has jumped from virtually zero to nearly $1 trillion.
• There are now over 100 cities in China with a population over 1 million. The U.S. has only nine.
• China currently boasts 1.3 billion consumers. Plus, to stimulate foreign investments, Beijing is pulling out all the stops.

China plans to boost natural gas consumption by as much as 500 percent ... invest nearly $4 billion in information technology and infrastructure ... expand fiber optic networks ... beef up mobile communications capacity ... establish digital capable HDTV transmission ... and use GPS technology for traffic control.

China is building massive skyscrapers, highways, city expressways, subway lines, and an intra-city light rail.

It's expanding the Beijing airport, improving water, electric, gas, and heating facilities. All across China, the equivalent of a city the size of San Francisco is being built every two weeks. This year alone, Shanghai (with 17 million people) will complete towers with more square footage than all the available space in Manhattan combined.

Even more significant is that China just launched a rural initiative for over 800 million citizens.

It plans to spend over $11 billion a year on rural education, irrigation, and medical services.

And it's investing tens of billions to build 112,000 miles of rural roads — enough to circle the globe four times over.

Imagine, just imagine, the raw materials and natural resources like cement, asphalt, tar and steel required to feed that kind of growth. That's why consumption of just about every imaginable resource is flying off the charts!

Read the complete article here.

The Great Paradigm Shift

John Loeffler provides a good summary of the coming paradigm shift heading at Americans at an increasing speed. For several years, Loeffler has been talking about a window from 2009 to 2012 as the critical years when all the pieces begin to fall into place to create what Jim Pulplava has dubbed, "The Perfect Financial Storm."

In his July 18 episode of his weekly "Steel on Steel" webcast, Loeffler hosts:

• James Kunstler - The Long Emergency
• Warren Brucy - The Second Great Depression
• Matt Simmons - Twilight in the Desert

As we come out of this crisis, life as we know it will be very different than it has been. The Great Consumer Economy is coming to an end.

What is a paradigm shift? A paradigm is the way people perceive the world. As people go through a paradigm shift, there first inclination is to try to get things back the way they were. This is evident right now in our political leadership. Both major political parties are promising that the good times will continue to roll, in spite of the clear warning signs the economy has given us in the last year.

As people begin to recognize that perhaps things are not going to be like they used to be, they accept the new paradigm, but they still try to play by the old rules. Loeffler gives the collapse of the Soviet Union as an example. When the Soviet Union broke apart from 1989-1991, the paradigm changed. Unfortunately, the American political and military leadership still tried to play using the old rules of the cold war. It wasn't until 9/11 that Americans began to realize that the world was very different from the one we had lived in from 1946 to 1990.

The third stage = new time, new rules, new methods. The faster you get to that stage, the better you will adapt. Right now, the world is adapting very slowly to the new paradigm that is being thrust upon  us.

Where are we now?

IndiMac Bank is the latest bank failure. The way we kept the economy afloat the last 15 years has been through inflation. Starting in the early 1990s, Alan Greenspan, then chairman of the Federal Reserve, started dumping liquidity into the markets. The result was the tech bubble of the late 1990s. By  1998 to 2000, everyone with any spare cash was investing. The news was buzzing with small investors who were suddenly millionaires (on paper). People with little, if any, investing experience were quitting their jobs to become day-traders. As this bubble began to collapse in 2000, the big investors got out in time, and a lot of little investors lost their shirts. Fortunately, for the government, 9/11 provided cover for the economic downturn and mild recession that started in early 2001 (months prior to 9/11).

Following 9/11, Alan Greenspan began to inflate the money supply again in an effort to bring the economy out of the mild recession, and the result this time was the housing bubble. Cheap, "no money down" loans flooded the market, and home buyers who were unqualified under old rules were encouraged by the government and by banks to buy into the housing market. Independent mortgage brokers began to spring up to meet the demand of buyers who were either moving into the housing market for the first time, or existing homeowners hoping to cash in their expanding equity for a bigger home plus cash to continue their consumer buying spree.

This combination of low interest rates, adjustable rate mortgages, and increasing home values provided enough stimulus to keep the economy growing until it all blew apart in August 2007. This is when the first edge of the large wave of bad loans created in late 2003 to 2004 (with three-year adjustable rates) began to readjust, and the home owners were unable to make their new mortgage payments. As a result, they defaulted.

This began a cycle that has not ended. Homeowners default, home values go down, homeowners who are unable to make their payments try to sell their home only to discover they now owe more on their home than the home is worth. This, in turn, drives more homeowners into default.

It took several months, but now we are watching the lending institutions start to collapse under the weight of these bad loans.

Oil Prices Reach $135 A Barrel

The quotes below from two news stories on rising oil prices help to give some context to the crisis the U.S. faces in the coming months. I draw two conclusions from these articles:

1. Oil prices are not coming down. There are economist and politicians trying to make the point that oil will one day return to $40 or $50 a barrel, but their voices are slowly being shut out by the reality of the world market.
2. We can point our fingers at the oil companies, but oil companies do not control the supply of oil. This is controlled by oil producing countries, many of whom are not friendly to the U.S. (e.g. Russia, Iran, Venezuela).

MSNBC -- May 22, 2008 [Source Link]

As dire forecasts about runaway oil prices become reality, it’s impossible to know how much higher they’ll go. But the impact of the price surge already is  being widely felt. And if prices go much higher, the damage to the U.S. economy will be deeper and wider than the fallout from the run-up so far.

Oil prices have doubled in the past year and have shot up nearly 50 percent since January to a record $135 a barrel. Much of the rise appears to be driven by speculators betting that tight supplies — or outright shortages — will push prices even higher.

Consumers — already hit with rising prices and flat wages — are being stretched further. As the Memorial Day weekend kicks off the summer driving season, gasoline prices are at record levels, reaching a national average above $3.83 a gallon. Some analysts predict the average will break past $4 as early as next week. In some parts of the country, prices are already closing in on $5.

“We're already in a mild recession,” said Lakshman Achuthan, an economist at the Economic Cycle Research Institute. “I think if we go towards $150 (a barrel), we start talking about something worse than a mild recession.”

FinancialSense.com -- May 20, 2008 [Source Link]

The oil price is around $128 a barrel. As recently as last year we were being told that the price would probably not make it over $100. Now we are being told there’s plenty of oil, so the oil price should drop to $100 or lower. These platitudes are sounding pretty empty as we are told that O.P.E.C. is not supplying any more than they are at present. And still the oil price goes up. What is not clear is the long-term effects of an oil price forecast to move as high as $200 a barrel. This will be a major crisis in itself.

Who is Benefiting from High Oil Prices?

 

Indeed O.P.E.C. is presently happy with the market situation; for there are many moves that oil users can make to reduce the cost of fuel and oil should they wish to do so. They can halt speculation in oil, which would return a great volume of oil to the market for consumption, which would lower oil prices, but it would also mean to go against the Free Market principles that shape the entire developed world. 

IT Needs to Prepare for $200 A Barrel Oil

Tech Republic is alerting readers to begin preparing now for the increased demand for for remote connections if oil continues to climb. Bill Detwiler states:

Many IT organizations, particularly in large enterprises, already support a distributed workforce. IT leaders within this category should ensure their infrastructure has the capacity to support increased demand. IT departments not currently supporting remote users should begin exploring their options now. At the very least, you should make certain your network can support existing remote workplace technologies. Also, IT will not be immune from this trend. IT leaders must develop the skills and techniques required to manage a distributed workforce.[1]

Unlike Mike Rhodin, General Manager of IBM Lotus Software, who sees the virtual workplace becoming the rule rather than the exception[2], Detwiler believes a hybrid model will emerge. Employees will work from home a few days each week.

As business and enterprise consider the trend towards the virtual workplace, educators and churches need to consider the virtual classroom. Anytime the words "travel" and "training" are used in the same sentence, we need to think "virtual." It will be too costly to send learners to remote locations for training...we must find effective methods to use technology to bring the learning environment to them.

From a church's perspective, we need to rethink models that require learners to travel to and from the church several times a week. How can the church employ technology to meet its teaching objectives? Leaders need to start exploring how to utilize the tools available to us now. Moreover, given that most churches rely on volunteer teachers, there will be a steep learning curve in helping volunteers develop the skill sets needed to communicate and teach to their classes via collaborative tools.

References

[1] "IT must prepare for $200-a-barrel oil and a rise in remote workers" - May 07, 2008. As transportation costs rise, organizations and workers will look for ways to reduce travel. For many employees, this will mean working from home to eliminate the daily commute. Tech Republic

[2]"IBM Predicts Five Future Trends That Will Drive Unified Communications" - March 19, 2008. Mike Rhodin, General Manager of IBM Lotus Software, made five predictions during his keynote address at the VoiceCon conference in Orlando, FL in March 2008. These include:

1. The Virtual Workplace will become the rule. No need to leave the office. Just bring it along. Desk phones and desktop computers will gradually disappear, replaced by mobile devices, including laptops, that take on traditional office capabilities. Social networking tools and virtual world meeting experiences will simulate the feeling on being there in-person. Work models will be changed by expanded globalization and green business initiatives that reduce travel and encourage work at home.
2. Instant Messaging and other real-time collaboration tools will become the norm, bypassing e-mail. Just as e-mail became a business necessity, a new generation of workers has a new expectation for instant messaging (IM) as the preferred method of business interaction. This will fuel more rapid adoption of unified communications as traditional IM becomes the core extension point for multi-modal communications.
3. Beyond Phone Calls to Collaborative Business Processes. Companies will go beyond the initial capabilities of IM, like click-to-call and online presence, to deep integration with business processes and line-of-business applications, where they can realize the greatest benefit.
4. Interoperability and Open Standards will tear down proprietary walls across business and public domains. Corporate demand for interoperability and maturing of industry standards will force unified communications providers to embrace interoperability. Converged, aggregated, and rich presence will allow businesses and individuals to better find and reach the appropriate resources, removing inefficiencies from business processes and daily lives.
5. New meeting models will emerge. Hang up on routine, calendared conference calls. The definition of "meetings" will radically transform and become increasingly adhoc and instantaneous based on context and need. 3-D virtual world and gaming technologies will significantly influence online corporate meeting experiences to deliver more life-like experiences demanded by the next generation workers who will operate more efficiently in this familiar environment.