The All Hat and No Cattle Nation: Lessons from the Great Depression Part XVII: When Economic Times Cause and Economic Tipping Point.
Posted by: admin in Real-estate news“Americans, while occasionally willing to be serfs, have always been obstinate about being peasantry.” - F. Scott Fitzgerald, The Great Gatsby The Great Gatsby was published in 1925 and chronicles the Jazz Age and captures some of the excess of the roaring 20s. F. Scott Fitzgerald wrote the novel during a time in which there was booming […]
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“Americans, while occasionally willing to be serfs, have always been obstinate about being peasantry.”
- F. Scott Fitzgerald, The Great Gatsby
The Great Gatsby was published in 1925 and chronicles the Jazz Age and captures some of the excess of the roaring 20s. F. Scott Fitzgerald wrote the novel during a time in which there was booming economic prosperity and to a certain extent the novel idolizes riches and glamour yet throughout the book there is a slight discomfort of the unchecked materialism. Even though it is now largely read by most Americans, this book was not popular during its initial publication or subsequent years. A few years later, the Great Depression took hold and many of the themes in the novel simply did not apply to the large majority of Americans. To talk about unrestrained prosperity during the 1930s was absurd. After the Great Depression America had its mind preoccupied with World War II. Only after these major events did this novel garner any large readership.
The idea of the nouveau riche is something that has always been a part of the American spirit. Horatio Alger captured this by his popular rags to riches stories during the 19th century. So this current era of economic boom is nothing new. One of my real estate mentors once told me that, “you Californians have all hat and no cattle. Everyone goes around pretending to own things with money they don’t make.” This was a few years ago and those words ring loud and clear in what is going on today in our current economic collapse.
The idea of “ownership” has morphed in the last few decades. Owning something became more about appearances rather than actually having complete possession of material objects. There is one thing that highlights this point to perfection. The auto lease. Chrysler recently announced that through its financing arm that they will not be offering any additional leases:
“(WSJ) A week ago Chrysler LLC announced its financial arm would stop offering leases on new cars and trucks, effective Friday. For some dealers, the move has sparked a boomlet.
“It has been a frenzy,” said Paul Steel, who runs three dealerships in Michigan, including Southfield Chrysler Jeep outside Detroit. “Everyone is trying to get in now on a three-year lease hoping that Chrysler Financial will get back in the game by the time their lease is done.” Mr. Steel has kept his dealerships open until midnight every night since Monday, and he expects his staff will be working until at least 2 a.m. Friday to process all the orders.”
A friend of mine told me that leasing is a way of “hiding the cheese” of those that actually make a good sum of money. With the current unforeseen spike in fuel prices the large truck market has come to a screeching halt. Many dealers such as Chrysler, Ford, and GM are getting hammered by people bringing back their trucks from short leases and are finding no market for trucks. In addition, the value of each leased truck that is brought back is costing them a sizable amount since it has depreciated significantly due to market conditions. Housing isn’t the only thing that is crashing. With many of these dealers cutting back, we will start seeing who really has the “cheese” and wealth.
This is part XVII in our Great Depression series:
12. Is the DOW now Tracking with the California Housing Market?
14. Bank Failures.
16. Items That Sold in the Credit Bubble.
This phenomena isn’t only a California issue. The entire automotive industry relied on this easy credit decade and played into the “all hat and no cattle” sociological trend. The majority of people thought that by simply leasing a car too expensive for them to own that they somehow were wealthy. What really was unfolding is the same thing as those that purchased homes with Pay Option ARM mortgages and had an artificially low rate. The entire economy was built on people pretending that they actually owned artifacts of the wealthy when the reality of the situation was that their balance sheets were on the verge of becoming insolvent.
I’ve tried to understand the psychology of this and think that as a society, certain constraints were removed that allowed this excess to flow. First, the idea of financial prudence was completely removed. The “greed is good” mentality flowed unchecked. After all, why do an honest hard day of work when you can get a $10,000 commission check for putting someone in a toxic mortgage? Why would hedge funds on Wall Street want to invest in sustainable slow growth companies that add value when they can invest in CDOs and MBS that were yielding rates twice or even three times as much? Instant gratification. There was really no point in looking ten steps ahead when all the wealth was at your door knocking right now.
The media fed right into this. It took two to tango. The majority of those in society now labeled as “consumers” were fed by their opposite side the “producers” and all was well. People wanted homes, we will build homes. People wanted huge gas guzzlers, we will build huge gas guzzlers. People want easy credit, we will give them easy credit. The unchecked consumption is what we are now dealing with. That is the problem. All the solutions being thrown around somehow still have nostalgia for going back to this lifestyle. We can’t even if we wanted to because we have reached the tipping point of maximum debt. Take a look at our nation’s debt:
With the backstop to Fannie Mae and Freddie Mac we have virtually guaranteed that the total Federal debt will surpass $10 trillion in the next few months. As distressing as the above figure is, the American consumer has outdone the actual Federal government. Take a look at household debt and liabilities:
The American consumer is on the hook for $13.1 trillion in obligations. This is for mortgage, auto, and consumer debt. The majority of that debt is with mortgages. Now the thing that is occurring is that the underlying assets like McMansions with uranium countertops and civilian tanks with spinning chrome rims are actually losing value as we speak. The debt itself is still valued at the peak price. Welcome to wealth destruction. This is actually deflationary since each foreclosure and each leased truck being dropped off at the dealer is forcing someone to take a loss. The higher prices with fuel and groceries is simply a reflection of our declining dollar.
Given that a large number of people never could really afford a $60,000 SUV or a $600,000 home, prices simply by the law of economics are going to have to come down. They already are. This is how the free market should work. These items are now being valued at their true market rates and not under the decade long Ponzi scheme where the new economic paradigm was, “trade up because it will always go up in value.” Even with the new FHA guidelines people are now going to have to show their actual income and not their brokers made up $250,000 income from working at Target. Those with the cheese, that is good credit and incomes to match, will be able to buy assets at vastly discounted prices. The only reality is this group isn’t as large as many of these companies would like to believe.
Think this isn’t the case? Here are a few examples of people looking to protect their hats:
“(Slate) Along with free trade and the SUV, another ’90s-era icon that seems to be dying is “casual dining.” The Bennigan’s and Steak and Ale chains closed down and will file for Chapter 7 bankruptcy, “the latest casualties in the so-called casual dining sector, considered a cut above fast food,” as the NYT puts it. Technically, only the 150 or so corporate-owned branches-not the roughly equal number of franchisees-are immediately affected, “but the franchisees now find themselves owning a brand with no corporate cousins,” as the Dallas Morning News points out.”
Think Bennigan’s is the only one feeling the pinch? How about a local popular chain P.F. Chang’s:
Over the last 5 years, the company is now down by 45%. I’ve noticed this a couple times during lunch meetings and the foot traffic is demonstrably slower. Or what about the ultimate resilient Starbucks? Everyone needs their latte right?
People are cutting back drastically because they have no other choice. If anything, they are simply trying to realign their balance sheets and now that credit is much more restrictive, it is becoming rather apparent that their spending was all hat. It is time to seek out the cattle if there is any left. Yet it isn’t all bad news. Too early to call a trend but some retailers are actually looking at Great Depression fashion:
“(NY Post) The duds say it all - and it’s depressing.
Taking a cue from the grim economy, this fall’s fashions at Banana Republic, Gap and H&M are featuring a distinctly Depression-era trend of cloche hats, pencil skirts, conductor caps and baggy, vintage-style dresses.
One of the most popular styles appears to hark back to the impish, newsboy getup of the 1930s: baggy trousers, caps, pinstriped vests, oxford lace-up shoes and utilitarian handbags.
“We associate the newsboy look with urban poverty - street kids of the 1930s,” said Daniel James Cole, a professor at the Fashion Institute of Technology.
“Given that we’re in an unstable economy and an uncertain political landscape, it’s possible that a retro style has come back as a way to connect with our heritage.”
Connect with our heritage? How about connecting with reality. Amazing that all this talk about recession and depression is happening during a stable time according to some politicians. We’ve lost jobs for 7 months in a row:
That is the reality of the situation. What we are learning is much of the cattle that we had was on a short-term lease and now we need to pony up if we want to continue that lifestyle. Hard to continue funding conspicuous consumption when jobs are being lost.
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Related Posts:
■Bank Failure: IndyMac Bank. Lessons from the Great Depression Part XIV. Bank Failures.
■The Lords of Money Speak: Even the Prime Will Fall. Lessons From the Great Depression Part XV. The King JPMorgan Speaks.
■The Sham of our Current Unemployment Rate Numbers: Lessons from the Great Depression: Part X. Data Mining.
■The Day Housing Faced the Plague of Locusts: Lessons from The Great Depression Part XIII. Facing our Own Economic Pilgrimage.
■Home Shopping Crisis Network: When the Ballyhoo Years Turn Into Relics of Excess. Lessons from the Great Depression Part XVI: Items That Sold in the Credit Bubble.
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