Downward Economic Spiral Driving Consumption Down
Economics / Recession 2008 - 2010 Jan 16, 2009 - 10:07 AM GMTBy: Oxbury_Research
Don't Forget the Economics - Jan. 14 (Bloomberg) -- Apple Inc. Chief Executive Officer Steve Jobs, who said this month that he is being treated for a nutritional ailment, will take a medical leave of absence through the end of June. The shares fell 10 percent.
Although I wish the best for Steve Jobs, I care very little about this whole Apple story. The reason I bring it up is due wholly to CNBC. They've covered this story, along with the Madoff, for a large portion of the day.
But the reason I wanted to talk about Apple today actually has to do with some of the coverage on the story. A number of analysts, financial reporters, and traders were interviewed on the topic. Most of it was your typical uninspiring garbage, but the interview would usually end with the question of whether or not Apple is a buy at current price.
There were all sorts of funny answers from the Goof Troop, but what stood out were the ones claiming Apple as a buy citing that Apple is trading at an attractive multiple. There were many who made this claim and used it along side Apple's solid product base as their reasoning.
I tell you what. It's all completely irrelevant. Current earnings estimates and multiples based off these estimates are just ridiculous. Apple is just one of many stories that relates to the bigger economic picture here.
Economic Spiral Driving Consumption Down
The problem is that people don't understand the ripple effects of what's going on. Let me put it very simply for you.
Over the past decade or so, the growth in housing prices as a result of Keynesian stimulus (negative real interest rates, monetary inflation, and fiscal expenditures) created this massive pool of artificial wealth held by the consumers. Both domestic and foreign manufacturing and service bases grew proportionally to accommodate.
When the worm turned and housing prices began to retract, the pool of wealth began to contract as well. That was the first ripple. Now the manufacturing and service jobs that were being supported by the artificial wealth are gone in the first waves of job cuts. Now the pool is even smaller. It is easy to see how this snowballs until the excess liquidity is been extracted.
Put it this way, in 2008 the U.S. lost 1.9 million jobs. I fully expect that the U.S. will lose another 2 million jobs by May. The Case-Schiller Index showed home prices declined 18% in 08. I look for a repeat of that in 09.
After the excess pile of wealth is completely gone, and were almost there, the cuts consumers have to make won't end, and they will only get more painful. Many consumers have eliminated the first round of excess expenditures, big ticket items. Boats and cars are the first expenditures slashed. Then consumers will stop buying other leisurely items such as computers and iPods. After that consumers will really start to identify between the "really want" goods and the "really need" goods.
Analysts don't get the severity of what's going on. The above mentioned scenario is NOT priced in to earnings expectations for companies like Apple. The ripple effects don't stop there.
Ripples into Commercial Real Estate
I talked a couple of months back and periodically after that about the coming turmoil in commercial real estate. Well, the above mentioned reasoning are the fundamentals behind this trend.
You just have to look at it from a slightly different perspective. I spoke of the growth in the manufacturing and service bases that took place to accommodate the artificial pile of wealth consumers held. Commercial real estate was required in order to support that.
Now that there's less demand for these goods and services, there is less demand for the commercial real estate. Like everyone else, commercial real estate developers did not see this down turn coming and commercial real estate was greatly over built. Have a look at this chart.
Many of these developers are having trouble moving units, experiencing cancelations of expected clients, or are have current clients back out of their leases. Declines in personal income, housing, and employment are only going to increase and we can look to the commercial real estate market to represent this. This market has started to roll over, but we are still in the very early stages. Look for turmoil to show up in the commercial real estate asset backed paper markets.
By Nicholas Jones
Analyst, Oxbury Research
Nick has spent several years researching and preparing for the ripsaws in today's commodities markets. Through independent research on commodities markets and free-market macroeconomics, he brings a worldy understanding to all who participate in this particular financial climate.
Oxbury Research originally formed as an underground investment club, Oxbury Publishing is comprised of a wide variety of Wall Street professionals - from equity analysts to futures floor traders – all independent thinkers and all capital market veterans.
© 2009 Copyright Nicholas Jones / Oxbury Research - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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