Tuesday, June 3, 2008

WSJ: Pinched Consumers Scramble for Cash

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No surprise here - I mentioned in the fall the path for "no more house ATM for you" American consumers would be credit cards first, drain 401ks (whatever they actually invested, which is very little) second, beg borrow steal (pawn) next, and away we go to bankruptcy circa 2009 last. Real wages stagnant for a decade (using government inflation figures, far worse with 'real inflation') eventually will catch up to you. Keep in mind folks, we are not even "in a recession"; what happens if we "enter" one.

Thankfully issues like this will be resolved in less than a month as the 2nd half recovery commences, and my scenario will not play out. Once July 1, 2008 arrives and the 2nd half recovery begins we won't have to deal with front page stories like this one in the Wall Street Journal - those fear mongers obviously do not understand the recovery story and/or the benign data from government that shows an economy poised to rebound imminently. (cough)
  • After a long binge of borrowing, U.S. consumers face a credit crunch and a sagging economy. To sustain their living standards, many Americans are doing what comes naturally: scrambling to raise more cash.
  • Sheron Brunner, 63 years old, bought a $250,000 life-insurance policy in 1997, planning to leave the proceeds to her three children. Health problems forced her to siphon her savings. A monthly Social Security check of about $700, her only source of income, doesn't cover her medical bills and rising everyday expenses. It wasn't enough, so this spring she signed what's known as a life-settlement agreement with J.G. Wentworth, a company that buys life-insurance policies and other tough-to-sell assets. The contract transfers ownership of a life-insurance policy to a third party, which then pays future premiums and collects the benefit. Ms. Brunner received about $45,000 for her $250,000 term policy. (unfortunately this is the generation of Walmart greeters I keep talking about; they actually have it well off since many have pensions and decent social security - it is their kids in their 40s that are going to lead the true "work til you die" generation of non savers - just imagine how LITTLE social security will pay for in 10 years after another decade of 2-3% cost of living adjustments, based on government data, while "real life goes up 8-15% a year)
  • As consumers max out their credit lines and banks clamp down on lending, many older and middle-class Americans are resorting to pricey, often-risky alternatives to stay afloat. Some are depleting their retirement accounts, tapping 401(k)s for both loans and hardship withdrawals. While 401(k) loans generally carry reasonable interest rates, individuals who take them lose some of the valuable power of compounded returns -- jeopardizing their retirement security in the process.
  • Some new fast-cash options allow homeowners to squeeze equity from their houses -- without the burden of monthly payments. One new product offers a one-time payment. In exchange, the company shares in as much as 50% of any future gain or loss in the property's value, typically collecting proceeds when the house is sold.
  • Many people are resorting to more conventional means of borrowing: In March, consumers had a record $957 billion of credit-card and other types of revolving debt outstanding -- up about 8% from a year earlier, according to preliminary data from the Federal Reserve.
  • Reverse mortgages are gaining new favor. Secured by a home's equity, this vehicle can provide consumers with a lump-sum payout, a line of credit, periodic payments or a combination thereof. Reverse mortgages often involve high fees and costs, which often add up to as much as 5% or 6% of the home value. A homeowner or his heirs must typically sell the house to repay the loan, which becomes due when the borrower leaves the home for more than one year or dies.
  • In 2007, 18% of workers had taken a retirement-plan loan within the past year, up from 11% in 2006 (that's 1 out of 5 for the math challenged, up from 1 out of 10 just a year earlier) ;)
And the last sentence of the paragraph of the article pretty much sums it all up better than I ever could.... now my question is for all these people - what will you do in "retirement" (see Walmart employment line)
He tapped into his retirement savings instead, taking one loan and one taxable withdrawal. His logic: "Why plan for retirement if you can't make it today?"
Folks, in the end it's just a shell game, transferring debt from one place to another - until you run out of places to hide. But we are still in frantic hiding stage. The bankruptcies will be hitting in 2009...and 2010; just in time for the 2nd half recovery (of 2010)

Conclusion: Buy stocks. It's all priced in and most multinationals don't need us slimy Americans anymore to succeed.

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