Coffee heat rising

Man with $191,300 job pronounces recession over

Ben Bernanke says the recession is over. Isn’t that great? And only a year after the entire economy melted down. Sure am glad to hear it, aren’t you?

Not to gainsay an august presence like the chairman of Federal Reserve Board, but… I’ll believe it when I see people going back to work. An unemployment rate of something over 9 percent does not an “over” recession make. IMveryHO, that is.

I’ll believe it when the local schools stop cramming 50 kids into each grade-school classroom.

I’ll believe it when the Department of Public Safety stops talking about laying off more police officers.

I’ll believe it when the City stops laying off essential workers.

I’ll believe it when the foreclosures stop and people are no longer being thrown out of their homes.

I’ll believe it when the value of the house my son and I bought at what we then thought was the bottom of the real estate collapse returns to the “bargain” price we paid for it.

I’ll believe it when my income rises to cover the ballooning costs of taxes, insurance, and utilities.

I’ll believe it when the Dow rises above 10,000 and stays there.

Easy to say the recession is over when you have a job with a six-figure salary. Not so easy when you’re in the trenches, still living the recession.

Repurcussions of the fall

Talking with people about the collapse of the economy, you gain some unexpected insights and hear stories you hadn’t thought about.

DCP_2671This afternoon I dropped by a pricey optical boutique in hopes that they could adjust my glasses frames and get them right. Background: Three or four years ago, I bought a pair of stupefyingly expensive Silhouette frames, mostly because my former best friend had a pair (yah, I know…monkey see, monkey do!). Their design really is neat. The lenses are completely rimless, not even any wire or nylon line around them, and the temple and nose pieces are so light and airy you hardly notice you have a pair of glasses perched on your schnozz. They have no hinges: the temple piece is made of a sproingy substance that can be folded, sort of, but springs back to its original shape.

Because they’re expensive, not every optical dispenser carries them. And because they’re kinda exotic, opticians who don’t sell them sometimes are a little flummoxed about repairs and adjustments to the frames. When they get bent, which can happen if you sit on them (ahem!), the repair job is not something for the happy handyperson—you end up having to take them to an optician who knows how to deal with them.

The other day, for no good reason, one of the temple pieces snapped off its lens. So I schlepped them downtown, not a hideously long drive but off my beaten path and so a bit of a nuisance. The woman who’s now running the place announced that the warranty had expired (say what? thôt they had a lifetime warranty!) and it would cost $85 to repair them. Exasperated, I ponied up the money to have her ship them back to the factory to be fixed, eight-five bucks being significantly less than the price of a new pair of the cheapest, ugliest glasses in the shop.

When I went to pick them up, she had me stick them on my face, took one look at me, said “that looks fine,” and out the door I went. No adjustment. Soon as I got home and glanced at myself in the bathroom mirror, I realized one lens was higher than the other. I looked like some sort of wacked-out comedienne…not exactly the image one likes to project when standing in front of 25 hypercritical students.

Hence the visit to the high-fashion optical boutique: it’s a lot closer to my house, and they dispense this variety of overpriced glasses.

The proprietor adjusted the frame so it sits straight on my nose, remarking (in passing) that the lenses had been drilled incorrectly and the temple pieces are too short for me.

This fall, before I’m canned, I’m going to need to buy a new pair of glasses. I’d planned to buy the cheapest junk I could get, just as a back-up.

“Well,” said he, “Before you buy something you won’t want to wear in public, take a look at these: I have a whole showcase full of frames marked way down. Four of my suppliers have gone out of business, and I need to move this stock.”

Hmmmm???

Indeed, the prices were marked down from stratospheric to about mid-level expensive. And some models were very, very handsome, obviously top of the line, with high-quality construction. Much nicer than the pair of glasses I was dragging around town to get adjusted correctly.

He said that the last part of 2008 and first part of 2009 were the worst period he’d ever been through, in twenty years as an optician. Not only was there no traffic through the store, but suppliers were collapsing all around him, some of them leaving him high and dry. “The outfit that made these,” he said, indicating a drawerful of jewelry-like frames, “stiffed me for $4,000!”

Over the past three months or so, however, things have been getting better. He said that right now his business is just about back to normal. People are starting to buy again, and he feels better about the prospects for the future.

Opticians pushed to the wall by the recession. Who would’ve thunk it? With so many people half-blind, aren’t glasses a necessity? On the other hand: it’s not surprising. Even low-end glasses are pricey, and “insurance” programs to help you buy the things are right up there with dental insurance: they don’t cover much. The industry has aggravated the problem by lobbying successfully for regulation forbidding you from buying a pair of glasses unless you’ve had a $70 eye exam in the past year. Add tax, and voilà! A $300 pair of glasses morphs into a $400 gouge. At Arizona’s 8.3 percent sales tax, even a cheaper $150 pair ends up costing you $240—and has to be replaced in a couple of years. Who has that kind of money laying around the house?

I wonder how many Americans are putting off glasses, dental care, and nonemergency medical care, feeling they can’t afford it? Are you delaying vision, dental, or health care because of the recession?

Recession kills off local merchants

The buy-local movement struggles under the best of circumstances. All you have to do is walk into your nearest mall to see that: every shopping district in the land, except for those targeted exclusively at tourists, looks identical, a mind-numbing array of the same boring, cookie-cutter chain stores. Even some tourist traps are chain stores.

So it’s disappointing to learn that one of Arizona’s most prominent local merchants, Eddie Basha, had to declare bankruptcy and close a slew of his statewide chain of grocery stores. He’d already closed 10 stores; this latest round of cuts will shutter 14 more.

Bashas’, owned by an old-line Arizona family descended from a Lebanese couple who immigrated here in 1884, actually comprises four subchains:

Food City, downscale markets that target the Latino population;  
Bashas’, middle-class neighborhood grocery stores, most of which are small supermarkets;  
AJ’s, expensive upscale gourmet grocery stores on the Whole Foods model—they actually were here before Whole Foods and in many ways are preferable; and  
Diné Markets, which cater to Indians on three reservations.

Most of the original Bashas’ markets, at least the ones in the central part of the city, are small and located in aging facilities. They function more as neighborhood convenience stores than as full-blown supermarkets, and so they often have even less selection of goods than the pared-back Safeways with which they compete. In the suburbs and in some smaller towns, the stores are larger, very much like a Safeway. Prices are often better than Safeway’s. But Bashas’ real claim to fame is a friendly, neighborhood-market atmosphere where employees behave as though they care whether customers live or die.

Food City stores appear in barrios and low-income neighborhoods, some of which middle-class shoppers will not enter. These stores, too, are staffed with friendly, upbeat employees, and their merchandise lines are extremely interesting. The Food City near me, for example, carries every variety of fresh and dried chili pepper known to humankind, plus a wide variety of organ meats and animal products with which most Americans are unfamiliar. When pasillos are fully in season, Food City employees set up a big grill in front of the store and roast them over mesquite coals: the perfume is glorious!

Personally, I much prefer this store to the nearby Albertsons, where I haven’t felt safe in years and where customer service is next to nonexistent. Food City stores are frequented by immigrant families; I’ve never been panhandled or hassled in the parking lot, nor have I ever encountered any scary characters inside the store. At the Albertsons, I have actually been chased around the parking lot by a panhandler—two of my neighbors reported the same experience—and I have stood in line with a man who had tears tattooed down his cheek, walked past shady characters doing business on the public phones outside the front door, and otherwise socialized with folks that you wouldn’t want to meet in a dark alley. You never see low-life at the Food City.

AJ’s is the jewel in Eddie Basha‘s crown. It’s hard to imagine how it could be profitable, because it’s expensive and pleasant to shop in, and because when Whole Foods came to town, it acquired a competitor with deep pockets and an organic-foods motif. The best of these stores, IMHO, is the original outlet at the interesection of Central and Camelback. Newer, fancier stores with better sushi and wider choices of food and wine have opened in the suburbs, but they lack the warmth and friendliness of the central-city store, a hangout for midtown professionals, socialites, and old-line Phoenicians who still live in North Central.

It’s interesting that the sole AJ’s he’s closed (so far) is the big, gaudy production out in Chandler. M’hijito suggests it’s because all those suburbanites, with their houses worthless and their jobs evaporated, no longer can afford to buy fancy foods. People who live in North Central are largely lawyers and doctors, most of whom are still employed.

We thought our AJ’s would be the first to go, because during the real estate boom the stores at Central and Camelback were slated to be demolished and replaced with another faceless high-rise. We were spared that loss (temporarily) when the bubble popped…but it’s still surprising to see this smaller, less elaborate store survive as 24 other stores in the Bashas’ chain shut down.

The closure of these stores is a real loss to Arizona and Arizonans. Clearly, it’s too late to resist the homogenization of America’s cities, but many of us believe we should cling to those institutions that make our towns, cities and regions unique. Speaking as one bereft American, I find it depressing as hell that Atlanta looks just like San Antonio looks just like Phoenix looks just like San Diego looks just like San Francisco looks just like Seattle. We used to fly up to San Francisco to buy clothes and furnishing, because the City had a wide selection of locally owned, unique stores selling stuff we couldn’t buy anywhere else. Now the place has nothing we don’t have here: nothing but Talbots and Ann Taylor and Crate and Barrel and the Gap and Boston Stores and on and deadeningly on. Clone stores for clone people living clone lives in clone cities.

Is it any wonder we’re so disconnected from our surroundings that we can’t walk without yakking on a phone or drive up the road without texting? The dystopic future imagined forty years ago is here, folks, and we are living in it.

Fight back, my friends. Buy local! Google “buy local” or “local first“plus the name of your city, and you’ll likely find an organization that lists local merchants. Make it a point to do business with one of these merchants at least once a month. Better yet, find one you like and become a regular. Resistance is not futile.

Cash for Clunkers: A boondoggle?

A billion dollars gets soaked up like water into a sponge, in four days, and then Congress appropriates still more billions of bucks to get people to buy new cars by paying them more than their junkers are worth? Fantastic. And I do mean that in its true sense.

How many more billions of dollars are going to run down the Cash for Clunkers drain?

Wouldn’t it have made more sense to use that money to build a decent public transportation system for one major city or one geographic region that doesn’t have one? Since almost no major US cities have anything that resembles viable public transport, surely it wouldn’t have been difficult to find a place to build one.

And if we want to get the gas-guzzling, emissions-belching junk off the road, there’s a simple way to do it: don’t let people register them. It wouldn’t take umpty-umpteen billion dollars to pass a law saying a car that’s X number of years old and that gets less than Y miles per gallon cannot be driven on the public roads. And no exceptions for “historic” vehicles. Then fine the bejayzus out of people who leave them rusting on private property or beside public thoroughfares. This would force owners to turn them in for salvage. Then those who can’t afford to buy a new junker could ride the lightrail, high-speed trains, and buses our taxpayer billions would be freed up to build.

It’d put a lot more people to work than a batallion of car salesmen, too.

Too much debt? Sell your house and rent it back!

For Sale--Make Offer!

Ever doubt whether your elected representatives should be your role models? Well, here’s a new twist on finance guaranteed to convince you, one way or another: the Arizona state legislature proposes to sell state capitol buildings, presently owned free and clear by the taxpayers and including the state House and Senate buildings, and them rent them back from the new owners. So deep in debt is our feckless state government that this desperation move apparently makes sense to some of our august leaders.

Think of that.

Now let’s suppose you, the personal financier, owned your house free and clear; let’s imagine it’s worth, say, $300,000. You’ve made a few small errors in your personal finance adventure…to wit, you’ve charged up $350,000 on your credit cards, and now that the economy has imploded, you’re out of work and can’t pay those pesty, interest-bearing bills.

So to raise some cash to hush up the bill collectors, you sell your house to Bob Buzzardo for $280,000, about the best you can do in the depressed real estate market. You now have 280 grand in cash, and Bob agrees to rent the house back to you for $1,678 a month (not including taxes and insurance). You propose to pay down those nagging bills at the rate of $2,000 a month, using the money you expect will soon “begin flowing into [your] coffers,” creating a monthly outflow of $3,678. At that rate, your $280,000 will last 76 months, or about six years and four months—assuming you’ve invested the principal gained from your sale in a reasonably safe instrument.  At that time—when you run out of cash—you will have paid down your $350,000 debt by $12,688.

You will still be in debt over your head, and now you’ll be out of money to pay against those debts and also out of money to pay the rent.

Amazing concept, isn’t it?

Okay, I admit: a state government is not a household, and government finances do not equate to personal finances. Still, raising taxes—a move our legislators stoutly decline to do, especially where business taxes are concerned (horrors!)—is roughly the equivalent of taking a second or third job. Which would you do: a) take a side job or two; or b) sell your house, rent it from the new owner, and use the proceeds to pay the rent and try to keep the wolf from the door?

If your choice is the second, maybe you should consider running for public office.

😀

The Twilight Zone

Today we present another guest post by Stephen Taddie, managing partner of Stellar Capital Management, LLC, located in Phoenix Arizona. In this essay, a quarterly report to investors, Steve observes that although the economy appears, by some indicators, to be on the mend, we may be about to experience an inflationary experience, and he explains why. Two other possibilities present themselves, neither of which is an impossible scenario. Full disclosure: Stellar is my financial manager.

If you stepped into an episode of Rod Serling’s Twilight Zone last New Year’s Eve and were isolated from newspapers, television, the Internet, and the obsession with valuing the daily gyrations in the economy and markets and then emerged from that alternate reality on July 1, what would you find?  The S&P 500 was up about 2 percent to 920, the 10-year treasury bond yield rose by about 50 percent to 3.5 percent, economic activity as measured by the gross domestic product (GDP) fell about 3 percent, and nonfarm jobs in the U.S. dropped by over 3 million taking the unemployment rate to near 10 percent.  In sum, a rather flat stock market, much higher interest rates, and a worse economy.

In last quarter’s commentary, “Déjà Vu or Something New,” we drew parallels to 1938 and suggested that the combination of regulatory change and massive stimulus provided a catalyst for stability, and that the tide should turn. Since then, the tide has halted its relentless ebb and has risen a bit to cover up some of the jagged rocks and sunken ships in the harbor.  The sea looks much calmer now, but backward-looking economic data will continue to serve as a reminder of the past carnage. We will likely see a few more ships running aground as they attempt to navigate the still treacherous harbor.  The sea captains are still searching for the elusive catalyst for growth that will create a rising tide and make the harbor more navigable for commerce.  The months of debate on this topic on news channels and in professional journals has yielded no real evidence of growth, and has caused the equity markets to stall. The question lingers: “How long will we wallow around in a less bad economy?”

In our investment meetings, where Dick, John, Phil and I delve into the details of the economy and markets, we have been discussing three major themesgeographic and industry growth centers, the U.S. dollar, and inflation.  Looking at current and projected U.S. economic growth rates, it’s clear that less bad economic news is not a very clear path to growth.  Comparatively, Asia seems better positioned for growth than America or—for that matter—many other regions. Even though we would like to believe that the sun rises and sets on the U.S. economy, consumerism, while still a significant part of the U.S. economy, is unlikely to be a growth engine for us or the rest of the world until we create more jobs.

The sheer size of the stimulus monies available puts much of the U.S. economy’s fate in the hands of our policymakers and their handling of the Fed’s balance sheet.  Three mutually exclusive outcomes related to the management of the national balance sheet are 1) inflation, where the Federal Reserve (Fed) does not shrink its balance sheet fast enough and eventually monetizes the government deficit, flirting with an inflationary spiral; 2) Goldilocks II, where the Fed gets it right, shrinking its balance sheet while methodically avoiding a monetization of the deficit, and achieving growth without inflation; or 3) deflation, where the Fed shrinks its balance sheet too quickly, pulling the rug out from under the economy, worsening the recession and flirting with depression.

There is as much debate about inflation as there is about finding the elusive catalyst for growth. At times it has been a politically charged debate, with Republicans forecasting that the liberal Democrats’ runaway spending programs will cause inflation, while the Democrats blame the Republicans for getting us into this jam in the first place.  Entertaining as those debates may be, it is hard for us to fathom that the U.S. economy can avoid an inflationary bias with the amount of stimulus monies currently circulating and three times that amount still ready to be pumped into the economy, plus the admitted bias of policymakers fearing deflation more than inflation.

The rational arguments for “no inflation” are mostly based on our economy having no upward wage pressure and plenty of spare industrial capacity…which are very good points. Our concerns, however, lie in the worth of the U.S. dollar versus the currencies of our trading partners, its effect on the interest rates U.S. debt issuers must pay to compensate investors for that weakness, the higher prices consumers might have to pay for the goods we import, and the additional cost that manufacturers might have to pay for raw and intermediate materials.  This may not make headlines until later in the year, because the year-over-year comparisons for commodity prices still reflect the sky high levels of last summer and do not yet flash the warning signs of inflation.  As we move into the fall and winter, the differences will narrow and, at current levels, will show price inflation by the turn of the year.  The Bernanke Fed has proven its mettle, and policymakers as a whole have done a good job of coordinating efforts.  We hope the policymakers “get it right,” but we are still looking for inflation to begin increasing in 2010, with the Fed following—rather than leading—the market with regard to increasing short-term interest rates.  This should yield a scenario somewhere between inflation and Goldilocks II—call it “inflated Goldilocks.”  We believe the U.S. economy will see a return to growth. It will not be a V-shaped “total recovery,” but instead will be a less leveraged, slower-growth version of its previous self, as those of us who weren’t fortunate enough to be in the Twilight Zone don’t have enough memories of the meltdown to last a lifetime.

The steep slide in the stock market that was reinitiated during the first quarter of this year was the straw that broke the back of both individual and institutional investors, keeping many on the sidelines, and it will have lasting emotional effects.  The catalyst for stability in March spurred a combination of wishful thinking and less gloom and doom, and the resulting rally pushed the S&P 500 to a 35 percent advance from the market low in early March.  To advance significantly past this point, some of these wishes will have to start coming true.  Just as many did not see the depth of the downturn in the cards two years ago, many will also not see the potential for more a significant upturn either.  The twist woven into this episode might be that the individual emerging from the Twilight Zone remains oblivious to the meltdown and the subsequent exuberance of the stock markets and, absent that emotional baggage, is able to better evaluate the economy for what it is.

Steve Taddie
Managing Partner
July 6, 2009