Gary and I have been negative on the home builders since - sometime in the fall last year. We got vociferous about it early Spring. We also recommended (on Feb 15) to our account base that they sell the subprime lenders.
What we've been looking at is exactly what you're talking about: people's purchasing power. Personal disposable income less personal consumption expenditures and residential investment expenditures.
This number has been negative in six of the past seven years. There have only been 7 other years that this has been the situation since 1929. Two of those were during the Great Depression; three were just after the end of World War II; the next was 1955, the last was 1999.
This has happened because Americans have been borrowing against their homes. And the lenders lent the money. The real problem now is that with this credit source drying up, there will be less cash available for consumers to use.
The banks knew what those loans were worth - with given risk assumptions. Change that default rate, and the values change dramatically. That's the new problem. The risk premiums dramatically negatively impacting the value of those loans.
What we're seeing now is the very disturbing trend of consumers having to choose between mortgage payments and credit card payments, evidenced by default rates between the two seesawing.
As to the comment on the basic materials and commodities bubble comment:
For the past decade, Gary has been very "pro" resource-based economies (Australia, Canada, Russia - the countries that can get the products to market). The currency valuations indicate he's been right (not as many of our accounts think he's so crazy anymore). The Canadian dollar is currently worth $1.0368 US dollars!
...The reason behind Gary's analysis is somewhat complicated, but for people like me it basically can be boiled down into one word: China. China is going to have a middle class the size of the U.S. in the not-to-distant future, and right now it is the driver of the world economy. India's not far behind.
We would argue that the basic materials and metals - and gold - aren't a bubble. The economy of the U.S. and Europe slowing down may minorly affect them, but India is the largest per capita user of gold in the world, and it's growing like a weed. They may even surpass China for a quarter this year. India may gag for a bit on the latest spike in gold, but given that the country has managed to take every hike since 2000 with only short set-backs, we would expect the same to happen now.
The G7 already decided Central Banks weren't going to dump gold like they did in 1998 and 2000 to artificially depress the price, and industrial use of gold has risen along with tech and aerospace applications.
Oil is volatile because of the political issues - that's always there. But China's demand for oil has made it the second-largest consumer in the world. China surpassed Japan in oil consumption in 2003. Take a look at this:
Some analysts are out there predicting $110 per barrel on crude. Right now we don't see that happening (barring political problems that may be a real issue) - but the falling dollar in and of itself is going to make the actual cost of oil more to us here in the U.S. We think the weaking global/U.S. economy is going to impact demand for oil and thus we see this spike as temporary.
But long term? If China's demand continues, the predictions by the IEA are that China will consume 30 million barrels a day (the US consumes 20 million a day now). The IEA also predicts that without new energy policies, the world’s oil demand will grow by 50% by 2030 and gas demand will double. Obviously the real issue is the ability to refine the oil we pull out of the ground - that will determine the long term price.
But back to the original question: Bail out the banks? Government intervention hasn't ever worked. There are always repercussions, and we always end up paying for them. They delay the inevitable. Even Greenspan doesn't like the new Superfund being set up by JP Morgan, Citigroup and Bank of America.
Right now, people with discipline and good credit are paying for the mistakes of those who spent what they couldn't afford. But I also believe that many did not understand the problem they were getting into, and I don't know whether the blame lies with the consumer or the lender. To me it's kind of like the hot McDonald's coffee - is McDonald's to blame that someone scalded themselves with hot coffee? Or are they supposed to warn us that the coffee is hot?
I grew up in a family that held the motto "buyer beware." Others didn't.