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No Relief
James Cook
July 8, 2009
Over the fourth of July weekend one of my sons-in-law rented a houseboat
on Rainy Lake. This sprawling body of water lies half in Minnesota and
half in Ontario. It’s a five-hour drive north of Minneapolis. When
we got to the houseboat agency outside of International Falls, I was
perplexed by the 15 or so houseboats at the dock. Why, I asked the
proprietor, weren’t they out on the lake?
He explained that in a normal year all of them would be rented. This year
only three were booked. The rental fee for our houseboat that carried 10
of us was $1100 a day. When we returned, only one boat was on the lake
in what normally was their busiest week. He wearily explained that the
business had taken a tremendous nosedive.
We have no way of knowing his financial circumstances. If he owes the
bank, he could be in serious trouble. You can find stories like this
all across America in every business. Sadly, most of the struggling
entrepreneurs are hoping for a rapid improvement which isn’t likely
to happen. The consumer has run out of gas. We had high times based on
income growth, full employment, credit card debt and refinancing. Savings
were nil, spending was excessive and debt went into orbit. You could buy a
room full of furniture a few years ago and the first payment may still not
be due. You could even get a chunk of cash for buying something on credit.
Everybody knows that three-quarters of GDP (our economy) comes from
consumer spending. That’s why you can’t be too optimistic about a
return to the high life. In fact, things can get a whole lot worse as
those who used debt to make purchases continue to be liquidated.
The businesses that flourished serving this runaway consumption binge
have run into a concrete wall. They are learning to live on less. If they
over-borrowed, they’re done for. We have a car dealer in Minnesota who
was so successful he reached celebrity status. He had 24 car dealerships
in Minnesota and California. He borrowed relentlessly to buy more. He
financed a $12 million dollar home, a $9 million dollar lake place and
a winter retreat in Cabo where he kept his yacht. He traveled by private
jet. He bought interests in upscale restaurants and resorts. He owned a
rental car business and a mortgage company. In a good year he made over
$20 million.
When the car business soured and the economy retrenched, his empire
collapsed. He owed $550 million to auto companies. His personal bankruptcy
included scores of creditors. Among them were Las Vegas casinos for
$600,000 and credit card debt of $365,000. His Neiman-Marcus bill
was almost $200,000. (My wife reminded me hers was quite minimal in
comparison.) A newspaper article claimed he owed so many banks they
didn’t have the space to list them all.
As the economic crunch eliminates one business after another, commercial
real estate feels the squeeze. Financings in this sector exceeds all
credit card debt, student loans and auto loans combined. The Wall Street
Journal wrote recently about this crisis in the making. While visiting
with the president of my bank recently, he told me about a request for
a loan from a beleaguered property owner. This client had a $9 million
dollar commercial building and another $6 million dollar property. In
order to keep them out of foreclosure he had to borrow $2 ½ million. The
bank turned him down. My banker advised me that commercial real estate
was in big trouble.
Already, some politicians are pushing the administration to ready a new
stimulus package. If commercial real estate lenders have to be bailed
out, and the government floods the country with more stimulus, it can
set off a firestorm of dollar dumping and eventually runaway inflation.
Normally we get a recovery soon after a downturn. Things eventually
get better. This time it’s different. We’re still sinking. Another
burst of deflation, followed by more government ineptitude, a devastating
deficit, a moribund economy and, ultimately a grievously debauched dollar
seems to be the order of the day. The government will want to spend us
into recovery and borrow the money to do so. If they can’t borrow,
they’ll print. Predicaments don’t get much worse than this.
No Relief
James Cook
July 8, 2009
Over the fourth of July weekend one of my sons-in-law rented a houseboat
on Rainy Lake. This sprawling body of water lies half in Minnesota and
half in Ontario. It’s a five-hour drive north of Minneapolis. When
we got to the houseboat agency outside of International Falls, I was
perplexed by the 15 or so houseboats at the dock. Why, I asked the
proprietor, weren’t they out on the lake?
He explained that in a normal year all of them would be rented. This year
only three were booked. The rental fee for our houseboat that carried 10
of us was $1100 a day. When we returned, only one boat was on the lake
in what normally was their busiest week. He wearily explained that the
business had taken a tremendous nosedive.
We have no way of knowing his financial circumstances. If he owes the
bank, he could be in serious trouble. You can find stories like this
all across America in every business. Sadly, most of the struggling
entrepreneurs are hoping for a rapid improvement which isn’t likely
to happen. The consumer has run out of gas. We had high times based on
income growth, full employment, credit card debt and refinancing. Savings
were nil, spending was excessive and debt went into orbit. You could buy a
room full of furniture a few years ago and the first payment may still not
be due. You could even get a chunk of cash for buying something on credit.
Everybody knows that three-quarters of GDP (our economy) comes from
consumer spending. That’s why you can’t be too optimistic about a
return to the high life. In fact, things can get a whole lot worse as
those who used debt to make purchases continue to be liquidated.
The businesses that flourished serving this runaway consumption binge
have run into a concrete wall. They are learning to live on less. If they
over-borrowed, they’re done for. We have a car dealer in Minnesota who
was so successful he reached celebrity status. He had 24 car dealerships
in Minnesota and California. He borrowed relentlessly to buy more. He
financed a $12 million dollar home, a $9 million dollar lake place and
a winter retreat in Cabo where he kept his yacht. He traveled by private
jet. He bought interests in upscale restaurants and resorts. He owned a
rental car business and a mortgage company. In a good year he made over
$20 million.
When the car business soured and the economy retrenched, his empire
collapsed. He owed $550 million to auto companies. His personal bankruptcy
included scores of creditors. Among them were Las Vegas casinos for
$600,000 and credit card debt of $365,000. His Neiman-Marcus bill
was almost $200,000. (My wife reminded me hers was quite minimal in
comparison.) A newspaper article claimed he owed so many banks they
didn’t have the space to list them all.
As the economic crunch eliminates one business after another, commercial
real estate feels the squeeze. Financings in this sector exceeds all
credit card debt, student loans and auto loans combined. The Wall Street
Journal wrote recently about this crisis in the making. While visiting
with the president of my bank recently, he told me about a request for
a loan from a beleaguered property owner. This client had a $9 million
dollar commercial building and another $6 million dollar property. In
order to keep them out of foreclosure he had to borrow $2 ½ million. The
bank turned him down. My banker advised me that commercial real estate
was in big trouble.
Already, some politicians are pushing the administration to ready a new
stimulus package. If commercial real estate lenders have to be bailed
out, and the government floods the country with more stimulus, it can
set off a firestorm of dollar dumping and eventually runaway inflation.
Normally we get a recovery soon after a downturn. Things eventually
get better. This time it’s different. We’re still sinking. Another
burst of deflation, followed by more government ineptitude, a devastating
deficit, a moribund economy and, ultimately a grievously debauched dollar
seems to be the order of the day. The government will want to spend us
into recovery and borrow the money to do so. If they can’t borrow,
they’ll print. Predicaments don’t get much worse than this.
