Williams Inference

The biggest problem of the U.S. economy is the sky high level of consumer debt.

The housing bubble has many signs such as:

· Mortgage and house-related swindles have risen over 25 percent in the past year, according to the FBI.  Borrowers who fall victim to aggressive lenders alone pay $9 billion more than they should for loans.

· Investment clubs are zeroing in on real estate.  The popularity of such clubs has been climbing rapidly.  National figures are hard to come by, but The National Real Estate Investors Association, which offers services to clubs, estimates that there are some 600 real estate investment groups nationwide, double the number just two years ago.

· The number of Americans getting licenses to sell real estate is surging.

The Texas Real Estate Commission issued new sales licenses at a rate nearly double the year-ago period.

· With mortgage rates hitting 35-year lows, a growing number of home owners are being lured by no-fee mortgages when they refinance.  Lenders are aggressively pushing these mortgages, in which the lender typically picks up the cost of everything from appraisals to attorney fees.  No-fee mortgages have risen to 25 percent of the mortgage business, up from 5 percent a year ago.
 
Debt
 
Mortgage debt is the real household bubble.  Loan delinquencies have steadily risen in the past 24 months, to a point where nearly 1 in 20 home loans is delinquent–on of the highest rates in the past decade.  Also, a record number of loans are in foreclosure.
 

Terrorists have changed the way we live.

This particular theme began with the terrorist attacks on September 11, 2001, and has developed over the year as the terrorist war.

Thanks to the DeVoe Report, we became acquainted with an article from the Summer 1993 issue of Foreign Affairs magazine titled “The Clash of Civilizations?” by Samuel P. Huntington, which Mr. Hunting has also expanded into a book.

Quoting Mr. Huntington:

“During the Cold War the world was divided into the First, Second and Third worlds.  Those divisions are no longer relevant.  It is far more meaningful now to group countries not in terms of their political or economic systems or in terms of their level of economic development but rather in terms of their culture and civilization.  A civilization is a cultural entity. . .
 
"We are now in a war economy."
Richard Maybury, U.S. & World Early Warning Report

. . .Differences among civilizations are not only real; they are basic.  Civilizations are differentiated from each other by history, language, culture, tradition and, most important, religion.  The people of different civilizations have different views on the relations between God and man, the individual and the group, the citizen and the state, parents and children, husband and wife, as well as differing views of the relative importance of rights and responsibilities, liberty and authority, equality and hierarchy.  These differences are the product of centuries.  They will not soon disappear.”

This war could be long and complicated.
 

Boomers are more than numerical heavyweights.  They have distinct values that affect society.  

Motorcycles to RVs

Our Boomers probe of April 7, 1996, featured the photo of  four leather-clad Boomers on their Harley motorcycles.  Since then, Boomers have added six years.  From 1998 to 2000, motorcycle deaths jumped by more than a third, with most of the increase involving middle-aged riders.  Therefore, it is logical that the Boomer is on the road again, this time with a RV.  Recreational vehicle sales and rentals are booming.  The president of the Recreation Vehicle Industry Association says, “We’re riding a demographic wave.”
 
Anti-Aging
 
Boomers are pursuing dozens of therapies to ward off the ravages of aging.

· With bionic knees, implanted hearing aids, regenerated hair, face lifts and Viagra, the Boomers are looking and acting younger.  This benefits orthopedic companies such as Stryker Corporation (NYSE:SYK) where sales are increasing.

· The biggest change in facial rejuvenation is that doctors are encouraging patients to come in far earlier.  Now, plastic surgeons suggest cosmetic surgery as early as 40 years old.

· Spending on prescription drugs jumped 17 percent last year.  Traditionally, those over fifty spend more on drugs.
 
“We’re seeing an anti-aging phenomenon unlike any in history. Boomers are pursuing therapies to ward off the ravages of aging. And science is pretty darn close to delivering these aspirations.”
American Demographics/October 2002
 

If deflation arrives, it is going to be hard for the consumer to give up his lifelong borrowing habits.

Good and Bad Deflation
 
Whether deflation is destructive depends on its form.  If falling prices are simply the result of improving technology or managerial practices, that is fine.  That is broadly what happened in the 19th century.  Today, we have something of that benign deflation.  Telephone calls are cheaper, airfare is cheaper, and it costs less to buy clothes and a computer.

But there is also malign deflation, when prices fall because of lack of demand.  This happened to Japan in the last decade.  Whether deflation remains benign or becomes nasty depends to a large extent, on how people react to it.  In this context, the consumer is extremely important.
 
Global Influences
 
Deflation is real in Japan and also threatens Europe.  In Germany, Europe’s largest economy, the number of jobless rose this June, pushing the jobless rate up to 9.8 percent.  Industrial output fell by a worse-than-expected 1.3 percent.  If the economy slides in Europe, that is going to dampen demand for U.S. exports, a trend that would put deflationary pressure on the U.S. economy.
 
Bursting Bubbles
 
The equity bubble helped to create other bubbles most notably in the housing market and in consumer spending. The ever-expanding property bubble has become central to the culture of excess that is now driving the United States economy.  The consumer-spending bubble has created American consumers long on debt, and short of savings.

What exterior event could cause a change for the consumer?  Several possibilities come to mind–a spike in oil prices, a surge of layoffs or a collapse of the property bubble.  History tells us that when major bubbles burst, deflation is the result.