Tuesday, October 6, 2009

Christmas in October

It’s a Wonderful Life…NOT!

Every Christmas I like to watch Jimmy Stewart in the movie It’s a Wonderful Life. The story is set in the 1930s during the depression. Jimmy plays a young business man trying to protect the financial interests of his small town at a time when the stock market had plummeted, real estate had collapsed and the banking system was in trouble. Somehow he had to persuade the town’s citizens to hang in there and not trigger their own financial disaster by withdrawing all their money from Jimmy’s little savings and loan company [that’s an American term: in Canada we call them trust companies]. The movie focused on the every day human emotions of the 1930’s banking crisis and the tireless work of Jimmy Stewart trying to fix it. Today the role of financial hero has fallen on the broad shoulders of the various government officials and central bankers. Our citizens have faith that these highly educated and highly paid economic professionals will somehow get us through the crisis. I recommend you watch this movie: it’ll be part of the usual Christmas build-up. It’ll help you understand some of the human dynamics of a depression, a real estate crisis and a banking crisis.

Observation: it is now the first week of October – doesn’t this seem a bit early to be thinking about Christmas movies? Apparently not. Several retail stores started their Christmas selling season last month. I wonder why.

The normal sequence of sales promotion is: [1] back to school, [2] fall fashions, [3] Halloween, [4] Christmas, [5] Boxing Day and January sales. A few years ago I noticed some stores started their January sales in December. And now they’ve moved Christmas to September. Something seems wrong, doesn’t it?

Are there too many stores? Are too many consumers tapped out? Are there too many stores in deep financial trouble and are they so desperate that they need Christmas sales now?

Is Jimmy Stewart’s Wonderful Life of the 1930s closer than we think? If America’s auto industry and America’s finance industry had to be bailed out, maybe her retail stores are in trouble too. Maybe they shouldn’t have opened all those box stores. After a ten-year binge of building more and bigger stores, have they gone too far? Big new stores have big mortgages or big leases… big monthly expenses. We can imagine how financially stretched out retail stores might be; and if sales are below their projected levels, maybe they need to move Christmas to September to survive.

Government officials and central bankers saved the financial system and the American auto industry. Can they save the retail industry too? How would they save it? They provided money to the banks and car companies: will free money help the retail stores?

In the 1930s movie It’s a Wonderful Life, Jimmy Stewart tried to persuade the town folk not to take their money out of his little business. Now-a-days we tax payers are being asked to put our money in. Jimmy talked directly to the people: and the people decided what they would do with their money. Obviously we tax-paying town folk are not foolish enough to put our own money directly into failing companies: our governments do that for us. Now-a-days politicians do what they want with our money, claiming all the while that what they do is in our best interest.

Ask yourself this:
1. Would you have loaned your own money to General Motors?
2. Would you have bailed out Smith Barney or Citibank?
3. Will you do your Christmas shopping in October?

It’s a Wonderful Life showed us how the economic problems of the 1930s were solved by business people talking directly to consumers to sort out their problems. Now-a-days, we seem to want others to do that for us. We want the government to fix it.

What will you do? Will you buy your Christmas decorations in October? Is that what it will take to avoid the next business crisis?

Seems ridiculous, doesn’t it?

The modern re-make of Jimmy Stewart’s classic movie would be It’s a Ridiculous Life: the story of a small town business man who borrowed his way to prosperity. He has the big house, the great car, the trophy wife and he’s done it all on bank loans. He bought a house in 1980, rented it out and used the cash flow to buy a second house with almost no down payment. As real estate prices went higher, he kept on borrowing and buying more real estate and renting it out. Soon he had the biggest real estate holdings in town, the biggest personal income in town and the most mortgage debt of anyone in town. Then they closed the factory at the edge of town. 300 workers were laid off and our hero’s empire came all undone. The tenants couldn’t pay the rent. Our hero couldn’t pay his mortgages. The bank foreclosed on his properties and his high maintenance wife left him.

The ridiculous part is that this story is true. This is how the long term rise in real estate prices was maintained: the up trend was financed by the banks.

The 1930s It’s a Wonderful Life problem was resolved by the town folk acting reasonable and conservatively. Is this how our remake will be resolved?

Apparently not. In our modern movie, It’s a Ridiculous Life, aren’t we being encouraged to do the opposite? Aren’t they suggesting we borrow even more money and spend even more? Buy a new car – buy a house. And now, buy our Christmas presents in October.

Ken Norquay, CMT.
Chief Market Strategist,
CastleMoore Inc


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