Fed Calls Gain in Family Wealth a Mirage

From:

http://www.nytimes.com/2009/02/13/business/economy/13fed.html?em

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WASHINGTON — The leap in wealth that Americans thought they were enjoying over the last several years has already turned out to be a mirage, according to new estimates by the Federal Reserve.
In its triennial survey of consumer finances, released Thursday, the Fed found that the median net worth of American households increased by a seemingly healthy 17 percent between the end of 2004 and the end of 2007. But the gains were wiped out by the collapse in housing and stock prices last year. Adjusting for those declines, Fed officials estimated that the median family was 3.2 percent poorer as of October 2008 than it was at the end of 2004. The new survey offers one of the first glimpses of how American families were positioned financially as the roof fell in on the economy, and it provides some sense of how much wealth has been destroyed since then. Indeed, the destruction of wealth is still in full swing: housing prices are still falling, more than two years after the bubble peaked.
The survey suggests that the boom years were not all that wonderful even before the crisis set in. And it indicates that many households will have to greatly increase savings rates, which were below 1 percent, to make up for some of the lost wealth.
Adjusted for inflation, the median household income actually edged down slightly over the three years ending in 2007. The mean, or average, household income jumped by a respectable 8.5 percent.
But a growing share of that income came from investment profits rather than from wages and salaries. And the wealth that Americans were building was overwhelmingly in the form of paper profits that vanished as quickly as they had appeared.
Fed analysts estimated that 35.8 percent of the average family’s assets in 2007 were in “unrecognized capital gains,” such as gains in the market value of houses that people had yet to sell. Slightly more than half of those unrecognized gains came from real estate, and the second biggest source was increases in the value of business assets.
The Fed’s estimates, which are based on a survey of 4,422 households, are in line with estimates that economists have made about the aggregate plunge in wealth since the housing bubble began to deflate in 2006.
Dean Baker, co-director of the Center for Economic Policy Research, estimated that the United States had lost $6 trillion in housing wealth since the peak of the bubble.
The Case-Shiller index of housing prices in 20 major cities, considered one of the most accurate barometers of such prices, has declined about 25 percent since mid-2006. On top of that, Mr. Baker estimated, an additional $6 trillion evaporated as a result of the plummeting stock market, for a total loss of $12 trillion since 2006.
“I’m actually surprised that you didn’t see higher values on stock holdings,” Mr. Baker said, noting that the median value of household stocks, adjusted for inflation, was slightly lower in 2007 than it was in 2001.
“Even when we were near the peak of the bubble, things didn’t look that good, and they’re looking worse today,” he said.

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Ok... article is self explanatory... but let's look at MALAYSIA now, for those of you who think this problem is confined to USA.

Let's take the, for instance, the working professionals between 20 and 35. What do you think the networth for these individuals is?

On average: slightly above 0.

Yes, you heard me right... slightly above ZERO.

But, look, you will say to me, they've got jobs and make quite a decent living, they live in their own houses, how can their average networth be so low?

Let me ask you this.

Most of these guys... let's liquidate all their assets. And use these proceeds to pay off all their debts. How much do you think that will come to?

...

It's going to be slightly above zero. Sure, you will have those who have some savings, but it won't be all that much. Their is the insurance too, but that hasn't reached a very high figure yet. You know that car that they bought? It has actually lost 30% of it's purchase value.

The major gain for most people in Malaysia for this agegroup is their houses/ apartments, actually. Like, how they bought it for 200k and it's worth 250k now.

I would estimate that the average household networth for Malaysians in the 20-35 agegroup would be under 100k.
And I would estimate that is under current market housing prices. Out of that 100k, I would say that 40k is from UNREALISED CAPITAL GAINS. We've got around 40%, compared to America...

Of course, I have absolutely no official figures to back me up on this, but, this is Malaysia, we don't have any government bodies which conduct this sort of stuff.... nor would our government want it so!

Malaysia Boleh... except when it comes to Transparency, in which case, it is very very much a case of Malaysia Tak Boleh!

Capitulation in US Housing coming: Malaysia will come later.

Here is what people THINK capitulation means: they think it means a large fall in the market, due to sentiment, after which the dust will settle, and everyone will jump in with all the cash they've laid by the sidelines, allowing a huge rebound.

Here's what I think capitulation will mean this time around:

Some people will realise they don't have as much cash lying by the side as they thought, and will be FORCED to sell. Unit Trusts been telling you not to liquidate, the bull will return? Your neighbours insisting that this is just a temporary housing glut?

Well, for some people, they are realising that they need cash, and they need it now, and they CANNOT AFFORD TO BARGAIN. They have to take buyers price, no matter what it might be.

It looks like the first to be hit are looking to be the Elderly.

Excerpt from:

http://www.nytimes.com/2008/11/22/us/22home.html?pagewanted=1&hp&adxnnl=1&adxnnlx=1227355470-Zlmge3SmDxUILDK2CQ8lIQ

Sooner or later, if things don't improve, these people are going to keep lowering their prices until they do find a buyer. They have little choice. It's come to the point where they either sell their home at a loss, or they sell their 401k plan at a loss... basically, they just have to sell their assets and take a loss.

As for our own markets... we are currently nowhere near capitulation. There are far too many people who are saying, "If I sell at this level, I will lose money!"

Get it through your head people. You have ALREADY lost money. Not admitting it is not helping.

Still, it's just human nature to delay the inevitable. Look at GM, AIG, Fannie, Freddie...

Capitulation in our markets will appear when everyone; (and by everyone I mean the 95% of the population who do not have enough in Fixed Deposits for them to live comfortably for the rest of their lives), when everyone realizes that times are getting tough, those properties they own are not getting rented out or resold, and those shares are not giving out dividends, their credit cards have been maxed out, and their company has begun to layoff workers...

My forecast is that the order of events in Malaysia will be this: Layoffs will be announced (first hit). Then layoffs will be implemented. Looking at the distribution of employment, I would say that the worst affected area would be Klang Valley. Effect of layoffs: many people will move back to their home states, selling their homes, or ceasing to pay rent. The housing fall will trigger another fall in shares.
As cheap foreign workers leave Malaysia, businesses will start to founder. Both due to lower revenues, and also because of lack of cheap labor. Some will close, some will have no choice but to sell blue-chip shares in order to keep their companies running.
When High Wage foreign expatriates leave, you can watch those high end properties shed ridiculous amounts of value. Those construction companies are going to be in serious cashflow problems. This of course will flowover to the banks which are doing financing.
At some point, banks will tighten their debt policies. At which point, you will really see a selloff of shares and "excess" investment property as people fight to keep their businesses, their homes, and their daily lifestyle expenses.
How about the return of our own workers who are abroad? I know for a fact that we have a decent number of Malaysians in America... I am uncertain of their policies over there, but I have my suspicions that there will be a bias to give American jobs to American people. Then again they have laws against that sort of thing, so who knows? Anyhow, I would assume that a lot of High Income (by malaysian standards) people overseas will lose their jobs and will probably end up coming back to Malaysia and liquidating some assets.
Sooner or later, we are going to see those "amatuer" shareplayers exit the market... I'm talking about those guys who don't even talk to a remisier, the ones who just get an online trading account, and have no idea what a PE ratio is... what's worse is that this group of people usually have shaky financials in the first place.

According to an advisor of mine in Australia, Australian economy is delayed behind America a couple of months. In other words, if consumer demand drops in America and layoffs occur, you can foresee layoffs in Australia a few months down the road. I have my suspicions, but no confirmation, that the same is true of Malaysia. A country which exports so much, has absolutely no need for so much production capacity during an economic downturn, and even less need during a global recession. ... I strongly suspect that we have at least 30% more labor than necessary for production, at the moment. (but again, I have no numbers. I don't think anyone has these figures, in fact, due to unfathomable hiring policies, foreign workers, inefficiencies, delay factor in hiring/firing...)


Summary: Capitulation. Look up a dictionary. It means total surrender. It does not mean "temporary retreat".
The elderly and unemployed will be the first to capitulate. This is why, after all, this is a world where the rich get richer and the poor get poorer. The rich will be the ones who will lead the rebound, and profit from it. The poor will be the first to cave in to the buyer's market, and will lose out most.