Will there be at some time in the next 10 or 20 years another big bubble and collapse? Absolutely

TO BE NOTED: From Bloomberg:

"New Normal of 2% GDP Growth Coincides With Biggs (Update2)

By Matthew Benjamin

May 26 (Bloomberg) -- Americans may have to get used to unemployment greater than 8 percent for the first time since 1983 and an economy that won’t grow much beyond 2 percent as a consequence of the lost confidence in consumer credit that shattered financial markets.

By this time next year, “the market will realize that potential growth for the U.S. is no longer 3 percent, but is 2 percent or under,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said in an interview with Bloomberg Radio.

“We are transitioning to what we call at Pimco a new normal,” El-Erian said. Pimco, in Newport Beach, California, is the biggest bond fund manager with about $756 billion in assets.

The Standard & Poor’s 500 Index must rise 41 percent to reach its last closing price before Sept. 15, when Lehman Brothers Holdings Inc. filed for bankruptcy, freezing credit markets. Since then, 10-year Treasury notes have climbed 4.6 percent. The disparity shows that stock investors aren’t convinced the economy and profits will grow fast enough to sustain a bigger advance.

The U.S. financial crisis and recession have produced lasting shifts in consumer spending and savings reminiscent of the 1950s that may crimp profits and productivity, said David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto and former chief North American economist at Bank of America Corp.

‘New Era’

“This is going to be a new era of frugality,” Rosenberg said. “This isn’t some flashy two- or three-quarter deal. This is a secular change in household attitudes.”

The last time U.S. gross domestic product grew at an annual rate of under 2 percent over a decade was the 1930s, when it expanded at an average 1.3 percent. In the 30 years before the recession that began in December 2007, the average was 2.9 percent. Over the past 15 years, it was 3 percent.

In the first quarter, after contracting at a 6.3 percent annual rate in the previous three months, the economy shrank by 6.1 percent. It was the weakest six-month performance since the last quarter of 1957 and first quarter of 1958.

The coming decade may, in some ways, remind people of those years during President Dwight D. Eisenhower’s administration, Rosenberg said.

The Cleavers

“Life wasn’t so bad for the Cleavers,” he said, referring to the family depicted in “Leave It to Beaver,” the television show that ran from 1957 through 1963. “They weren’t up to their eyeballs in debt and they weren’t a three-car family with a 5,000-square-foot McMansion.”

Behavior by newly ascetic U.S. consumers, whose spending drives more than two-thirds of the economy, will translate into “less return to capital and less-remarkable equity returns,” said Milton Ezrati, senior economist at Jersey City, New Jersey- based Lord Abbett & Co., which manages $70 billion. “The whole picture is muted.”

Barton Biggs, former chief global strategist for Morgan Stanley, sees the near future as brighter with a “powerful” comeback in equities because of government stimulus packages around the world, he said in an interview with Bloomberg Radio.

“The system has had an incredible adrenaline shot, so I think we’re going to have a pretty strong recovery,” said Biggs, who runs New York-based hedge fund Traxis Partners LP.

New Market

U.S. stocks are at the start of a new market that may spur an 88 percent advance in the Standard & Poor’s 500 Index in the next two or three years, said Laszlo Birinyi, founder of Westport, Connecticut-based research and money-management firm Birinyi Associates Inc.

“We’re confident we are in a bull market,” Birinyi said in an interview with Bloomberg Television.

The S&P 500 has rebounded 31 percent since hitting a 12- year low in March. It remains about 43 percent below its October 2007 high, ending at 887 on May 22. Markets in the U.S. were closed yesterday for the Memorial Day holiday.

At Pimco, El-Erian expects that “markets will revert to a mean, but it will not look anything like that of recent years,” he wrote in his May Secular Outlook report. “The financial system will be de-levered, de-globalized and re-regulated.”

Worldwide, “there are insufficient demand buffers and fast-acting structural reforms to provide for a spontaneous and sustainable recovery in the global economy,” he wrote. “It will be a major shock to those that are trapped by an overly dominant ‘business-as-usual’ mentality.”

‘Very Low Growth’

Hewlett-Packard Co., the world’s largest personal-computer maker, is expecting growth in the U.S. to be slow, said Todd Bradley, head of the company’s PC unit.

“We will plan our cost model for very low growth,” he said.

Investors will have to get used to “a 5- to 7-percent return game, not a 15- to 20-percent return game,” said Mark MacQueen, partner and portfolio manager at Sage Advisory Services Ltd. in Austin, Texas, which oversees $7.5 billion.

“Things have changed,” MacQueen said. “Wall Street has changed; confidence in the United States has changed.”

A lasting effect of the recession may be a “markedly higher” natural rate of unemployment, said Edmund Phelps, a professor at Columbia University in New York and winner of the 2006 Nobel Prize in economics. The natural rate is one that neither accelerates nor decelerates inflation.

“It was 5.5 percent,” Phelps said. “Maybe it will be 6.5 percent -- maybe 7 percent.”

Jobless Rate

The U.S. may report on June 5 that the jobless rate moved to 9.2 percent in May, the highest since 1983, from 8.9 percent in April, according to economists surveyed by Bloomberg. In the recession of 1981-1982, unemployment remained at 8.5 percent or higher for two years, beginning in December 1981. It didn’t move below 7 percent until 1986.

Now the rate may not go back under 8 percent until 2013, according to John Ryding, chief economist at RDQ Economics LLC in New York, and Conrad DeQuadros, the firm’s senior economist.

“This unemployment outlook is troubling for the ability of the banking system to make money on consumer loans and credit cards,” they wrote in a report on May 15.

The economy has shed 5.7 million jobs since January 2008, marking the biggest employment loss of any economic slump since the Great Depression.

Highest Debt on Record

Consumers are saddled with debt built up during the boom years. The total amount of U.S. consumer credit rose by an average of 4.9 percent a month at an annual rate from December 2006 to July 2008, according to data compiled by Bloomberg.

Yet it has declined in six of eight months since August 2008, according to data compiled by Bloomberg.

As a percentage of net worth, household debt -- including mortgages -- is at 27 percent, the highest on record, according Federal Reserve figures.

The personal savings rate, which averaged 0.9 percent from 2004 through 2007, has climbed to 4.2 percent. People are responding in part to a drop in their wealth, with house values down 27 percent since June 2006 after rising 63 percent the previous four years, according to national Case-Shiller data.

“That in itself will be a big slowdown in the economy if people are saving instead of consuming,” said Kenneth Volpert, who oversees $180 billion in taxable bonds for Vanguard Group in Malvern, Pennsylvania. The national savings rate could peak at 9 percent, he said.

Debt, Savings

Household debt was 11 percent of net worth at the end of 1959 and the savings rate was about 8 percent, according to Fed and Commerce Department data. The average size of a home built in 1960 was 1,200 square feet, according to Census figures. That grew to 2,521 square feet by 2007, with 24 percent of new homes larger than 3,000 square feet.

Now, smaller may be back as people seek to devote less of their incomes to mortgage payments, said Ara Hovnanian, CEO of Hovnanian Enterprises Inc., New Jersey’s largest homebuilder.

“For some number of years certainly after this correction you will see that conservatism translate into both the size of the homes and the finishes customers want,” Hovnanian said. That means “fewer European cabinets and appliances and fewer granite countertops.”

$200 Handbags

Shoppers will be restrained, which will result in the number of U.S. malls falling by at least a fifth and weak chains succumbing to bankruptcy, said retail analyst Patricia Edwards, founder of Storehouse Partners LLC in Bellevue, Washington.

In preparation, Coach Inc. has begun to “engineer” its collections so at least half its handbags fall into the $200 to $300 range, compared with 30 percent previously, meaning an average reduction in price of 10 percent to 15 percent, CEO Lew Frankfort said.

Long after the economic contraction has ended, “consumers will spend less on luxury goods than they did before the recession began,” Frankfort said at an April 28 investors’ conference. “We are adapting to what will be a new normal.”

Abercrombie & Fitch Co., a teen-apparel retailer that had avoided offering discounts and promotions, said May 15 it will begin reducing what it charges at its Hollister stores. Brinker International Inc., the owner of the Chili’s Grill & Bar chain, said April 21 that it updated its menus to reflect a focus on “lower price points.”

That’s not to say that debt-fueled shopping sprees, expensive restaurants and run-ups in house values and stock prices won’t ever make a comeback, said Ethan Harris, co-head of U.S. economics research at Barclays Capital in New York.

“Will there be at some time in the next 10 or 20 years another big bubble and collapse? Absolutely,” Harris said. “You can’t entirely change human nature.”

To contact the reporter on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net."

"the answer may depend on whether consumers’ new penchant for self-service is temporary or permanent."

Cate suggested this post to me. From the NY Times:

"Outsourced Chores Come Back Home

By CATHERINE RAMPELL

A few months ago, as her family’s income fell, Laura French Spada, a real estate agent in Glen Rock, N.J., began dyeing her hair at home and washing the family cars herself. Her husband, Mark, started learning how to do electrical( I DRAW THE LINE HERE ) repairs.

Susan Todoroff, a personal trainer in Ann Arbor, Mich., has begun brewing espressos at home and cutting her hair and cleaning her house herself. And Tamar A. Zaidenweber, a health care market researcher in Astoria, Queens, is spending more time walking her dog instead of taking it to day care each week.

All of these consumers could praise themselves for their newfound frugality in the midst of an economic downturn. But every step they take toward self-reliance — each shrub they prune themselves, each cupcake they bake from scratch — hurts the people and small businesses that have long provided these services professionally.( TRUE )

These small, service-oriented businesses are run in storefronts on urban streets and in suburban strip malls, or sometimes just out of pickup trucks. Responsible for roughly 18 million jobs nationwide( A LOT ), according to 2006 Census Bureau data, these companies have long been seen as engines of America’s economic growth. Yet after years of explosive expansion, many beauty salons, dry cleaners, landscapers, dog walkers, nanny services and restaurants experienced slower sales growth or even decline in the final months of 2008.

Their services are suddenly, and painfully, being perceived as nonessential( THEY ARE ).

The question now for these businesses is whether demand will stabilize or, eventually, drop enough to force them to close. And the answer may depend on whether consumers’ new penchant for self-service is temporary( ME ) or permanent ( CATE ).

After all, as incomes rose and gender roles changed over the last 50 years, families have become accustomed to outsourcing more and more of their household chores. No longer was it just the very rich who had “servants,” said Jan de Vries, an economic historian at the University of California, Berkeley( GO BEARS! ).

“Household members, particularly women, have been working more in the market,” said Mr. de Vries. “They have had less time( YES ) and higher money income, and they have been spending a lot of that money income on services they once provided themselves.”

Still, he said, even before the recession, some families had already cited moral reasons( THESE ARE VERY GOOD REASONS IN MY BOOK ) for reverting to domestic self-sufficiency( I DON'T LIKE PEOPLE IN MY HOUSE ), to those good old days( WHEN WOULD THOSE BE? LIKE FIDDLER ON THE ROOF? ) when families grew their own food and burped their own babies.

“Families have been creating a discussion over the past decade about value-driven concerns that are now being reinforced by forces in the economy,” he said. As a result of this confluence of moral and financial incentives, “The way households function 20 years from now will probably be sort of surprising to us( IF I'M AROUND I'LL BE SURPRISED ).”

Indeed, after decades of spendthrift subcontracting, many consumers now say they view such specialist services as indulgences rather than necessities( WELL, THEY ARE. WHICH IS NOT TO SAY THAT SOME INDULGENCE ISN'T GOOD. ).

“A lot of the way we’d been living was all an illusion, a fantasy,” said Ms. Spada, who has also been cooking more and bathing the family dog instead of going to the groomer. “We’ve been asking ourselves: Can we replicate some of those specialized services, which normally we would outsource, ourselves?”

Even as Americans cut back on restaurant dining, pet care services, professional hair and nail services, house cleaners and landscapers, companies producing some of the do-it-yourself products are seeing higher sales.

According to Information Resources Inc., a market research firm in Chicago, sales of products used in home manicures, home cooking and home medical treatments, among others, have experienced healthy growth in the last year. Dollar sales of cold-allergy-sinus tablets, for example, increased 17.2 percent in 2008. Meanwhile, according to Sageworks, a company that tracks sales at privately held businesses, revenue at physicians’ offices fell by 0.06 percent.

“They’re reducing doctor visits, and trying to treat themselves at home,” says Thom Blischok, president of global innovation and consulting at Information Resources.

Big-box stores that sell these products have been capitalizing on the return to a self-service mentality. Target, for example, recently began its “New Day” marketing campaign, which glorifies the family-friendly, do-it-yourself alternatives to activities households used to outsource. Against upbeat lyrics about how things are “getting better every single day,” the ads show dismal economic headlines( THESE ARE SURE USEFUL ), followed by scenes of a father buzzing the hair of his smiling sons (“the new barber shop”) and a child eagerly eyeing his mother’s cookie-filled oven (“the new bakery”).

At the same time, the service providers have been hurting.

“From the moment that the stock market collapsed and the TARP was being talked about, in September( YES ), it was like someone turned the switch off for nanny demand,” said Steve Lampert, the president of eNannySource.com, making a reference to the Troubled Asset Relief Program. Family subscriptions to eNannySource.com, a national nanny placement company based in West Hills, Calif., are down to 150,000, about a third of the site’s peak in 2007, he said.

James Erath, owner of Puppy Love & Kitty Kat in Manhattan, said, “Business is definitely down, about 25 or 50 percent down.” He has been offering steep discounts on grooming to attract customers who might bathe their pets at home.

Similarly, Rhonda Coop-Piraino, a hair stylist in Dallas, said about 10 percent of her clients had started coloring their hair at home to save money. Many of these clients, she said, return to her salon for color correction when their home kits disappoint.

“They do come in sometimes with some pretty orange hair,” she said. “I have a hard time charging the same amount I once charged for color correction, though. I have clients who have been with me for so many years, and it’s hard for me to charge them $200 in this economy.”

Like Ms. Coop-Piraino’s clients, some consumers say that doing things for themselves has not been as easy as they thought.

After letting their maid go last October, Chris DeCarlo said he and his partner, Chris Toland, realized they had a lot to learn about keeping their Manhattan apartment tidy. Their biggest challenge has been laundry.

“No mishaps yet,” said Mr. DeCarlo, a Web site designer, “but my partner is proud to report that somebody in our laundry room who was watching him struggle felt the need to intervene and show him the proper way to fold a fitted sheet.”

And there are some services that consumers now have trouble duplicating themselves because of technological advances.

When it comes to cars, for example, consumers might be able to refresh their memories about how to change a car’s oil — and some mechanics report a rise in such self-service. Faisal Akram, the owner of service stations in Irvington, Tarrytown and Cortlandt Manor, all in New York, said that for the first time in recent memory customers were bringing in waste oil from home.

But beyond oil changes, there is little most car owners can do themselves because automobiles have become so sophisticated.

Aaron Clements, the owner of C & C Automotive and host of a car-repair radio show in Augusta, Ga., said that in recent months twice as many customers had been calling and asking for advice on how to service their cars themselves. But usually, once they learn what equipment, training and effort would be necessary for self-service, he said, they opt to take the car to a shop.

“Two cars ago, I was able to rebuild the entire engine,” said Vicki Robin, the co-author of “Your Money or Your Life,” a book praising the financial virtues of self-service. “But back then a car was a car. Now a car is a computer with wheels.”

As their former nannies, stylists, landscapers, dry cleaners and maids languish, consumers report mixed feelings. They say they sometimes feel guilty about the ripple effects their penny-pinching is having on the livelihoods of others, but at the same time they feel unexpectedly empowered by their rediscovered self-reliance.

Many say that even when their financial worries abate, they will probably remain self-service converts. ( I SEE THIS AS GOING AGAINST HUMAN NATURE )

“After doing it yourself, it’s like, ‘Why was I ever spending $200( MAYBE THE PRICES SHOULD COME DOWN ) to pay someone else to do it for me?’ ” said Ms. Zaidenweber, who recently dyed her hair for the first time from an $8 home coloring kit. “It was kind of fun, even if it didn’t turn out exactly as I expected, and even it took a couple tries to get it done right.”

Caitlin Kelly contributed reporting."

I'm sorry, but people love leisure and indulgence and sex, where did that come in, and other comforts that make them happy. There will never be a large society of self-imposed poverty or even lean living without the economic context that would force people into it. Having said that, I do approve of people being more prudent and conservative with their money, and not valuing money to the exclusion of other pursuits in life. So, in a way, I'm torn. I really do agree with the idea of more self-sufficiency, but I don't want the social and economic context that would make it mandatory. I doubt few others would as well.

I'm glad that these people are finding a new sense of meaning and empowerment in our economic downturn, but I'd just as soon it had not happened. That's another paradox to add to my list of life's paradoxes.