2008 Financial Meltdown Imminent?

As 2007 comes to a close, I can't help wondering what 2008 has in store for us all from an economic standpoint. Should I make a 2008 economy prediction now? Sure, why not,... the "experts" seem to make plenty of forecasts, prognostications, best-guesses, predictions, or whatever else you may want to call them, so I will release my 2008 Financial Meltdown Prediction now.

The way I see it, the only thing that could prevent a mass collapse of our existing financial system at this point is (as nearly always is the case) a large-scale intervention by the Federal Reserve / Government to create yet another "bubble" in yet another sector of the economy with hopes of a newly inflating bubble saving us from one that is currently popping (i.e., the housing bubble). You wait, and watch, and you will see I am right. It is going to take something large (hopefully not a massive war) to seriously change my forecast.

Some things that point to an imminent and impending financial / economic collapse:

• In general, the house of cards (debt-masked artificial "growth" and GDP) known as our "economy" is finally nearing a tipping point. Remove consumer-debt-financed "growth" and government deficit-spending from the equation, and I posit that there is ZERO true economic growth (negative in fact; as it has been for years, though heavily disguised).
• The fact that basically nothing is made here anymore is partly to blame for things. All our money is flowing outward, and at a record pace.
  
• Year-over-year real-estate numbers. These are down about 7% nationwide, which results in over $1-Trillion in lost "equity" / paper-value of all homes in the USA. This was a historical record correction, and, I think we are only at the cusp of what is to come.
  
• Credit-card late-payments are up FIFTY PERCENT yr-over-yr. People are right on the edge of total collapse. Complete delinquencies are also soaring - accounts that have no hope of ever being paid back.
  
• Large companies are showing signs of desperation, borrowing massive amounts of cash from (and losing equity to) foreign investors (like Citigroup's $7.5BillionMiddle-East Abu-Dabi bailout deal, Merrill Lynch's $6.2BB bailout by a Singapore-owned state investment firm, Morgan Stanley selling a 9.9% stake to the Chinese government for emergency financing / bail-out... the list goes on!
• Rising unemployment, which, mark my words, is going to really take off in early 2008. I would bet a substantial sum that massive, widespread corporate layoffs are going to emerge early in 2008 just after the holidays. This seems to be the only way companies can ever come up with to "increase profitability", since management can not otherwise figure out how to differentiate their business from a competitor's and gain market share or improve products and services to increase profits. And, if there is work that still needs done, don't worry -- they'll just use foreign labor and outsource even more than already.
  
• Our "volatile food and energy" inflation is out of control, primarily due to competition for food sources from energy concerns (i.e., ethanol production). It's bad enough energy prices are hitting people's wallets, but it takes pure insanity for a country to compete with its food resources to make fuel (regardless of how much farmers may currently be enjoying this windfall). Don't think it is just corn that is going up. Wheat is up 50%+ in the past year, as are many commodities. And, this has hit grocery bills hard, further pinching the consumer.
  

What has lead to this?
Housing was a bubble created to bail us out of the technology stocks speculation / bubble before it. People seemed to overwhelmingly believe that, once again, a certain sector of the economy could turn in "growth" indicators month after month, year after year, that were so completely out of line with overall long-term GDP growth that it should have been obvious there was a speculative bubble in motion again. But, even the "experts" (which there seems to be no shortage of), continually preached how this was "different" and sustainable, and so on, spewing forth (abused) statistics to back their opinion of why housing was such a great investment.

Contrary to all the analysis and observations by mainstream "economists", I think there is a very simple method for detecting such over-speculation, hype, "froth" (a Greenspan term), lunacy (my term), and so on when it comes to sectors of the economy / market being on fire. Do you want to know how to detect a bubble, and do so in time to avoid getting caught in a downturn like the one we are currently seeing with housing?

Spotting Bubbles Early...
One way I suggest to get advance insight into the formation, expansion, and impending collapse of "bubbles" is to look at Google-Ads (and other online ad mechanisms) to spot market "hot spots". What am I talking about? Well, any time there is the lure of easy money through speculation, and likely areas of exploitation (and even fraud), like some of the business practices that were driving the housing bubble, you will see over enthusiasm and willingness for individuals and companies to pay a very high per-click price for keyword-specific online advertising.

When I heard from a friend a couple years ago who claimed he was making (his cut) as much as $5, $10, or even $20 per CLICK on website ads for mortgage refinancing, home sales, etc., I knew the market was ready to implode! Those rates would imply that people were spending perhaps as much as $50/click to show an ad on websites! The only reason anyone would be willing to spend such amounts on a gamble that the person clicking would then perhaps actually buy their service / product, is if there was some extremely lucrative opportunity to exploit a short-term bubble and cash-in on the craze that was sweeping the country (adjustable rate loans, no-money-down mortgages, and so on). Their was so much profit potential to be had be selling these "financial vehicles" that people were willing to essentially gamble with Google Ads and the like just to get people to their websites.

I had some money in Nuveen Real Estate Income Fund (Public, AMEX:JRS) ETF at the time, and as soon as I started looking into these insane per-click prices, and read all about the rate of supposed per-day house-price increases in places like Orange County, CA (yep, per day -- I read articles about houses going up faster than what a person could make working in a day), I knew it was time to get out. And, I did. I sold before that particular real estate stock fund peaked, but also before it fell nearly 50% to it's current price. I am quite glad I ditched out in time!

What about Economists and their Forecasts?
This leads me to why I consider most economists useless, since as a group, they are nearly always led down the same path as the rest of the population and are nothing more than reactionary. Sure, a select few saw the bubble for what it was, but somehow market analysts, economists, forecasters, and the like as a whole didn't see the bubble for what it was (or, if they did, they were not the ones getting any air-time on TV). They are reactionary in general, and rarely seem to spot useful trends in time.

This continues now. Today I saw this Dow Jones Reuters report, and excerpt which I quote here:

Total applications for U.S. jobless benefits unexpectedly rose by 1,000 last week, while the number of longer-term unemployed rose to its highest in more than two years, the government said on Thursday.

What immediately gets me is the single word: UNEXPECTEDLY. These economists are out of touch. Who, in their right mind, would not expect unemployment to rise when the housing market is imploding, corporate credit-issues abound, the consumer is tapped-out as a whole, and so on?

Given this level of mainstream economists' ability (to forecast), I don't have much confidence in their ability to see how bad things truly are right now. Or, do they all see it and are just not allowed to say it in the public forum? Sure, there are a few small signs of hope within the economy, but I don't think they outweigh the multitude of issues facing our financial system right now.

Presidential Election 2008
Answer this question: why does anyone want to be President in 2008, and inherit this economic catastrophe-waiting-to-happen? Surely whoever is elected will have to deal with a general economic downturn in 2008, a continued weak housing market (if not downright terrible one), a banking system in distress, and more. I go back to my general line of thinking, which is, there must be some really lucrative and long-lasting benefits to being President for someone to want that position badly enough to spend millions to get it. Reminds me of the insane per-click price for advertisements I mentioned earlier.

People definitely expect to get back a LOT more than they put in, whether those people are the candidates or the people (and companies) backing them. How does this fit into my blog today? Well, I ultimately blame this type of behavior for the looming economic crisis we're facing now. Short-term profit motivation is outweighing common-sense, and the consequences of the quick-money mentality are going to catch up to us all.

Business Gift Tax Deduction - $25 per person

Don't miss the chance to write off business gifts...
The 2007 business gift deduction is something many business owners will accidentally overlook this time of year. You still have a few days left, and you can give a (small, $25.00 maximum value) tax-deductible yearly business gift to your client contacts and any employees.

I am not an accountant, and can't give legal or tax law advice, but it seems the law for business gifts and taxes is all about making sure you are giving a gift with the intention of receiving some value in return. It makes sense that you would give gifts to clients or prospects in hopes of landing more business in the future, and the IRS will gladly take their cut of any future profits that directly or indirectly arise from this act of kindness you show your business contacts. Likewise, gifts to your employees are deductible (to that $25 limit) since it is assumed your employees will return that much "value" to you for this expression of gratitude for work well done.

Gifts to Contractors, Gifts to Suppliers, etc...
I have not been able to find specific tax law wording regarding contractors you have on staff -- and perhaps other people that help you with your business (e.g., your accountant, lawyer, and perhaps others you feel would return additional business "value" after building a more friendly working arrangement), but it seems logical that you could.

Worst case is you would have to fight for your right (with the IRS) to attempt to minimize costs for your business, over a maximum of $10.00 lost in tax revenue off the $25.00 gift you gave to a supplier in hopes they would perhaps not charge you when you call them with a simple question, etc.

If you save on expenses, your business profit increases, and you pay more tax, right? So, if an act of kindness saved you even a percent or two when negotiating the best-price with your supplier for paper or office supplies or contracted services, it wouldn't take much at all to offset that tiny little gift-expense in terms of taxable profit / income later.

Once again, I am not tax expert, or accountant, but it seems like you could defend this position (logically at least - - god knows logic rarely plays into tax law though). Consult your accountant for details.

This insane, eternal, low, $25.00 limit!
The dark side of this gift tax deduction for businesses is how lame the limit is! Although it is nice that you can write-off some small items that may garner a bit of extra favor with clients and employees, I still find it reprehensible that the IRS has not raised the $25.00 limit in decades! Sure, they want to avoid rampant fraud and abuse and not lose revenue if they can avoid it, but come on guys, how about a $50.00 limit by now (though, I think $100 limit would make more sense, especially if they go back to not increasing with inflation for another decade or more).

I always try to get some little things for clients and employees every year, since it is a write-off. But, TWENTY-FIVE BUCKS!!? This has not changed in DECADES! Talk about a hidden tax increase! (since, no inflation adjustment factors are in place).

You can't buy anything TOO NICE for twenty-five dollars! So, tell your employees, "here you go -- great job!... sorry, I could only get your something simple and cheap. But thank god for those cheap Chinese imports, since it is the only way I could keep up with inflation!" LOL

At the same time, we recently cut capital-gains rates in half for even billionaires, and GWB whines on TV about how the "death tax" (formerly, pre-propaganda times known as an "Estate Tax") needs permanently removed and the capital gains tax cut needs to be permanent. It says something about our tax-law and who benefits from the larger and highly publicized changes to it, when the IRS worries about $7.00 or so tax revenue per gift, that would grow to perhaps $15/gift lost if they doubled the write-off to $50.00 maximum gift deduction, while at the same time we extend the biggest tax cuts in history to the top income brackets.

So, given the priorities of our Congress and Leaders, chances are nearly certain that the 2008 business gift tax deduction and 2009 business gift tax deduction, etc., will remain subject to the same paltry $25.00 limit. But, take what scraps they give you... you never know when they'll decide to take away this little deduction to balance another handout to a more preferred cause.

Note: if you want to read more detailed insight into this topic of giving tax-deductible business gifts, Microsoft Small Business had this article online about giving a business gift and getting a write-off, that goes into much more of the specifics behind the tax-law.

Also, consider a year-end company party...
If you have food expenses for a company party or for office snacks or meals, those expenses could be fully deductible (instead of the normal 50% deductibility for standard meal and entertainment expenses). So, if you want to buy some "good will" near the end of the year, buy lunch for the office staff and/or have snacks available or throw a nice party. It's a no-brainer for raising workforce morale while you get the full benefit of a tax write-off.

Likewise, you may want to take the opportunity to promote your products and services to the public. If your company is providing food to the public for free as part of a promotional campaign, those costs could also be fully deductible / expensed (100% vs. M&E 50% rule)