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Wake Up and Apply Your Brakes


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Knowing when to apply your brakes, is a necessary exercise for healthy economics

 

Consumers are slowing down and spending less. This is healthy for them but not for the weakening US economy. Consumer spending fuels around 70% of U.S. economic output, so a pullback directly affects growth. Over the last year, U.S. consumers have ignored the approaching economic storm and continued spending, while economists debate about how the housing downturn will affect the US economy. Credit debt, as well as energy and housing prices are burying the average American consumer. Now, evidence is mounting that consumers are applying their brakes in the face of an unpredictable economy.

 

The Dow Jones Industrial Average tumbled 246.79 points or 1.9% to 12606.30 on last week because of lower consumer spending.

 

Tiffany & Co. announced that its U.S. sales slumped during the holiday period.

 

American Express Co. warned late Thursday of rising delinquencies and slowing spending among its cardholders.

 

Kohl's Corp., cut earnings projections after reporting weaker-than expected sales.

 

Capital One Financial Corp. said its 2007 earnings would fall short of its earlier forecast.

 

AT&T Inc. said it has been cutting off more landline and high-speed Internet customers for non-payment.

 

Autodata Corp. the automotive industry tracker reported 3% drop in December sales compared to a year ago.

 

According to the Federal Reserve, credit market instruments such as home mortgages, auto loans and credit-card receivables, have hit an all-time high of 18.7% of household and nonprofit organization assets.

 

USA households are not in good shape at this point, and don't have many reserves to fall back on. With housing prices falling and mortgage-lending standards tightening, consumers can no longer easily tap into the value of their homes the way they could when prices were rising and lending was easy.

 

Housing pressures are causing most consumers to take a second look at their budgets, as high energy and food costs take a bite of their fragile incomes.

The American Automobile Association stated that regular unleaded gasoline is averaging $3.10 a gallon in the U.S., up from $2.99 a month ago and $2.28 a year ago. Steep gasoline and home-heating costs are probably the biggest thing dipping into the average consumer's budget right now. Moreover, consumer-credit woes are an issue for many to be concerned about.

 

Debt is part of this; people always put stuff on credit cards. It used to be 75% paid with cash, now it's the other way around. Most vendors are predicting slower sales that during the past years. It's a good thing that people waiting and are somewhat afraid

 

Many Americans have been pushed into the "fringe economy." This is where consumers seek quick loans via check-cashing storefronts and pawnshops. Dave Crume, CEO of Topeka, Kan.-based Capitol City Pawn & Jewelry, which runs pawnshops in Kansas and Nebraska, says, "Our typical loan used to be $60 to $100. We do see more people coming in that do need to borrow $400, $500, $1,000. Those are people that need the money for house and car payments and things like that."

 

The possibility that the USA is in another recession will continue to be debated by economists and politicians. However, here's some facts that reflect the current state of average consumers.

 

Michael Goldstein, an international dealer of antique diamonds based in New York City. He notes that record-high prices for gold have prompted many people to trade in their jewelry for cash.

 

The gold refiners in New York City have many people waiting in line to have their jewelry appraised, so they can exchange it for cash.

 

Shopping-guide publishers say that advertisers, mostly small businesses, are taking longer to make payments and that more accounts are going delinquent.

Restaurants have also reported a sharp fall in sales, according to Oscar Sloterbeck, head of

company surveys at investment firm ISI Group.

 

Last week, shares of McDonald's Corp. fell 6.6% after an independent analyst's survey pointed to weak U.S. store sales in December. Analysts at Friedman Billings Ramsey also issued a cautious report on the company.

 

Consumers are waking up and taking notice of the factors that are taking place. The average American consumer is worried about the economy, and curtailing spending across the board as a result. They are driving less and looking for less-expensive clothing, food and vacations. This is a good thing!

 

Anyone who is not willing to apply their brakes in the face of this approaching storm is rapidly heading down a dead end road.

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  • 4 weeks later...
Anyone who is not willing to apply their brakes in the face of this approaching storm is rapidly heading down a dead end road.

 

Thanks for submitting yet another observant, intelligent and well-researched Post.

 

Does anyone have ideas how to protect US financial holdings during this storm ? What is the conventional wisdom regarding US Pension security during an (apparently looming) Banking Crisis ? Any ideas how someone might move to secure such an income stream ?

 

I am moving towards liquidating much of my real estate holdings into 'cash' in the form of Gold and Strategic Metals and eliminating all debt in my life. I am investing in secure, economical transportation and housing (I am fortunate to have BlueWater Skills so I am considering a sailboat that I may take to Central/South America). I am also traveling to Thailand this summer to have all those 'fifty something' checkups done on the ultra-cheap, in quality facilities, while going on vacation to boot.

 

I am definitely preparing for a storm of magnitude. Personally I think it will happen before the next US Election

Even with all this preparation, I haven't a clue how to protect my pension from banking collapse/recession/depression. At one point I was considering investing in a Permanent Annuity for a secure monthly income stream, but after watching CitiBank and others get buoyed by offshore governments/corporations I've decided Annuities might not remain so...Permanent.

 

Seems this might have enormous ramifications for people in CR using laddered CD's for residency qualification.

 

Does anyone know if any Annuities have failed in recent memory ? During the Depression ?

 

Does anyone have ideas on how to protect a pension ? I was curious if one could cash-out using a 'structured settlement' buyout company, but haven't much information.

 

Nikki

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AlaskaGirl, fwiw, here is what I understand:

 

Most pension plans offer the retiree an option at the time of retirement to take a lump sum cash payment. This is NOT considered to be a wise thing to do, but it could mean some real money. Once a retiree choses not to take that lump sum, there is no going back. As a working stiff, paying into a pension plan, you have no option because you are not yet retired. In other words, most pension plans will not allow you to do anything other than dictate what kind of risks you might want to take with a 401K, or other annuity, but you cannot direct them what to do with the money until you actually retire. The only way to have any input into what to do with the Pension Plan's money is to run for the governing board of the Plan. As for your personal pension, it is either take your annuity in payments, or cash out.

 

Also, remember that a pension plan going under is not necessarily tied in with the failure of a bank. Pensions are tied into stocks, bonds, portfolios, and all kinds of financial instruments, and generally, are not linked with any particular bank.

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Nikki: My wife just got a distro from an old pension plan from a job she had years ago, and she had only two choices offered to her - take a lump sum or an annuity. She decided to roll the lump sum into her current IRA for now because she needs the money to grow some more before retirement.

As far as any annuities failing, I havn't read of any, but you could do a google search on that, I believe that they are insured.

Dana J

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Fixed annuities are an insurance product and are guaranteed by the insurance company who issued it. If an insurance company were to go under, usually another stronger company will buy the failing company while integrating and honoring the existing business. There is also guaranteed recourse from the state in which the insurance product was issued. Annuities are considered a very safe product.

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