Vallejo, California's Bankruptcy 'Unrelated' to Sub-Prime Lending?

Yesterday's big economic news, as far as I'm concerned, was that a town in California would be filing for bankruptcy. As the announcers were saying it, they adamantly followed-up each and every statement clarifying that this was not the result of the wide-spread sub-prime lending problems plaguing the rest of the country. ...how is this not related? Who are they kidding?

I'm the first to support the notion that the government, via the media, should do what it can to keep confidence levels up and maintain positive future prospects among the citizenry. That said, there's a point at which doing so can be more harmful than good. This is one of those moments.

People are funny. They watch the news in segments - disconnected segments. In one segment, an economist will be warning people of rising unemployment, growing concerns over inflation and work diligently to avoid saying the R-word (recession). In the very next segment, albeit after a regularly scheduled commercial break, the well-dressed financiers will excite everyone while quoting statistics from the latest rally sparked by news of higher sales volumes. How is it that no one connects the two segments to provide people with a more complete picture of what's going on in America?

Rising sales - sure, it's possible. Of course, the question is how are those sales being financed? With interest rates at 2%, I bet that you could guess! With the decline of home values to record lows, the average person's wealth has diminished dramatically. All the while, these same people are taking-on more and more debt, forgetting that unemployment is rising and their job security may not be there a month or week later. Then, ask yourself what happens when those individuals and families with all that debt lose their jobs and have zero (or negative) home equity. What happens to those individuals and families when interest rates begin to rise again and the cost of all that debt increases on them? I bet you could guess that too...

Credit lines in the sand

It's tempting to believe that the credit crisis is nearing an end. I hear it too; many of you know that I'm an avid CNBC watcher and their stance, more often then not, is that the worst is behind us. I'm afraid that I disagree. The worst is yet to come. The reason? The tighter belts at the banks and slowing credit hasn't had enough time to really impact businesses ...yet.

I wrote a post a few days ago quoting an article wherein they stated that bankruptcies were up 49% year-over-year. I'm afraid that even that is only the beginning, but it is an indication of what is yet to come.  Businesses, especially growing businesses, rely on their credit lines to get them through the tough times. We're in one of those times now, but the credit lines won't be there to provide the businesses with the cushions that they need.

In stead, businesses will begin to see their cash reserves dwindle as their sales and revenues decline. Of course, no business, especially new businesses, can react instantly to changing market conditions. As a result, fixed costs will remain at their original levels for some time and those fixed costs will need to be covered - if not by revenues, then by what? The credit lines won't be there... Put one and one together and you begin to see the picture that's developing nationwide.

The credit crises, or at least what started it initially, may be nearing an end. Unfortunately, the effects of that crisis are only now beginning to be felt and it will take time for their full impact to reach the bottom line.

Bankruptcies up 49%! Yes, 49%!

Some days, when you listen to the latest equity market numbers, you wonder can't help but wonder where all the fuss about recession comes from. Sure, the markets decline some days, but for the most part we only hear about the rallies and bulls. The bears are sparse and far between. Then you come upon an article that shocks you with some numbers that bring your feet back on the ground... bankruptcies up 49% years-over-year.

We already heard about the foreclosures, but that's because of the sub-prime hoopla, right? If there was any doubt as to whether the economy was slowing, the rising number of businesses forced to closedown should shed some light on the matter.

1.1 million bankruptcy filings! Yes, that's 'm' for million. As in... if you had one dollar for each business that failed, you would be a millionaire with some change to spare. Sobering, isn't it?