The Perfect Storm

by Joe Blow   

Everything seems to be coming along quite nicely. 

Iraq is now a civil war, the Base Realignment and Closure Commission (BRAC) is as good as over, New Orleans is about to be hit with a Category 5 hurricane, Louisiana and Mississippi were declared disaster areas in advance of the storm, and FEMA is on full alert. Even the Red Cross is leaving town.  

The national housing bubble is deflating, the dollar continues its slide, interest rates are headed up, oil prices are over $70 per barrel, gas is over $3 a gallon in California, the Treasury just confiscated some very rare privately-held gold bullion coins, the summer slump is here, and much tighter bankruptcy rules go into effect on October 17^th.  

Thousands of Americans are marching in the streets to protest the Iraq war, the war's tipping point was reached two weeks ago, D.C. pols are preparing to attack Iran, and the wildfire season is in full swing.  

California just had another large power outage, the drought in the Midwest has ruined most crops, Arizona and New Mexico have declared border emergencies, and Mexican drug lords control our southern border instead of the Border Patrol.  

The Army and Marine Corps are both exhausted, recruiting goals will not be met for the year, Bush’s poll numbers are in a death spiral, the body bags are still piling up, and Cindy Sheehan has the attention of the world's media.  

Hawaii just fixed wholesale prices for gasoline, foreign central banks are sounding alarms, Greenspan is sounding the alarm, and now even conservative pundits are sounding alarms.  

Meanwhile, George Bush continues his five-week vacation. “Stay the course and prepare for more casualties. I must get on with my life.”  

While some people think this is simply outrageous, the truth of the matter is that Bush has as much control over the approaching Perfect Storm as he has over Hurricane Katrina or events in Iraq or Iran : zero.  

Bush has already done the only thing that he can do: sign a piece of paper to start the flow of federal tax revenue to the pending disaster in the bayou. When it’s over, he will again do the only thing that he can do: fly over the devastation in an aircraft while making all the right noises.  

This is the best that the most powerful man in the world can muster? Actually, yes. Bush is powerless to control what is about to happen to this nation. While he still thinks that he can manufacture his own reality, he is about to receive another object lesson in humility. Reality therapy, isn’t it great!  

The 9-11 anniversary is less than two weeks away. Stand by for a crisis. All indications suggest nothing but more bad news for September and October. 

If terrorists strike in September, it probably won't be until the 12th, a Monday. Any attack will probably not occur on a weekend. You can anticipate a higher state of alert in September and maybe even martial law in the immediate vicinity of a strike. The dollar will be way down after the strike and gold will be up, but I do not expect a stock market crash because the bubble is in the housing market instead. 

(Several small strikes, several days apart would still have the desired effect.) 

The following sequence of events appears likely: terror strike (real, induced, or fabricated), national crisis, U.S. dollar crash, the Fed will raise interest rates to prop up the dollar, housing market crash, stock market slump, and a recession. The wild card is an October surprise ( U.S. attacks Iran ).  

Come Thanksgiving, you will be thankful if you are over 40—too old to be drafted. (The good news is that the recession may solve the recruiting crisis in the short term.) 

I expect that all of the above may occur even with only a small increase in interest rates. The Fed-induced national housing market bubble has run its course, the mania is already over in some local markets, and it will only spread with more bad news, including the recent BRAC closure recommendations. 

In the past five years, millions of Americans spent the equity in their homes while also moving up, that “equity” will soon be gone for good. It will not be available for second mortgages, lines of credit, consumer spending, credit card debt reduction, paying monthly bills, putting food on the table, cash savings, buying gold bullion coins, or as investment capital for the stock market. It is as good as gone, it was never real in the first place, and soon the bills will be coming due. More reality therapy! 

The massive liquidity that the Fed made available to stimulate the economy following the tech crash is gone; it was consumed by Americans buying expensive toys, electronics, GM cars on sale, and homes that people will soon owe more on than they are worth.  

I expect a recession by the end of the year, early spring at the latest. If the Fed overcompensates (as is typical) by raising interest rates too much, a depression is also a distinct possibility.  

But don’t expect to hear any of this from George Bush. What you will hear instead is a famous line from the 1978 classic movie “Animal House,” uttered by a very young Kevin Bacon playing a student named Chip Diller in the final parade scene as all hell breaks lose. Bacon is standing on the sidewalk, wearing his Army ROTC cadet uniform, waving his arms, and attempting to calm the clearly panicked crowd by screaming, “All is well!” He turns around just in time to be trampled into the pavement by the fleeing crowd.  

This scene is about to be repeated, with Bush playing Bacon’s part, and he will be just as successful as Bacon was in attempting to convince the crowd that all is well.  

As the Perfect Storm approaches, even former believers now recognize Bush’s mantra as often-repeated propaganda from a pol who is clearly disconnected from reality, the same reality over which he believes he has control.