[FoRK] economic storm brewing in the U.S.

Jim Whitehead < ejw at soe.ucsc.edu > on > Wed Dec 13 10:11:43 PST 2006

This article could have run 4-5 months ago using almost the same  
text... Timing plays are hard to get right.

- Jim

On Dec 11, 2006, at 5:48 AM, Eugen Leitl wrote:

>
> http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/ 
> 2006/12/07/do0702.xml&sSheet=/opinion/2006/12/07/ixopinion.html
>
>  Economic storm brewing in America
>
> By Ambrose Evans-Pritchard
> Last Updated: 12:01am GMT 07/12/2006
>
> America's stock markets typically start crumbling four months  
> before each recession, anticipating the crunch in profits. Shares  
> then grind relentlessly down for 10 months or so until they have on  
> average knocked 26 per cent off the S&P 500 index, Wall Street's  
> listing of top companies.
>
> So if you think the US property slump is looking scary after  
> October's 9.7 per cent drop in new home prices, it may be time to  
> take a little money off the table. It has been a lucrative autumn  
> rally, but the four-year bull market is long in the tooth by any  
> standards.
>
> As we report today, the rate of insider stock sales by company  
> directors on both sides of the Atlantic is the highest since  
> records began 20 years ago, with sales outnumbering purchases by 60:1.
>
> It makes scant difference whether your shares are on Wall Street or  
> the London Stock Exchange. The FTSE 100 index is a global play  
> these days. The lion's share of profits come from overseas, while  
> London's AIM market has become a bet on Chinese and Russian  
> companies nesting there by the dozens.
>
> The world economy is what matters, and I don't like the smell of  
> it. Nor, apparently, does Hank Paulson, who made $700 million at  
> Goldman Sachs before taking over the US Treasury this year. He has  
> reactivated a crisis team with a command centre in Washington to  
> cope with the "systemic risk" in a market melt-down. His worry?  
> 8,000 unregulated hedge funds with $1.3 trillion at hand, and  
> derivative contracts now worth $370 trillion. "We need to be very  
> careful here," he said.
>
> A well-sourced article in Washington's Weekly Standard says Mr  
> Paulson fears a "serious crisis that would be a body-blow to the US  
> economy".
>
> Yes, China is booming – for now – but it accounts for just 4 per  
> cent of world consumption. The great US shopping extravaganza is  
> six times bigger, and remains the anchor of the international  
> system. It is slowing fast, unsurprising after 17 interest rate  
> rises from 1 per cent in June 2004 to the current 5.25 per cent.  
> "Big ticket" orders for cars, aircraft, computers and such  
> plummeted 8.2 per cent in October.
>
> Average house prices have fallen from $244,000 in April to $221,000  
> last month, with more violent corrections in Florida, Arizona, and  
> New England. Builders have warned of a "death spiral" as they slash  
> prices to off-load a glut of unsold homes.
>
> The "happy handover" orthodoxy of the International Monetary Fund  
> is that America will escape with a shallow slowdown. Asia and  
> Europe will pick up the growth baton. The world will march on  
> without missing a step.
>
> Nice if you can get it. The more ominous possibility is that  
> America fails to recover quickly, and takes the world with it.  
> Japan already shows signs of stalling. Retail sales have fallen for  
> two months. Far from bursting back to life as expected, it is still  
> teetering on the edge of deflation.
>
> France ground to a halt in the last quarter as the surging euro ate  
> into the country's industrial core. Airbus was humming when the  
> euro was worth 90 US cents. Now it must compete at $1.33, with wage  
> costs in euros set against delivery contracts in dollars. Currency  
> hedges protect for a while, then reality hits.
>
> German industry says $1.40 is the pain limit. It is hard to see  
> what can stop the dollar sliding that far as funds bet on US rate  
> cuts next year. The yield premium that kept the currency aloft  
> earlier this year is about to narrow, perhaps sharply. The central  
> banks of Asia and Russia are sated on dollar reserves. They may not  
> slash their US holdings, but they are unlikely to add either. So  
> who will fund America's deficits?
>
> "The US needs a trillion dollars a year just to stand still," says  
> David Bloom, currency guru at HSBC. Modern financial crises have  
> always begun on the peripheries of global economy, setting off a  
> chain reaction. Mr Bloom says the seizure this time will be at the  
> heart of the system as the dollar buckles, pressing down on the  
> "aorta of capitalism".
>
> So we have a world where the ageing economies of Europe and Japan  
> are too fragile to withstand a dollar slide, yet America needs a  
> weak dollar to cushion its own downturn. Meanwhile, China is  
> holding its currency far below equilibrium. Nobody is doing much to  
> break this impasse. The 1930s come to mind.
>
> The consensus is that America will rebound quickly, averting a  
> sticky end. But it takes two years for rate rises to feed through  
> an economy, so Americans have not yet faced the worst. Nobody knows  
> how US households with record debt will cope with the squeeze.  
> Borrowings rose 8.1 per cent in 2000, 8.6 per cent in 2001, 9.7 per  
> cent in 2002, 11.4 per cent in 2003, 11.1 per cent in 2004, 11.7  
> per cent in 2005, with no let-up in 2006. Debt payments have  
> reached an all-time high of 13.9 per cent of personal income.
>
> Americans extracted 6 per cent of GDP from their homes last year in  
> equity withdrawals (ie, more debt), mostly to subsidise their  
> lifestyles. This game is up. Professor Nouriel Roubini from New  
> York University says recession is inevitable. "People have been  
> using their homes as their ATM machine, but many are now facing  
> negative equity so there will be a lot of foreclosures. As the  
> housing recession spreads to manufacturing, this is going to lead  
> to a much harder landing than people think."
>
> The bonds markets are alert, even if equities are not. Interest  
> rates on 10-year Treasury bonds (4.46 per cent) have dropped below  
> short-term rates (5.25 per cent) for five months. This is the  
> "inverted yield curve" of satanic fame, flag of recession. Ignore  
> that at your peril.
>
> Whatever happens, the Federal Reserve will come to the rescue. But  
> how soon? The Fed minutes from December 2000 show some governors  
> fretting about inflation long after the danger had shifted to  
> slump. That wily old bird Alan Greenspan silenced them, knowing in  
> his bones that the economy was going over a cliff.
>
> His untested sucessor, Ben Bernanke – burdened with inflationist  
> baggage – does not yet have the credibility to pull off that stunt.  
> Whatever he really thinks, he will have to play by the book. So  
> batten down the hatches for a long storm.
>
> -- 
> Eugen* Leitl <a href="http://leitl.org">leitl</a> http://leitl.org
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