Posted on 12/06/2006 7:08:36 PM PST by 1066AD
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.
advertisementIt 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.
The SKY IS FALLING, THE SKY IS FALLING!!!!!
Not likely. Liberal economists ALWAYS talk about collapse, conservative economists talk about adjustments.
Basically the message should be , stay out of the international stock and commodities market unless you know what you are doing.
whatever his motives they are directly linked to whomever he is writing for.
I don't know much about stock and bonds but I think he is writing for the National Enquirer...ha ha. I sure wish I would have tried and figure out investing in stocks and bonds years ago. A little would be a lot more now.
I can buy more shares at less cost in a down market,
because I 'dollar cost average',
I welcome not buying into high markets.
Now if one had a 10 or less year horizon,
one should invest conservatively.
Also, the 4th quarter of each year,
Oct to Dec,
is when earnings are going to be judged,
it always goes down a little in the beginning of a new year,
and if you miss out on an up-turn,
because of short term advice,
it gets more expensive trying to get back in.
This is such interesting analysis coming from someone in a country and a continent which would love to have the "problems" that America suffers, i.e., unemployment under 5%, inflation under control, economy riding high, gas at $2.20 per gallon, etc. Compare this with Europe, unemployment 8% - 20% depending on the country, inflation healthy and growing, economies stagnant, gas about $7 - $8 per gallon even though those countries' importers pay the same amount on the global market that we in the U.S. pay. Where does the missing money go? Taxes to make big governments bigger.
I love it when writers from lousy economies analyze our economy and give their suggestions on how to fix the U.S. economy! Sorta like Mankato, MN giving NYC suggestions on how to improve its postal service.
Seems to me he's been projecting a crash for about 20 years or so.
Anything and everything bad that occurs on the Dem's watch could be referred to as "The Pelosi Curse". (No more it's Bush's fault.) Think about it, she does have "witchy woman" eyes.
Nothing will stop the American idea. Innovators & capital seek the highest returns commensurate with risk - places where private property & the rule of law exist.
All you need to know about investing is to focus on countries which protect these ideals. Through up/down cycles, they will always thrive. But it's not the country itself, it's the idea that is the crucial point.
If these principles are abandoned, talent & capital will once again seek the safest harbors where ever it may exist.
It appears here in the Northeast that the "housing slump" is over already.
Well, mostly. For now.
No, it will be the "Bush Recession. Bet your booties. Let's just hope it's not the Bush Depression and does for the Republicans, and the Democrats for that matter, what Hoover's Depression did.
I think a Democrat in 08 is an inevitibility unless Ronald Redux rides out of the West to save the day.
What was the lumber market on 9-10-01? Upward swing? Sometimes I'm amazed at how strong our economy is when gov't stops taxing/regulating us to death.
My 401k just recorded its biggest one month gain in the past 25 years. Gimme some more of that pain.
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I have been averaging about four percentage points gain every DAY for the past few weeks. Obviously that cannot continue forever, in two more years Bill Gates and Warren Buffett would be asking me for financial advice. I am just hoping for a couple more months before I have to go to all cash.
Oh please ... I'm trying to keep my late lunch down.
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