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Picking through the rubble of post-bubble America - "Expect to see the Dow hugging 7,000 by year's end"
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This Link is located in the Public Channel Housing Bubble and Bear Links.
Posted by ian 2 years 10 days ago (onlinejournal.com). Views: 865
Tags: housing bubble |
| Related Tags: credit crisis gold wall street peter schiff economics inflation banks |
By Mike Whitney
Mar 11, 2008
The deflating housing bubble is finally being felt in the broader economy. Home equity is vanishing which is putting downward pressure on consumer spending and shrinking GDP. Also, the dollar is at historic lows, and an intractable credit crunch has left the financial markets in disarray. Experts are now predicting that consumer spending won't rebound until housing prices stop falling which could be late into 2009. When Japan experienced a similar credit/real estate meltdown, it took more than a decade to recover. There's no reason to believe that the present crisis will unwind any faster.
On Friday, banking giant USB estimated that credit woes would end up costing financial institutions $600 billion, three times more than their original estimate of $200 billion. But USB's forecast does not take into account the $6 trillion of lost home equity if housing prices fall 30 percent in the next two years, which is very likely. Nor does it account for the potential losses in the structured finance market where $7.8 trillion of loans (which are presently in “pooled securities”) have gone into a deep freeze. There's no way of knowing how much capital will be drained from the system by the time all of this plays out, but if $7 trillion was lost in the dot.com bust, then it should greatly exceed that figure.
The housing bubble was entirely avoidable. It was the policies of the Federal Reserve which made it inevitable. By fixing interest rates below the rate of inflation for almost three years, then Fed chief Greenspan ignited speculation in housing and created a false perception of prosperity. In truth, it was nothing more than asset-inflation through the expansion of debt. The Fed's actions were complemented by repeal of regulatory legislation which prevented the commercial banks from dabbling in securities trading. Once the laws were changed, the banks were free to peddle their mortgage-backed securities to investors around the world. (A-rated mortgage-backed bonds are currently fetching just 13 percent of their face value!) Now, those sketchy bonds are blowing up everywhere leaving large parts of the financial system dysfunctional.
As investors continue to run away from anything remotely connected to mortgages; the price of risk, as measured by the spread on corporate bonds, has skyrocketed. In fact, investors are even shunning overextended GSEs like Fannie Mae and Freddie Mac. As the number of foreclosures continues to soar, the aversion to risk will intensify, triggering a savage unwinding of leveraged bets in the hedge funds as well as a wider paralysis in the financial markets.
There's absolutely no doubt now that the storm that is currently ripping through the financials will soon bring Wall Street to its knees. It may be a good time to remember that on March 24, 2000, the NASDAQ peaked at 5048. On October 9, 2002, it bottomed out at 1114; a loss of nearly 80 percent. Could it happen again?
You bet. Expect to see the Dow hugging 7,000 by year's end.
An article in the New York Times by Morgan Stanley's Asia chairman, Stephen Roach, states that the country is not in a cyclical downturn, but post-bubble recession. There is a big difference. The Fed's interest rate cuts and Bush's “Stimulus Plan” are unlikely to stop housing prices from continuing to fall nor will they miraculously fix the problems in the credit markets. The massive expansion of credit in the last six years has created a $45 trillion derivatives balloon that could implode or just partially unwind. No one really knows. And no one really knows how much damage it will cause to the global financial system. Stay tuned.
Roach notes that the recession of 2000 to 2001 was a collapse of business spending which only represented 13 percent of GDP. Compare that to the current recession which “has been set off by the simultaneous bursting of property and credit bubbles. . . . Those two economic sectors collectively peaked at 78 percent of gross domestic product, or fully six times the share of the sector that pushed the country into recession seven years ago.”
Not only will the impending recession be six times more severe; it will also be the death knell for America's consumer-based society. Attitudes towards spending have already changed dramatically since prices on food and fuel have increased. That trend will only grow as hard times set in.
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Credit Bubble Bust
I have been watching this for the last year and a half...and reading everything possbile. Started cashing out investments last March, some last October and the rest in January. Of course my advisor thought I was "nuts". We will see. Holding cash and federally insured fixed income. Kind of concerned about the federally insured part. LOL.
Attitudes towards spending have indeed changed. Just loved the "stimulus" package with the directive to "go out and spend so it can help our economy". Forget about how much debt you may have.
The American consumer has been chastised by our government for not saving...while on the other hand...more than encouraged to spend on borrowed credit going deeper into debt. Just why did Greenspan keep interest rates so low ...for so long? He is partly responsible for this mess.
Still....I think it is difficult to get the "real story". I see all sorts of manipulation by officials including what is allowed to be released in the media. A website that projected economic indicators early was shut down ..supposedly due to "lack of staff". Bottom line...I think they don't want us to know exactly how bad it is.
Glad I maintained my parents values about money. Save...for a very rainey day my friends.
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