Best of the Week
Most Popular
1. Crude Oil and Water: How Climate Change is Threatening our Two Most Precious Commodities - Richard_Mills
2.The Potential $54 Trillion Cost Of The Fed's Planned Interest Rate Increases - Dan_Amerman
3.Best Cash ISA Savings for Rising UK Interest Rates and High Inflation - March 2018 - Nadeem_Walayat
4.Fed Interest Hikes, US Dollar, and Gold - Zeal_LLC
5.What Happens Next after February’s Stock Market Selloff - Troy_Bombardia
6.The 'Beast from the East' UK Extreme Snow Weather - Sheffield Day 2 - N_Walayat
7.Currencies Will Be ‘Flushed Down the Toilet’ Triggering a ‘Mad Rush into Gold’ - MoneyMetals
8.Significant Decline In Stocks On The Cards! -Enda_Glynn
9.Land Rover Discovery Sport Extreme Driving "Beast from the East" Snow Weather Test - N_Walayat
10.SILVER Large Specualtors Net Short Position 15 Year Anniversary - Clive_Maund
Last 7 days
This Tech Breakthrough Could Save The Electric Car Market - 19th Mar 18
Stocks Set to Open Lower, Should You Buy? - 19th Mar 18
The Wealth Machine That Rising Interest Rates Create Conflict With The National Debt - 19th Mar 18
Affiliate Marketing Tips and Network Recommendations - 19th Mar 18
Do Stocks Bull Market Tops Need Breadth Divergences? - 19th Mar 18
Doritos Instant £500 Win! Why Super Market Shelves are Empty - 19th Mar 18
Bonds, Inflation & the Market Amigos - 19th Mar 18
US Housing Real Estate Market and Banking Pressures Are Building - 19th Mar 18
Stock Market Bulls Last Stand? - 18th Mar 18
Putin Flip-Flops Like A Drunken Whore On Bitcoin Cryptocurrency Legalization - 18th Mar 18
How to Legally Manipulate Interest Rates - 18th Mar 18
Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - 18th Mar 18
Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - 17th Mar 18
Strong Earnings Growth is Bullish for Stocks - 17th Mar 18
The War on the Post Office - 17th Mar 18
GDX Gold Mining Stocks Fundamentals - 16th Mar 18
Nationalism, Not the Russians, got Trump Elected - 16th Mar 18
Has Bitcoin Bought It? - 16th Mar 18
Crude Oil Price – Who Wants the Triangle? - 16th Mar 18
PayPal Cease Trading Crypto Currency Bitcoin Warning Email Sophisticated Fake Scam? - 16th Mar 18
EUR/USD – Something Old, Something New and… Something Blue - 16th Mar 18
DasCoin: A 5-Minute Guide to How It Works - 15th Mar 18
Stock Market Downward Pressure Mounting - 15th Mar 18
The Stock Market Trend is Your Friend ’til the Very End - 15th Mar 18
6 Easy Ways to Get What Women Want, for Less! - 15th Mar 18
This Isn’t Your Grandfather’s (1960s) Inflation Scare - 15th Mar 18
Eye Opening Stock Market Index, Volatility, Charts and Predictions - 15th Mar 18
Gold Cup At Cheltenham – Gold Is For Winners, Not For Gamblers - 15th Mar 18
Upcoming Turnaround in Gold - 14th Mar 18
Will the Stock Market Make Another Correction this Year? - 14th Mar 18
4 Ways To Writing An Interesting Education Research Paper - 14th Mar 18
China Toward Sustainable Economic Growth - 14th Mar 18
Stock Market Direction Is No Longer Important - 14th Mar 18
Trade Tariffs Defeat Globalists and Return Prosperity - 14th Mar 18
Stock Market Crash is Underway and Cannot be Stopped! - 14th Mar 18
Are Energy Sector Stocks Bottoming? - 14th Mar 18
Nasdaq Stocks Soars to New Record High After Strong Job Reports - 14th Mar 18
Bitcoin BTCUSD Elliott Wave View Calling for Rally toward $15,000 - 13th Mar 18
Hungary’s Gold Repatriation Adds To Growing Protest Against US Dollar Hegemony - 13th Mar 18
Record Low Volatility in Precious Metals and What it Means - 13th Mar 18
Tips for Writing and Assembling the Classification Essay - 13th Mar 18
Gerald Celente "If Rates go up too High, the Economy goes Down, End of Story" - 13th Mar 18
Stock Market Selloff Showed Gold Can Reduce Portfolio Risk  - 13th Mar 18
Silver Does it Again! Severe Consequences - 12th Mar 18
Has the Stock Market Rally Run Out of Steam? - 12th Mar 18
S&P 500 at 2,800 Again, Stock Market Breakout or Fakeout? - 12th Mar 18
The No.1 Energy Stock To Buy Right Now - 12th Mar 18
What Happens Next When Stock Market Investor Sentiment is Neutral - 12th Mar 18
Economic Pressures To Driving Gold and Silver Prices Higher Long-Term - 12th Mar 18
Labour Sheffield City Councils Secret Plan to Fell 50% of Street Trees Exposed! - 12th Mar 18

Market Oracle FREE Newsletter

Urgent Stock Market Message

US Housing Crash Deepens As the US Drifts Towards Stagflation

Economics / US Economy Sep 26, 2007 - 12:19 AM GMT

By: Nadeem_Walayat

Economics Best Financial Markets Analysis ArticleThe US Shiller House Price Index which reflects the housing market of America's ten largest cities fell by an annualized 4.5%, which greatly increases the probability of a US recession sparked by the deepening housing bear market that has already made itself felt in the form of the Subprime mortgage sparked credit crunch. As an adjunct to falling house prices, property sales also continue to tumble with the National Association of Realtors reporting sales of family homes falling by 4.3% in August alone to the lowest annualized rate since August 2002.

If it was not clear before, it should be clear by now that the US housing market is no where near the bottom. Not only that, but things are going to get much much worse, as numerous articles on the Market Oracle over the past year have been forecasting such as US Housing Market Crash to result in the Second Great Depression (23rd Feb. 07).

US Fed Panic Rate Cut

The US Fed last week panicked by cutting interest rates by 0.5% despite resurgent inflationary pressures. The rate cut was an attempt at preventing the meltdown in the housing market sending the US into a recession. Unfortunately the US housing market is expected to be depressed by an tightening in the liquidity squeeze despite desperate actions by the Fed. Over the coming 12 months mortgages will reset in ever greater numbers from low fixed rates to much higher higher interest rates and lending requirements due to the credit crunch.

John Mauldins Article of 18th August 07, explains in depths the structure of the US mortgage markets and the expected impact of Adjustable Rate Mortgages (Arms) over the next 12 months.

The conclusion is that US house prices will continue to decline for at least a further 12 months, we are probably some way off the half way point yet for price falls.

US Drifts Towards Stagflation

The Fed will therefore continue cutting interest rates the consequence of this and a weakening US economy will result in further falls for the US Dollar and therefore higher inflation further out. This suggests the US is entering a climate of stag-inflation, that will only end with much higher US interest rates in the longer term. The stagflation scenario is already reflected in the money supply data, where M3 has grown from a low of 4% in 2004 to over 14%.

The inflationary outlook is reflected in the resurgent commodity prices trading at multi decade and all time highs with the latest additions to the commodities inflationary bull market being the agricultural commodities on the back of rising global demand mainly from China and India as well as increasing demand for bio-fuels such as ethanol.

China Exporting Inflation

During the past decade the US and much of the western world have enjoyed deflationary pricing imported from China, that deflation is now turning into inflation as both chinese workers demand higher wages and chinese domestic inflation soars to above 6%. In response the Chinese government has raised interest rates and will continue to do so. Another consequence of rising chinese inflation is China letting their currency (Yuan) strengthen and thus increasing the price of Chinese exports, as china looks to both reduce inflationary pressures and to diversify a significant proportion of its vast US dollar reserves out of US Treasury Bonds and the Dollar.

Fed Will Act Belatedly to Nip Stagflation in the Bud.

If CPI inflation rises to above 3% then the Fed will be forced to start raising interest rates, thus further depressing the US economy. If the Fed refused to or delayed raising interest rates then that could result in a crash in the US Dollar and the US lurching further towards stagflation after which much much higher interest rates will be needed to bring inflation under control than if pre-emptive action is taken to nip stagflation in the bid.

Unfortunately as we have seen with the September rate cut, and despite media commentary, the rate cut has actually come too late as the subprime blowout warnings have been flashed for over a year. Hence the Fed will probably delay raising interest rates by too long, and thus eventually requiring much higher US interest rates to bring inflation under control.

By Nadeem Walayat
(c) 2005-07. All rights reserved.

Nadeem Walayat is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 100 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2018 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


11 Nov 07, 12:38


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules