Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Stock Market Final Thrust Review - 19th Jan 20
Gold Trade Usage & Price Effect - 19th Jan 20
Stock Market Trend Forecast 2020 - Trend Analysis - Video - 19th Jan 20
Stock Trade-of-the-Week: Dorchester Minerals (DMLP) - 19th Jan 20
INTEL (INTC) Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 18th Jan 20
Gold Stocks Wavering - 18th Jan 20
Best Amazon iPhone Case Fits 6s, 7, 8 by Toovren Review - 18th Jan 20
1. GOOGLE (Alphabet) - Primary AI Tech Stock For Investing 2020 - 17th Jan 20
ERY Energy Bear Continues Basing Setup – Breakout Expected Near January 24th - 17th Jan 20
What Expiring Stock and Commodity Market Bubbles Look Like - 17th Jan 20
Platinum Breaks $1000 On Big Rally - What's Next Forecast - 17th Jan 20
Precious Metals Set to Keep Powering Ahead - 17th Jan 20
Stock Market and the US Presidential Election Cycle  - 16th Jan 20
Shifting Undercurrents In The US Stock Market - 16th Jan 20
America 2020 – YEAR OF LIVING DANGEROUSLY (PART TWO) - 16th Jan 20
Yes, China Is a Currency Manipulator – And the U.S. Banking System Is a Metals Manipulator - 16th Jan 20
MICROSOFT Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 15th Jan 20
Silver Traders Big Trend Analysis – Part II - 15th Jan 20
Silver Short-Term Pullback Before Acceleration Higher - 15th Jan 20
Gold Overall Outlook Is 'Strongly Bullish' - 15th Jan 20
AMD is Killing Intel - Best CPU's For 2020! Ryzen 3900x, 3950x, 3960x Budget, to High End Systems - 15th Jan 20
The Importance Of Keeping Invoices Up To Date - 15th Jan 20
Stock Market Elliott Wave Analysis 2020 - 14th Jan 20
Walmart Has Made a Genius Move to Beat Amazon - 14th Jan 20
Deep State 2020 – A Year Of Living Dangerously! - 14th Jan 20
The End of College Is Near - 14th Jan 20
AI Stocks Investing 2020 to Profit from the Machine Intelligence Mega-trend - Video - 14th Jan 20
Stock Market Final Thrust - 14th Jan 20
British Pound GBP Trend Forecast Review - 13th Jan 20
Trumpism Stock Market and the crisis in American social equality - 13th Jan 20
Silver Investors Big Trend Analysis for – Part I - 13th Jan 20
Craig Hemke Gold & Silver 2020 Prediction, Slams Biased Gold Naysayers - 13th Jan 20
AMAZON Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 11th Jan 20
Gold Price Reacting to Global Flash Points - 11th Jan 20
Land Rover Discovery Sport 2020 - What You Need to Know Before Buying - 11th Jan 20
Gold Buying Precarious - 11th Jan 20
The Crazy Stock Market Train to Bull Eternity - 11th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

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) Marketoracle.co.uk 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. http://www.marketoracle.co.uk

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

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

MARVIN ROSEN
11 Nov 07, 12:38
STAGFLATION

SO WE ARE HEADING TO STAGFLATION...A MARKET CORRECTION....LETS DISCUSS WHAT WORKED IN 1973-74


Post Comment

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

6 Critical Money Making Rules