Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
What to Expect at a Critical Stock Market Point: End of a Wave 2 Rally - 26th Apr 18
A New Lithium War Is About To Begin, Modern Gold Rush! - 26th Apr 18
Silver, silver, and silver! There’s More Than Silver, People! - 26th Apr 18
How to be Financially Prepared When Purchasing Your First Home - 26th Apr 18
Is a Stock Market Crash Imminent or Does this Stock Market Bull Still Have Legs - 25th Apr 18
Gold Price Focusing on May Cycle Bottom - 25th Apr 18
Cash “Vanishes” From Bank Accounts In Ireland - 25th Apr 18
Is the Malaysian Economy a Potemkin Village - 25th Apr 18
Land Rover Discovery Sport Rattling / Knocking Sounds From Car Pillars - 25th Apr 18
China Takes the Long View on Gold-Silver... and So Should You - 25th Apr 18
Russia Buys 300,000 Ounces Of Gold In March – Nears 2,000 Tons In Gold Reserves - 24th Apr 18
Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - 24th Apr 18
CRYPTOCURRENCY MASTERCLASS #CRY90 - 24th Apr 18
UK Gambling Statistics - What the Numbers Say - 24th Apr 18
Chaos Capitalists Short Countries - How Chanos Got China Wrong - 24th Apr
Artificial Intelligence Defines the Political News Narrative - 24th Apr 18
Stock Market "Oops, They Did It Again" - 24th Apr 18
Fox in the Henhouse: Why Interest Rates Are Rising - 23rd Apr 18
Stocks and Bonds, This is Not a Market - 23rd Apr 18
Happy Anniversary Silver Investors! - 23rd Apr 18
The Hottest Commodity Play In 2018 - 23rd Apr 18
Stock Market Correction Turns Consolidation - 23rd Apr 18
Silver Squeeze, Gold Fails & GDX Breadth - 23rd Apr 18
US Economy Is Cooked, the Growth Cycle has Peaked - 23rd Apr 18
Inflation, With a Shelf Life - 23rd Apr 18 - Gary_Tanashian
Stock Market Predictive Modeling Is Calling For A Continued Rally - 22nd Apr 18
SWEATCOIN - Get PAID to WALK! Incentive to Burn Fat and Lose Weight - Review - 22nd Apr 18
Sheffield Local Elections 2018 Forecast Results - 22nd Apr 18
How Long Does it take for a 10%+ Stock Market Correction to Make New Highs - 21st Apr 18
Sheffield Ruling Labour Party Could Lose 10 Council Seats at May Local Elections - 21st Apr 18
Crude Oil Price Trend Forecast - Saudi Arabia $80 ARAMCO Stock IPO Target - 21st Apr 18
Gold Price Nearing Bull Market Breakout, Stocks to Follow - 20th Apr 18
What’s Bitcoin Really Worth? - 20th Apr 18
Stock Market May "Let Go" - 20th Apr 18
Overwhelming Evidence Against Near Stock Market Grand Supercycle Top - 20th Apr 18
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

US Recession in 2007 - Third Leg of the Bear Market Likely

Economics / Analysis & Strategy Feb 05, 2007 - 12:45 AM GMT

By: Paul_Lamont

Economics

As our clients know, we have been forecasting a very hard recession over the next few years. At the beginning of 2006, our analysis was viewed with skepticism, but as more data comes in from the recent performance of the economy, our forecast is becoming more probable.

Debt
One of our main arguments has been that U.S. consumers are holding unsustainable levels of debt. The chart below from Ian Gordon, from The Long Wave Analyst shows private debt levels to GDP overlaid with his interpretation of the Kondratieff Wave. Without giving a lengthy description of the Kondratieff Wave, let us just say that as interest rates fall, investors are willing to take on more debt. Much of this credit is spent or used to fuel asset bubbles. Eventually bubbles exhaust themselves and deflate assets but debt is still owed. Participants must default on their debts causing loss of faith in financial institutions and subsequent depression. As you can see debt is now 300% of GNP, much higher than in 1929.

U.S. consumers are holding unsustainable levels of debt


Where Is the Debt Coming From?
In the chart below from Yardeni.com, U.S. consumers have been withdrawing money from their houses at record levels. Simultaneously, they have been saving less. The reliance on home equity extraction (increasing mortgage debt) to fuel the economy is similar to stock market investors in the 20's, who were borrowing money to invest in the stock market. As history has shown, once the speculation exhausts itself assets deflate, but the debt still has to be paid back. Unfortunately, the housing bubble has already started its descent.

, U.S. consumers have been withdrawing money from their houses at record levels.

U.S. Housing Problem
Looking at the U.S. Housing Price Index chart below, from Robert Schiller author of Irrational Exuberance , the forecast that housing prices could not continue its trajectory was not very difficult. This rise has been driven by speculation. So far we have seen the ascent.

Looking at the U.S. Housing Price Index chart below, from Robert Schiller author of Irrational Exuberance , the forecast that housing prices could not continue its trajectory was not very difficult

And now we are beginning to see the descent: On October 27th, "the government reported median new home sale prices dropped 9.7% in the past year to $217,100, the lowest price in two years." It's the largest percentage decline in 36 years according to MarketWatch. "Median prices for existing single-family homes are down 2.5% in the past year, the largest decline ever recorded." We believe housing prices have peaked and U.S. consumers will not have any new "paper capital gains" from home equity loans to spend. Thus our consumer driven economy is in trouble. U.S. Consumers with "no money down" loans or little equity in their houses have already started to walk away from their debts. In the third quarter of this year, foreclosures are up 43% from 2005 (albeit from low levels). In Colorado (the nation's leader), 1 in 127 households filed for foreclosure according to RealtyTrac. Nevada and Florida were closely behind with one new foreclosure for every 156 and 182 households, respectively.

New Car Sales
If U.S. consumers are getting financially squeezed, the first major purchase that they could try to delay would be buying a new car. Below is a chart from The New York Times that shows the annual change in car dealer sales. When new car sales fall "by 2% or more, the economy has either been in a recession or about to enter one." We have now fallen 2.4%.

U.S. consumers are getting financially squeezed, the first major purchase that they could try to delay would be buying a new car

GDP
GDP has also started to reflect the slowdown. The GDP advance estimate for the third quarter reported on Oct 27, 2006 by the U.S. Department of Commerce was a paltry 1.6%. Shortly following the data release, Bloomberg reported that that the Department of Commerce found a "statistical fluke" and had reported a 26% increase in auto production. Subsequently, the numbers will be revised downward to a GDP advance estimate of 0.9% for the third quarter. So this year, the GDP has gone from 5.6% to 2.6% to 0.9% in the first three quarters.

Why the U.S. will NOT have a Soft Landing

U.S. consumers accumulated debt to keep the economy running, financial institution

While U.S. consumers accumulated debt to keep the economy running, financial institutions gained more ownership of real estate (see above). The trouble is that real estate is extremely illiquid and when people get nervous they want cash. Unfortunately, banks are the most unprepared for this in the last 20 years. As you can see from the Federal Reserve Bank's chart below, U.S. banks are letting loan loss reserves dwindle (their 'rainy day' fund if you like), which support them when foreclosures increase.

The Great Bust Ahead: The Greatest Depression in American and UK History is Just Several Short Years Away. This is your Concise Reference Guide to Understanding Why and How Best to Survive It
$9 (50% discount)The Great Bust Ahead: The Greatest Depression in American and UK History is Just Several Short Years Away. This is your Concise Reference Guide to Understanding Why and How Best to Survive It

 

U.S. banks are letting loan loss reserves dwindle (their 'rainy day' fund if you like), which support them when foreclosures increase

This has not gone unnoticed at the Federal Reserve. In October 2006, a paper published by David Wheelock of the Federal Reserve of St Louis states:

"In sum, U.S. banks seem well positioned to withstand a modest decline in house prices, especially a localized decline. Still, empirical evidence from the United States and other countries indicates that declines in housing wealth can have severe macroeconomic repercussions, especially if banking system capital does become impaired."

History Repeated
We believe "severe macroeconomic repercussions" are highly likely and that "banking system capital" will be impaired. Continuing from our previous article " Credit Extreme Emotion ," the comparison to the 1930-1933 period is striking. Stock market patterns, debt levels, interest rate cycles, sentiment levels, and banking reserves are all aligning for a credit crunch and major asset deflation. In the stock market rebound of early 1930, investors were overjoyed that they had survived the 1929 crash. There was a mild worry about recent commodity rises and inflation but the mood was still ebullient. Investors were 'only' down 20% off the 1929 highs (much like the S&P500 today). President Hoover told banking officials visiting the White House in June 1930, "Gentlemen, you have come 60 days too late. The depression is over." But the mood turned down again, inflation began to cool, commodities fell, and investors realizing that the large debt they had accumulated in the last year had to eventually be paid back started selling stocks.

The third leg of the bear market resulted in the Dow Jones Industrial Average falling 85% from its high in April 1930. Three banking crises occurred during the next 3 years as frightened people desired cash. Farmers and investors were forced into foreclosure. Finally in 1933, when the debt had been cleaned out of the system, the stock market hit bottom and rallied for the next 73 years.

By Paul Lamont
www.LTAdvisors.net

At Lamont Trading Advisors, Inc. we specialize in the management of risk and preservation of wealth. Visit our Current Strategy section for information on our asset allocation recommendations or Contact Us if you would also like to be notified when our investment analysis reports are published.

Lamont Trading Advisors, Inc. was founded on February 3rd, 2004 in New York City. After extensive research in market behavior, investor pyschology, and financial history, President Paul J. Lamont realized the need for an investment management firm focused on wealth preservation over the next decade. In July 2005, Lamont Trading Advisors was relocated to 502 Bank Street in Decatur, Alabama. On May 1st, 2006, investment advisor registration with the State of Alabama was granted. ***No graph, chart, formula or other device offered can in and of itself be used to make trading decisions.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

George C.
01 Nov 07, 14:22
Consumer recession is here and Corporate will follow in 2008

I have been saying for six months that energy prices are to high, real estate prices are falling fast and government debt will drag down the economy.

Now that consumers biggest investment is (real estate)falling so fast they can't borrow from their equity and are being taxed on energy prices they will tighten their budgets and reduce their spending. Corporate will feel reduced consumer spending and the energy taxes will fall hard on some companies that use alot of fuel. Consumers will begin to look at their 401K as an attractive way to pull money out and that will impact the stock market.

I believe that the stock market will begin to feel the consumer recession by Jan.-March 2008 and the corporate recession within six months later June-Sept. 2008.

The Iraq War has just been a bust to the economy and has just inflated U.S. debt.


Post Comment

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

6 Critical Money Making Rules