Best of the Week
Most Popular
1.Gold Price Target of USD 2,300 - GoldCore
2.Greece Banking System Collapse Monday as ECB Pulls the Plug, Capital Controls Ahead of GrExit - Nadeem_Walayat
3.Why British Muslims Are Leaving Elysium Paradise for Syrian Hell - Nadeem_Walayat
4.Greece BANKRUPT! Financial and Economic Collapse to Follow IMF Debt Default - Nadeem_Walayat
5.Extreme Gold/Silver Shorting - Zeal_LLC
6.European Empire Strikes Back Against Greek Debt Fantasy, Counting Down to GREXIT - Nadeem_Walayat
7.Gold And Silver – Three Choices: Sell, Hold, Hold and Add. A Trading Treatise - Michael_Noonan
8.Gold and Silver Price Headed for Breakdown - Jordan_Roy_Byrne
9.Greece Crisis OXI - Raul_I_Meijer
10.Flatline Investing and Dead End Debt Schemes - Doug_Wakefield
Last 5 days
Greece Referendum Vote Result Forecast Yes Win, But Depression Will Continue - 5th July 15
The Great Greek Economic Depression - 4th July 15
Happy 4th of July Stock Market Analysis - 4th July 15
The Most Pressing Reason Yet You Want to Avoid Investing in Retail Stocks - 4th July 15
Fed’s Full Normalization and the Stock Market - 3rd July 15
The U.S. Dollar's 2014-2015 Rally: Wave 3 in Action - 3rd July 15
Stock Market Where are we? And where are we Going? - 3rd July 15
Xi’s Anti-Corruption Campaign Is Key to China’s Prospects - 3rd July 15
How the New Iranian Nuclear Deal Will Impact Crude Oil - 3rd July 15
China's Stock Market Rollercoaster Ride Continues - 3rd July 15
Gold Stocks Cheap to Buy but Not for Long - 3rd July 15
Capital Controls and a Bank Holiday in Greece… Here’s How You Can Profit - 3rd July 15
Greece's Varoufakis: I will Resign if there's a 'Yes' Vote - 2nd July 15
The Student Loan Bubble: Gambling with America’s Future - 2nd July 15
Inflation Is Lurking, but This Asset Can Protect You - 2nd July 15
Three Total Wealth Stock Investor Tactics You’ll Need Because Greece Isn’t Over - 2nd July 15
Why This $5.6 Trillion Investor Profit Boom Is Set To Take Off - 2nd July 15
Greek Debt Crisis: "Too late to prepare now" - Video - 2nd July 15
Guaranteed US Dollar Death Dynamics - 2nd July 15
The Greek Stress Test & The Reality Of Incremental Changes - 2nd July 15
Forget Drachmas Greece Syriza Government Could Instruct Central Bank to Print Euros! - 2nd July 15
Greece Debt Crisis Trigger for Stock Market Crash or Bull Rally? Video - 1st July 15
Gold Stocks Break Below 2008 Low - 1st July 15
SPX Stock Market Retracement May be Over - 1st July 15
Silver Tunnel Vision 'Experts' - 1st July 15
Gold And Silver - Monthly, Quarterly Ending Analysis - 1st July 15
Europe’s Controlled Demolition - 1st July 15
The End of Dow 18,000; Bailouts No Longer Extended  - 1st July 15
Athens Mayor: Greek Government Should Resign - 1st July 15
China Stocks - This Is What a Bubble Looks Like - 30th June 15
Stocks Plunge on Greece Euro-Zone Financial Armageddon Blackmail - 30th June 15
Greece Crisis Shows Importance of Gold as Europeans Buy Coins and Bars - 30th June 15
Stock Investors Express Route to Profits in the Healthcare Sector - 30th June 15
Beyond the Greek Impasse - 30th June 15
Gold GDXJ : Impulse Move Pending - 30th June 15
Fed Interest Rate Increase Could Be Best Thing to Happen to Gold - 30th June 15
Marc Faber - Greece is Basically Bankrupt - 30th June 15
Greece - Shoot the Dog and Sell the Farm - 29th June 15
Grexit?, BIS Warning, Chinese Market Crash & Systemic Risk Shake the Global Economy - 29th June 15
The New "Sharing Economy" May Not Be the Profit Bonanza Everyone's Expecting - 29th June 15
Gold and Silver Greece and Short Positions - 29th June 15
Volatility and Sleep-Walking Markets - 29th June 15
Greece BANKRUPT! Financial and Economic Collapse to Follow IMF Debt Default - 29th June 15
Stock Market More Decline Ahead? - 29th June 15
China Stock Market Crackup - The Final Trap Looms... - 29th June 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

China Stocks - Where are they going?

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.


© 2005-2015 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

Biggest Debt Bomb in History