Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Trump Stocks and Crypto Mania 2025 Incoming as Bitcoin Breaks Above $100k - 8th Dec 24
Gold Price Multiple Confirmations - Are You Ready? - 8th Dec 24
Gold Price Monster Upleg Lives - 8th Dec 24
Stock & Crypto Markets Going into December 2024 - 2nd Dec 24
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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.


© 2005-2022 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