Posted on 12/06/2006 7:08:36 PM PST by 1066AD
Economic storm brewing in America By Ambrose Evans-Pritchard Last Updated: 12:01am GMT 07/12/2006
America's stock markets typically start crumbling four months before each recession, anticipating the crunch in profits. Shares then grind relentlessly down for 10 months or so until they have on average knocked 26 per cent off the S&P 500 index, Wall Street's listing of top companies.
So if you think the US property slump is looking scary after October's 9.7 per cent drop in new home prices, it may be time to take a little money off the table. It has been a lucrative autumn rally, but the four-year bull market is long in the tooth by any standards.
As we report today, the rate of insider stock sales by company directors on both sides of the Atlantic is the highest since records began 20 years ago, with sales outnumbering purchases by 60:1.
advertisementIt makes scant difference whether your shares are on Wall Street or the London Stock Exchange. The FTSE 100 index is a global play these days. The lion's share of profits come from overseas, while London's AIM market has become a bet on Chinese and Russian companies nesting there by the dozens.
The world economy is what matters, and I don't like the smell of it. Nor, apparently, does Hank Paulson, who made $700 million at Goldman Sachs before taking over the US Treasury this year. He has reactivated a crisis team with a command centre in Washington to cope with the "systemic risk" in a market melt-down. His worry? 8,000 unregulated hedge funds with $1.3 trillion at hand, and derivative contracts now worth $370 trillion. "We need to be very careful here," he said.
A well-sourced article in Washington's Weekly Standard says Mr Paulson fears a "serious crisis that would be a body-blow to the US economy".
Yes, China is booming – for now – but it accounts for just 4 per cent of world consumption. The great US shopping extravaganza is six times bigger, and remains the anchor of the international system. It is slowing fast, unsurprising after 17 interest rate rises from 1 per cent in June 2004 to the current 5.25 per cent. "Big ticket" orders for cars, aircraft, computers and such plummeted 8.2 per cent in October.
Average house prices have fallen from $244,000 in April to $221,000 last month, with more violent corrections in Florida, Arizona, and New England. Builders have warned of a "death spiral" as they slash prices to off-load a glut of unsold homes.
The "happy handover" orthodoxy of the International Monetary Fund is that America will escape with a shallow slowdown. Asia and Europe will pick up the growth baton. The world will march on without missing a step.
Nice if you can get it. The more ominous possibility is that America fails to recover quickly, and takes the world with it. Japan already shows signs of stalling. Retail sales have fallen for two months. Far from bursting back to life as expected, it is still teetering on the edge of deflation.
France ground to a halt in the last quarter as the surging euro ate into the country's industrial core. Airbus was humming when the euro was worth 90 US cents. Now it must compete at $1.33, with wage costs in euros set against delivery contracts in dollars. Currency hedges protect for a while, then reality hits.
German industry says $1.40 is the pain limit. It is hard to see what can stop the dollar sliding that far as funds bet on US rate cuts next year. The yield premium that kept the currency aloft earlier this year is about to narrow, perhaps sharply. The central banks of Asia and Russia are sated on dollar reserves. They may not slash their US holdings, but they are unlikely to add either. So who will fund America's deficits?
"The US needs a trillion dollars a year just to stand still," says David Bloom, currency guru at HSBC. Modern financial crises have always begun on the peripheries of global economy, setting off a chain reaction. Mr Bloom says the seizure this time will be at the heart of the system as the dollar buckles, pressing down on the "aorta of capitalism".
So we have a world where the ageing economies of Europe and Japan are too fragile to withstand a dollar slide, yet America needs a weak dollar to cushion its own downturn. Meanwhile, China is holding its currency far below equilibrium. Nobody is doing much to break this impasse. The 1930s come to mind.
The consensus is that America will rebound quickly, averting a sticky end. But it takes two years for rate rises to feed through an economy, so Americans have not yet faced the worst. Nobody knows how US households with record debt will cope with the squeeze. Borrowings rose 8.1 per cent in 2000, 8.6 per cent in 2001, 9.7 per cent in 2002, 11.4 per cent in 2003, 11.1 per cent in 2004, 11.7 per cent in 2005, with no let-up in 2006. Debt payments have reached an all-time high of 13.9 per cent of personal income.
Americans extracted 6 per cent of GDP from their homes last year in equity withdrawals (ie, more debt), mostly to subsidise their lifestyles. This game is up. Professor Nouriel Roubini from New York University says recession is inevitable. "People have been using their homes as their ATM machine, but many are now facing negative equity so there will be a lot of foreclosures. As the housing recession spreads to manufacturing, this is going to lead to a much harder landing than people think."
The bonds markets are alert, even if equities are not. Interest rates on 10-year Treasury bonds (4.46 per cent) have dropped below short-term rates (5.25 per cent) for five months. This is the "inverted yield curve" of satanic fame, flag of recession. Ignore that at your peril.
Whatever happens, the Federal Reserve will come to the rescue. But how soon? The Fed minutes from December 2000 show some governors fretting about inflation long after the danger had shifted to slump. That wily old bird Alan Greenspan silenced them, knowing in his bones that the economy was going over a cliff.
His untested sucessor, Ben Bernanke – burdened with inflationist baggage – does not yet have the credibility to pull off that stunt. Whatever he really thinks, he will have to play by the book. So batten down the hatches for a long storm.
Peelowsee turns my stomach.
I can't believe what the sheeple did in that last election.
STUPID! STUPID! STUPID!
I don't want to think of the damage they WILL DO. With stakes being as high as they are ... we may not recover.
I love my country and HATE seeing it trashing itself.
But, but I thought that it was Clinton that was the master of the stock market.
Yes he was knee deep in "Mena" as well, I think he embarrassed his bosses so got transferred back home !
Good, pessimism helps the market go higher. Keep talking Ambrose, my investment accounts are on fire right now!
Now while Ambrose Evans-Pritchard is most often writing solid general media articles on finance, when his articles' bullet points coincide with Krugman whilst he's strewing about the gutter, this is a disturbing turn of events.
I just attended a conference in NYC on these very subjects, and the largest companies on the Real Estate side, both residential and commercial, said exactly the same bullet points.
Only point I have to make is that executives who are doing inside stock sales are the most likely class of worker to retire fully by their mid 50's, and as we as a country prepare for their baby boomer retirement as a whole, the top 2% are already retiring, hence the 60:1 inside sales ratio at the moment.
It has never been true, it is never going to be true, it wasn't even true in the 1930s. But like a dog with a bone, they will never ever give it up. Unemployment is at record lows for a generation, wealth and income are at record highs forever, the economy has run through every predicted crash trigger without more than a murmur, and corporate profits continue to set record after record.
They will still predict doom continually on the off chance that one quarter or two they might be right, then they will scream "see I told you so, give all power to me or we are all gonna die!" and the economy will shrug gently in sovereign contempt and resume its ordinary 3% growth trajectory.
Short of nuclear war, nothing is going to stop the American economy. It will bury this lot like it buried the last ten. It has run roughshod over egregious economic mistakes, ridiculously profligate government spending, world war, civil war, mercantilist fads, super protection and unbridled free trade, tight money, loose money, you name it. And taken us from 3 million poor farmers at the edge of a howling wilderness, to 300 million of the richest hedonist profligates the world has ever seen.
It will continue to do so. And socialists everywhere will remain deeply saddened, bitter, fearful, and wrong.
"Let's get Hillary elected" - by the UK press
I can;t believe that she will be able to hide her true self for very long. She is not that bright.
Her real beliefs will come out soon enough, I hope.
Bush's tax cuts get no credit whatsoever from the MSM, although the evidence is undeniable. In November, my 401k increased in net value by an amount of six times my monthly salary.
That's not usual, but it's surely not sign of economic weakness.
"Mena, Ark." Secret cocaine flights and all that. Brit tabloid stuff. (on the other hand Christopher Rudde I liked)
Just so it comes AFTER the Democrats take over.
You are so right. When there are tax cuts people will spend money its fact.
Very well and accurately said. I intend to cut and paste your entire post to share with trading partners.
That's a fantastic summation! Well done, sir!
That is true...
LOL.... good one.
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