Posted on 05/05/2008 8:36:10 PM PDT by SeekAndFind
So the sky did not fall in. While the Chicken Littles of the world economy, led by Gordon Brown, George Soros and Warren Buffett, may still repeat mechanically the IMF’s surprising judgment that the world - especially America - faces its worst financial crisis since the 1930s, their hearts are no longer in it. Mr Brown, after last week’s election woe, can no longer blame the world economy for his political failure. Mr Buffett, having speculated against the dollar for years and declared that credit derivatives are financial weapons of mass destruction, has finally begun to find attractive opportunities to invest his money and told his shareholders last week that the worst of the credit crisis was probably over. Mr Soros, in his forthcoming book, The New Paradigm for Financial Markets, states unequivocally: “We are in the midst of a financial crisis the likes of which has not been seen since the Great Depression.” But after making $3 billion for Quantum Endowment Fund by anticipating last year’s bear markets, he is now hedging his bets, as is only to be expected from the world’s most successful hedge fund manager. “I may well be proven wrong,” he told The New York Times last week, adding that he might yet again turn out to be “the boy who cried wolf”.
The main explanation for all this revisionism is simply the change in facts. The near-unanimity of a few weeks ago that the US was sinking into a deep, prolonged recession has been dispelled by recent data on jobs, GDP, business confidence, industrial orders and consumer spending – all telling a consistent story that although the US economy weakened abruptly last autumn, it is not nearly as weak as at the start of previous recessions, and that there have been no signs of further deterioration since February in the key economic variables apart from house prices.
Moreover, the time of greatest risk of a US recession is almost past, since tax rebates worth more than 1 per cent of disposable income will start landing in US taxpayers’ bank accounts from this week, almost guaranteeing that consumer spending will pick up, at least temporarily, in the year’s second half. And just as the stimulus to consumption from tax cuts runs out, benefits of the Fed’s big cuts in interest rates should start to be felt fully in the first few months of 2009. So, it is increasingly likely that the US economy will not experience even a minor recession, at least as defined in the official statistics, as a result of the credit crunch last year.
Even more important than the relatively benign statistics is the news from the financial markets. Signs that the worst of the banking crisis may be over appeared to be confirmed by rallies in financial markets worldwide last week. Financial markets’ better mood is partly related to stabilisation in US economic statistics. But mainly it is a consequence of radical steps by governments and central banks all over the world since it became clear that private financial markets would not resolve the credit crunch.
As a result of these government interventions, culminating in the Bear Stearns rescue and nationalisation of Northern Rock, one financial market after another has started to return to something nearing normality. Straight after the Bear rescue, there was a narrowing of credit spreads on top-quality securities such as government-backed mortgages in the US. Next, two weeks after liquidity returned to credit markets following the Bear rescue, the yield on US Treasury bonds stopped collapsing and reversed, implying that markets no longer saw need for panic cuts in US interest. In turn, the steepening of the US yield curve that followed the return of more normal conditions to the bond market helped to put a floor under the dollar two weeks ago. Finally – though this is still a more tentative conclusion - dwindling fears of a freefall in the dollar seemed to take some of the wind out of speculation in commodities and oil.
Of course, it is impossible to be sure of the sustainability of improvement in the four markets that have been causing all the trouble - credit, bonds, currencies and commodities. But what seems fairly clear is that the real economy of jobs, profits, investment and consumer spending in America has so far suffered almost entirely as a direct result of weaker housebuilding and construction employment – and not in response to the negative wealth effects and bank-credit contractions in the nightmare scenarios of Wall Street analysts.
To pessimists, this means that the worst is still to come, since the real consumer reaction to falling housing wealth and bank deleveraging has not even started. An alternative view more consistent with economic theory and historic experience was suggested by the Bank of England’s Stability Report last week: “Credit markets are likely to overstate significantly the losses that will ultimately be felt by the financial system and the economy as a whole . . . They will exaggerate to an even greater extent the potential damage to the real economy.”
As noted in that report, the pricing of many bonds and credit derivatives in financial markets already assumes bigger losses from US sub-prime mortgages and other dubious assets than anything implied by plausible worst-case scenarios. This is true of highest-quality credits, with AAA and AA ratings, whose unexpected collapse has done the greatest damage to bank balance sheets. The Bank’s sums suggest that the highest-quality mortgage-backed bonds are now undervalued by 25 per cent (see chart). It now seems that, contrary to the Chicken Little rantings of many analysts in the City and Wall Street, these bonds face almost no risk of serious defaults even in the event of far bigger falls in US housing prices than any that have happened so far.
Indeed, the Bank’s calculations suggest that present pricing of mortgage-related bonds in financial markets has probably overstated the future losses on US sub-prime lending by about double.
None of this means that the credit crunch has been a storm in a teacup, as I originally thought. Changing attitudes to borrowing and lending will have a dramatic impact on the world economy, reducing long-term growth in consumption in economies that have been driven by powerful housing and mortgage cycles, including Britain, Spain and France. As Mr Soros says in his book, global growth can no longer rely on these economies and must depend on consumption and infrastructure investment in China, India and other emerging markets. These are momentous changes, and while they are quite far advanced in America, they have hardly started in Britain and Europe. But if economic news continues to deteriorate for a while - as it almost certainly will in the UK – investors and business should realise that the really important story in the world economy today is not the threat of a sudden collapse in the financial system, but a gradual long-term adjustment in the world economy in favour of emerging markets. This may at times be an uncomfortable process – but the sky will not fall in.
Nuther case of the media getting ahead of the facts.
Cluelessness of the author is clear here. Bonds are a type of credit, so it's three in any case. And currencies and commodities are reacting to the events, not the cause of them.
BTT for an interesting article, and thanks for posting it.
The bonds used to cume credit are being bought up by the FED.
The FED, right now, has become the only source of substantial credit in the US. They’re buying up the bonds that no one will touch, which in credit markets is all of them.
The FED is where new mortgages are actually being originated. Student loans, a huge chunk of the auto loan market ... its all coming from the FED.
Real bank reserves are zero. You put your cash into the bank, it gets burned up immediately in write downs. Then the FED rushes in, daily, to replace the cash so there arent any runs.
The article is ridiculous.
No, the sky has not fallen in...yet.
/moonbat
“”Unfortunately, a significant portion of that perceived rise in home value was actually due to the dollar currency losing value - thereby making housing go up in price even though it was not really worth more. It just took more dollars to buy the same house - or any house.””
Nail on the head- Same goes for oil and food the prices are not really going up the dollar is going down.
So how much has the government taken out of our pockets in the last couple of years 30%? 50%? Of my money? I think I wuz robbed here
If you’re a citizen of a country your fortunes rise and fall with the fortunes of that country. Does this come as a surprise to you?
I see thousands and thousands of consumers per week (I’m a demonstrator, part time) and at least here in Austin, the consumers rage on.
I feel there is a tsuami of consumer spending trying to happen: don’t see any pinched faces due to prices, the retail scene looks quite inflationary.
No, it did not take more dollars to buy the same house.
Incomes and home prices are both in dollar denominations. The cost of US labor and most materials in a house were in dollar denominations. US land is certainly in dollar denominations.
The increase cost of houses had absolutely NOTHING to do with the devalued dollar and everything to do with speculation and starry-eyed stupidity, as well as loose, fraudulent lending practices.
Houses tend to rise with inflation, not with dollar depreciation. Unless you are buying your houses from Europe or somewhere else abroad. Are you sure you mean to say what you wrote?
Yep.
Apparently the guy hasn’t noticed that in the last week, walking backwards from today:
1. Bank of American has indicated that they might not back Countrywide’s paper. Further, there is now question as to whether BofA will carry through with acquiring CFC.
2. The Fed’s survey of bank lending practices continues to show banks tightening credit requirements and lending practices.
3. Last Friday, the Fed bailed out the student loan lenders:
http://www.businessweek.com/ap/financialnews/D90DOPFO0.htm
This one really has me burning.
4. The Fed (as mentioned in the above link) added more money to the TAF. If the credit crisis is over, why is the Fed expanding the type of credit they’re backstopping, and why are they continuing to add more money to the TAF?
5. The number of vacant homes continues to rise.
6. Business bankruptcies rose 43% in 2007.
There isn’t a pile of good news out there just yet. And much of the “good news” being tossed around is just headline crap, and people aren’t reading the reports in detail - such as the GDP report.
The most important economic story of the last couple of weeks was the City of Vallejo, CA was considering bankruptcy. There are a lot of state and local governments that are in sad, sad fiscal shape and unlike the Federal Government they do not have the power to coin money.
Good points...
Changing attitudes to borrowing and lending will have a dramatic impact on the world economy, reducing long-term growth in consumption in economies that have been driven by powerful housing and mortgage cycles, including Britain, Spain and France. ... investors and business should realise that the really important story in the world economy today is not the threat of a sudden collapse in the financial system, but a gradual long-term adjustment in the world economy in favour of emerging markets. This may at times be an uncomfortable process – but the sky will not fall in.
Very nice article, and very accurate. I believe that all signs are that the worst of this is already over for the US, but not for the rest of the world, and that the US economy will be kicking into gear again before early '09 - yet again dragging a world that is even more socialist than we are out of the global recession that they will have fallen into.
Therefore, exactly of what and what value is the FED using to repurchase consumer debt bonds? The net effect is the standard of living for the American middle class is spiraling downward.
The author hasn't a clue as to the net long-term effect of the impact of the hyperinflation inflation in food, energy, medical, the housing bust and the sub-prime mortgage orgy is going to have on this economy. Watch the retail reports of large name=brand stores, plus with inflation taken into account, total sales numbers to be reported this week from Wal-Mart and Target will be deceiving. Net profit is the key, however, I'd like to see the total number of items sold versus last year's number too.
I read a while back many name brand retail chains are closing stores in the malls nation wide.
This economic downturn isn't over by no means...the goobermint and the MSM are backpedaling as hard as they can to delay the truth of just how screwed this economy is.....
Our great education system has taught 2 generations to regurgitate, not think, and it shows.
I knew back in 2003 when homes in many areas of the US were rising like they were with cheap illegal labor at its base, that the next run-up would be manipulated.
As more time goes on, I see the real world and the fantasy the goobermint and the MSM deceitfully spew while sticking it up the backsides of the average American.
Guess really being a low life lying thief really does pay off this days.
I am seriously concerned at just how many other companies are cooking the numbers these days.
Joe should be investing in.....what?
What do you think the Fed is buying?
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