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jeffolie

It has been my position for a long time that the economy would tank led by ARM resets that will peak in the Spring of 2008. The consequences of the bad housing are failed financial instruments such as MBSs and CDOs. Because it takes time to turn a failed ARM reset into a forecloure, I have been calling this:

The Crisis in the Summer of 2008.

GK

jeffolie,

The housing crisis is going to take much longer than that. In some places like California, the price in 2026, or 18 years from now, will not be higher than 2006 in inflation-adjusted terms.

Other sectors, like technology, will not experience much of a downturn at all.

jeffolie

The depth and length of economic downturns are very difficult to predict. Japan's downturn pushed 14+ years while many recessions last around 8 months. Japan's stock market peaked in 1989 at about 40000 and currently is about 13000.

The downturn in technology stocks as measured by the NASDAQ has been going on from the peak of nearly 5000 in 2000 to the present at around 2500.

While I am predicting a Crisis in the Summer of 2008, there is a strong likeihood that the economy will be stimulated in the fall of 2008 because of the cuts in the Fed funds rates in addition to the expected Fed government stimulus package. Will this be enough of a rebound to end the economic crisis or will there be a relapse in 2009?

brokerdavelhr

Just curious as to how any recession we are in right now will truly get better? The fact that it cannot be rightfully called a recession sheds some light on this I think. What it boils down to, is that the US is in debt. Most people barely make enough to get by, and 2 incomes is the norm for keeping 1 household afloat. About a third of my paycheck was taken away in taxes, social security, etc.. For a guy who makes what I do, that is rediculously high. And what do I get back for it all? I get a driveable road to get to and from work everyday. Meanwhile, I see all kinds of politicians and special interest groups spreading the wealth amongst themselves. To make matters worse, I could invest my own money for retirement better then they ever could. When I was jobless, did they offer me a dime? No. When healthcare was provided to my fiancee in the hospital, it took them three days just to do a basic test! The US wants free healthcare for everyone from the government. Canada and Brittain tried this, and are far from happy with the result.
I will wrap up by saying this: The US needs to start becoming better spenders instead of blowing billions of dollars like it was a joke. Hillary wants to raise taxes. WHAT FOR? to give 'free healthcare'?! To help out a third world country who would show no gratitude?! Yet on the same token, she would gladly drop 50 billion for 'alternative energy' plans (which by the way is a waste of money, let the private sectors handle that). If a recession is at our heels, the only way to combat it with useful long-term effect, would be to decrease government spending on non-neccesities, lower taxes, and let the economy do what it has thousands of years before government taxes ever became this much of a problem!
Sorry about the rant GK, but I am curious to know what is the real issue here.

GK

dave,

It is just an ordinary recession, one that happens every 6-9 years no matter what.

Most people barely make enough to get by

Therein lies the problem - the expectation of what 'getting by' constitutes continues to inflate. Plasma HDTVs, cars with iPod ports, a second home, eating out every other day, international vacations, etc. are all basic expectations of the middle-class, while 30 years ago none of this was available to them.

A decrease in government spending will not happen until both parties are punished continually at the ballot box until some fresh faces finally deliver results.

brokerdavelhr

GK,
Right on lol. I must say though that the middle class I have become aquainted with (and part of) cannot afford ipods, PS3's, plasma tv's, eyc. etc. Sure we would like to have them, but they are kind of out of the question.
But maybe I am not thinking about actual middle class. Define middle class please.

Shiv

Hey GK,

Hope all is well.

Can you do an analysis of this? It is an article on Rediff that has caught many eyes. The title is - 'Why the US rate cut may kill the dollar'.

Tnx! :)

Here is the link - http://www.rediff.com/money/2008/jan/31dollar.htm

Cheers,
SD

HarshV

I agree with your tentative view of a late 2008 revival. I am only a little worried that we may have to pay too much in the form of inflation for those rate cuts.

It would be interesting to hear your views on inflation GK.

GK

Shiv,

In general, people like to complain. When the dollar is strong, the complain about 'Outsourcing' that benefits from cheap wages in places like India.

When the dollar is weak, the wages in India are not so cheap anymore, and Outsourcing stops. People who used to complain should be happy then, right? Instead, they complain about a new set of problems.

A competitive dollar vs. the expensive Euro enables US companies like Boeing to out-compete European competitors like Airbus. A competitive dollar causes Europe to outsource jobs TO the US. It also benefits tourism to the US (which itself generates $400B a year).

Lower rates make the dollar weaker, but it is other countries that suffer more (India's outsourcing, Chinese exports, European products, etc.)

Always remember that 80% of the US economy is generated from internal commerce, and only 20% is exposed to the world outside the US. No other large country is this self-reliant economically.

Harsh V,

Inflation is a temporary concern, but a small one. The only source of US inflation in the last 5 years has been the rise in oil prices from $20 to $90 (today).

But, keep in mind the difference between *high* prices and *rising* prices. If oil, at $90 today, stays at $90 for 1 year, the contribution to inflation in that 1 year is zero, as the price, while high, did not actually rise. It would have to rise above $90 for the amount above $90 to contribute to inflation.

Thus, the only way there can be more additional inflaton (above the normal 2-3% that excludes oil) is if oil quickly rises far above the present level of $90. This, too, has long-term benefits that arise from the short-term pain, but that is another subject.

jeffolie

GK

Stagflation, the worst-of-both-worlds scenario in which weak growth is accompanied by robust inflation. The risk is evident in the latest economic numbers.

I firmly believe that we are experiencing stagflation. The CRB has broken out again to new highs.

http://charts3.barchart.com/chart.asp?sym=CRY0&data=A&jav=adv&vol=Y&evnt=adv&grid=Y&code=BSTK&org=stk&fix=

Ask anyone who has purchased a loaf of bread, or a futures contract of wheat, if there is inflation in something other than oil.

jeffolie

Here is another sign of inflation:
Feb. 13 (Bloomberg) -- Platinum surpassed $2,000 an ounce for the first time in London and New York after mining disruptions in South Africa squeezed supplies at a time of increased demand.


Here is another sign of the declining economy:
Southern California home sales dipped below 10,000 transactions for the first time in more than 20 years last month as most potential buyers and sellers appear to be waiting out market turbulence, a real estate information service reported.

Shiv

Cool, tnx for the explanation GK. I do agree that people in general like to complain :)

Cheers,
SD

tom

GK
You said: housing may do poorly in inflation-adjusted terms

It is imprudent, i think, to do any anaylsis/planning with "inflation-adjustment".

Inflation is the next chapter of this story. We will be taking about CPI long after we have forgetten about MBS, CDOs, Subprime, TAF etc

brokerdavelhr

GK,
About our economy. Gas prices have nearly tripled since 1998. A gallon of milk has almost doubled. So has bread, etc, etc. All these items are either needed to get to work, or to live healthy.
No salary in any industry has even come close to doubling since 1998. Most jobs are happy with 2% annual raises.
So yes the economy is doing very, very poorly. Technology is rapidly evolving. it's a bloody shame the economy cannot evolve with it.
Worse yet, taxes and other paycheck deductions are reminding me more and more of a socialist government. On top of the health coverage taken out of my paycheck for me, an additional 700 is taken out for medi-care. Ditto for social security. Strikes me as funny that social security is taken out so that people will have money for their retirement, and that likewise for medicare etc. With all the money taken out a month, I could set up my own retirement plan, and have much better coverage for me and my family.
I cannot say that I like the way our nation is going one bit. Worse yet, many Americans think that universal healthcare (government sponsered of course), is the way to go. What they do not realize, is that the more things (ie healthcare, retirement, etc) that the government deals with, the more money it will cost in support. And lets face it,most branches need 5 people to tell them what to do for breakfast!
Solution? Get word out to voters who will vote for people who would return the power to the people instead of making it a crime to not pay into social security, medi-care etc. Something is very wrong with the direction we are headed. With voters who elect people off of news interviews and who do no real research of their own on who they are voting for, they sure do complain alot about what is wrong.
So before you all vote next, remember to do as much research as possible (this does not include taking news as research)on your candidate of choice.
Who knows, maybe if someone were to get into office who knows their butt from a hole in the ground, our economy would not be so bad.

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