By Paul Lamont
Nov. 6, 2006
As our clients know, we have been forecasting a very hard recession over the next few years. At the beginning of this year, 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.
One of our main arguments has been
Where Is the Debt Coming From?
In the chart below from
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.
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
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%.
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
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
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.
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***No graph, chart, formula or other device offered can in and of itself be used to make trading decisions.
Copyright ©2006 Lamont Trading Advisors, Inc. Paul J. Lamont
is President of Lamont Trading Advisors, Inc., a registered investment advisor
in the State of