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[Updated on 12/07/2008 07:43:00]
While the current US housing contraction has caused plenty of fears and worries, not just in the US but throughout the whole world, most do not realise that the direct impact of the housing contraction on the broad US economy has actually been rather limited. A lot of the damage has been at the psychological level. (Like watching Freddie Krueger)This is due partly to the fact that house prices, which have risen substantially, have been dropping recently. Another factor has been the constant media attention given to scary forecasts (Unker Warren, Unker Jim, Unker Soros, Unker Murdoch.....pls dun sked us lah) that the current housing contraction is the worst since the 1930 Great Depression and that this time round, it could be headed that way. Fortunately, the facts of the matter do not support such a negative view.
Figure 1 below shows the single–family housing starts over the last 50 years, a stretch of period that covers all kinds of recessions and financial crises. Some of these recessions and crises have been as severe as the current economic situation, while some have been even more serious and frightening than the current global turbulence.
The 1973-75 recession was very severe and global in nature. All the major economies were very badly hit by the 1st oil shock. Inflation and interest rates skyrocketed globally. The economic slump was very severe. In fact, at that point in time, it was the worst economic recession since the 1930 Great Depression. Unemployment rate skyrocketed to nearly 9%. In 1973-74, the S&P 500 plunged around 50%. There were bank failures.
The 1980-82 recession was also severe and global in nature. Like the 1973-74 contraction, there were fears and panic everywhere. Mexico defaulted. It was the start of a global disinflationary phase as the impact of Volcker’s severe monetary tightening bit. The S&P 500 plunged 30%. The US unemployment rate skyrocketed to double digits.
In contrast, what is happening presently is actually very mild. (quick death or slow death??)The unemployment rate is at a healthy 5.4%. While inflation is rising, the cause is cyclical in nature. The S&P 500 cannot even stay in bear market territory. The rise in oil price, while very substantial, has been spread over 8-10 years. Of late, interest rate has dropped instead of rise. US productivity growth has remained impressive unlike in the Seventies and Eighties. The present decline in housing starts has been sharp but instead of fearing more declines to come, the plunge is very close to its end. Most importantly, the recessions in 1973-74 and 1980-82 did not have a fast transforming and developing China. The world economy simply did not have any other major sources of economic growth, unlike nowadays. i Capital is not even convinced that the US economy is in recession. (i think we're alone now - Tiffany)
i Capital retains its short-term outlook of the NYSE at a range of 1,250 to 1,500. This is the part where the NYSE tries to establish its bottom and trading can be volatile. As crude oil price enters a prolonged correction, fears over stagflation would subside. Eventually, investors’ confidence would return. i Capital retains its long-held bullish longer-term target of the NYSE at 1,900 - 2,000.
____________________ Don’t Try to Predict the Future / Be In Harmony with the Market / Don’t fight the Market ~Charlie Wright
That was almost caused a psychological damage to my brain cells.
the facts of the matter do not support such a negative view.
LOL!
Man... what are they talking about?
The collapse of Bear Sterns, the failure of IndyMac, the dire situation that Freddie and Fannie is in ( technically chap lap?) ... i wonder why and what caused it to happen?
James: A lot of what we’d seen previously had
been what we’d termed a “cynical bubble.”
Meaning that people didn’t really believe what
was going on, but were prepared to go with it
because it was in their best interest to do so;
the relative performance kind of stuff. But this
now looks much more like a bubble of belief,
which is exactly what we saw in the tech sector
in ’98-’99, where you got these ridiculous
methods of valuation appearing, such as price
per click and price per eyeball, and that sort of
thing. I don’t know what the equivalent in mining
is, price per tractor tire perhaps, or something
else that seems can be used to justify
almost any growth expectation. But that’s
exactly what we’re seeing now. We’re seeing a
bubble of belief build that this time really is different;
that there is some long-term opportunity
within the emerging markets. Both Albert
and I — Albert from fundamental and liquidity
points of view and I from a market view — have
issues with the notion of decoupling. I just
don’t see it. People always, classically, forget
about lags at turning points. And if your chief
export market implodes, which is potentially
what we’re going to see the U.S. consumer market
doing— if it’s not already done so — it’s hard to
imagine why you’re going to continue to see
export growth. There are an awful lot of fallacies
that surround the emerging markets and the
basic materials, too. And these things aren’t
cheap. Emerging markets are trading on a 40
times cyclically adjusted P/E. Back in 2003,
they were at 10 times cyclically adjusted P/E. As
uncharacteristic as it is to imagine, I actually
got bullish on emerging markets back in ’03
because they were cheap. But now we find that
the reverse is true. Now that everybody else
wants to buy them— and is willing to pay top
dollar for them — I sit here and think, “No, I’d
rather not.”
Sorry, this should not belong to : What are they talking about? but i thought it too interesting. So i would just continue here:
Albert: That’s right. All I’d add is that from the
commodities side what has surprised me, as I
have written, was that when I looked at some of
the commodities indices, because I was sort of
relating the CRB to world growth, it’s only been
in the last six months or so that the CRB has
totally detached from the cyclical slowdown
we’re seeing and gone potty. And when I actually
looked at some of the industrial commodity
indices that exclude oil, like the Economist’s
industrial baskets, which includes agricultural
industrial commodities as well as metals, and
the IMF industrial commodity index, they’re
actually flat year-on-year, which, to be honest,
surprised me. So I dug around a bit more and
then found out — because I don’t keep my eye on
these things all the time — that actually things
like lead, zinc and nickel are down about 50%
from their peaks. As always, as James says, people
reach for growth, so as these sort of cyclical
risk dominoes tumble, they funnel into the
remaining stories that haven’t yet been disproved. What is interesting is that this is now
very much a food and energy bubble. All the
speculation seems to have funneled in, even
within the commodity complex, to food and
energy, just those few commodities. Obviously
they are key commodities. But the oil price —
before I left London to come out here I read
through a stack of newspapers from this week,
and saw an interesting article in the Wall Street
Journal saying that actually there is a glut of
spot oil. Some Gulf states are hiring tankers to
basically park their surplus oil in the Gulf,
because they can’t find buyers for it.
