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| quote: | Originally posted by Shakka
Heh. It's fun to theorize. So many hypotheticals and variables. I believe that the housing bubble fizzle will be, at least initially, most evident in areas that have simply had explosive appreciation in asset prices more as a result of loose, easy money rather than some wonderful event that has made a shack in L.A. suddenly worth $1M. It's not like America is safer now. But then again, California is a strange place. There are plenty of other areas across the country, e.g.Florida, Virginia, Arizona, Las Vegas, etc. that have had similar experiences. And no doubt, the easy money at record low interest rates, and ever more exotic mortgages (Option ARMs, No Doc/Low Doc loans). With a good portion of those adjustable rate mortgages getting ready to reset, interest rates are much higher now, somebody is getting ready to feel a bigger pinch. Throw on much higher energy costs, new credit card payment minimums which will essentially double the minimum-payment amount--a lot of folks on the sub-prime section of the credit scoreboard are really gonna be in a pinch. Not to mention, it's a lot harder for them to file Chapter 7 anymore.
But the real root of the problem is that the U.S. consumer is so tapped out. I've thought so for several years now, but I really believe we're finally at an inflection point. At some level there are going to be serious problems. The U.S. has a negative savings rate. What people can't afford to buy, the buy on credit. When they run out of credit, the use up their equity. Mortgage Equity Withdrawals have peaked--last year they were around $800M annualized in September.
Throw into all of this a now fully inverted yield curve and the milestone event that is Greenspan stepping down and Bernanke stepping in. Will Bernanke be hawkish and satisfy those that defy him to raise rates in the face of an inverted yield curve? To prove his might? Will he drop money from helicopters and flood the market?
Man, I don't know, but I'm pretty sure the consumer is about out of gas. In any event, the consumer can't afford to grow at the rate he's been going at, let alone sustain the current level of growth when the house they've been using as an ATM runs dry? Last qtr GDP growth was only 1.1%. How much of that can you blame on Katrina?
Things just feel a little ominous to me right now. There are real risks out there that I'm concerned about. But then again, I work for a shop that can be pretty bearish on the economy. Then we try to position ourselves accordingly. |
Hehe sorry for the late reply, I forgot that I asked you a question in this thread. Yea I'm pretty bearish on the economy for 2006 as well. I think the reason for that is that, as you said, consumers are pretty much stretched to the limit. The savings rate is simply abysmal in the US and to me it's simply unsustainable. I think the only reason why consumers were able to prop up the economy as much as they have was because of the additional equity they were able to utilize because of the housing boom and thus have spent beyond their means with their credit (you're definitely spot on with that imo). I forsee some inflationary pressures that I anticipated in 2005 but have yet to see. The reason for this is because there's was still strong demand for the dollar, despite irresponsible deficits, because there were no attractive alternatives in any other currency market. But I think we're starting to see some changes. For one, I think Germany is on the mend. THe start of 2006 seems to indicate that there will be some significant economic reform and a big upswing in consumer confidence. This could be tempered with the remote possibility that Italy will withdraw from the Euro, but I think that that is extremely unlikely this year. The other big change is that Japan appears to be on the mend. Despite what's happened with livedoor, I think they're finally escaping their slump considering the performance of all their economic indicators. I just have a bad feeling about the US economy in 2006. I could be completely wrong, as most economists are, but I've adjusted my 401k allocation by giving a Euro/Pacific fund a larger share of my savings. Please, this is not financial advice to anyone, this is my own personal opinion which has been wrong many times in the past.
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