The consumer started cutting back in February of 2006. That is when our recession began. It began to manifest itself a year ago as weakness showed up in manufacturing. That weakness is now more obvious. The recent consumer confidence figures tell us the real estate collapse, the lack of real estate equity cash out, the results of free trade, globalization, offshoring and outsourcing and the credit crisis are all simultaneously taking their toll. Next comes the stock market collapse. That tells you all you should be out of revolving debt and long gold and silver related assets.
This recession will not be sector by sector. It will be all encompassing simultaneously. Consumer spending and borrowing will not hold up this time, everything is going into the tank. Twenty-five years of ‘shop until you drop’ is over.
That 70 to 72 percent of GDP that came from consumption will drop to the long-term norm of 64.5% and will eventually drop much lower.
The fuel to keep consumerism on the march was easy, inexpensive credit. That game is over. We see the coming recession/depression as deep and long lasting, perhaps to 2012 or longer. This time it will be a replay of the 1930s and perhaps worse. Initially we see a minimum 20% decline in housing from here and a $400 billion reduction in spending over the next two years, or a reduction of 4% of income. This is the most conservative estimate possible.
The dollar will fall to 40 to 55 on the USDX, the dollar index. It is currently about 75. That will help exports, but it will only increase GDP about ½% according to the B.I.S. Luxury purchases domestically will be hit, as well as autos and other big-ticket items as well as discretionary spending. It should be noted that import prices will rise 25% or more for a reduction of $200 billion in imported goods. Retailers will be hit hard. We are going to see five bad to very bad years and perhaps more. Get out of debt and get gold and silver related assets.
The Reuters/University of Michigan Sentiment Index decreased to 76.1 in November from 80.9 in October. That is a terrible drop.
The October Conference Board’s leading index decreased 0.5%.
The real drop in home prices is much deeper than statistics show. In Phoenix, subprime loan homes are selling because homebuilders are discounting 10 to 15 percent, but also because they are throwing in incentives as well. We wonder what Fannie and Freddie think of that? They have demanded such information.
The weekly Economic Cycle Research Institute report showed US economic growth fell due to slower housing activity and lower stock prices, while its annualized growth rate fell to its lowest level in 63 weeks. The index fell to 139.2 for the week of 11/16, down from 139.9 the prior week. The growth rate fell from minus .09% to minus 1.2%.
S&P says it expects the Fed to cut rates to 3.5% in 2008 to deal with the fallout from the housing market. S&P says the chance of recession is 40% over the next year and the GDP growth will be 1.8%, another stupid forecast.
The OECD says financial firms could lose $300 billion in the mortgage crisis - almost $900 billion in mortgages reset in 2008.
For those of you who missed it, the Commerce Department said October housing starts grew 3%. That included a 7.3% decline in single-family starts and a preposterous 44.5% increase in multi-family units. The Midwest supposedly has an increase of 21.1%, which truly defies reality. Permits fell 6.6% to the lowest levels in 14 years.
Finally our patience on our Fannie Mae short has paid off, but we are kicking ourselves that we did not short Freddie as well. Their portfolios are being destroyed and if they do not raise money fast they will be out of business. The fallout from the collapse of these two companies will be deafening. What is truly terrifying is that both haven ‘t submitted financials for over a year and over 700 financial institutions are recommending the stocks. This is totally unsuitable but the SEC is nowhere to be found. There obviously is no longer is a “prudent man” rule.
Fannie and Freddie are symbols of governmental excess, manipulation and interference in our nation’s economy. The crash of these two stocks will be remembered because the day it happened former White House Press Secretary Scott McClellan told us that President Bush and V.P. Dick Cheney had lied about the Plame affair.
We predicted three years ago that both Fannie and Freddie would go bankrupt and so they will. We expect our government, in behalf of us taxpayers, will bail them out and government will end up owning all that housing. That we forecasted six years ago.
The big question now with these McClellan revelations is, will the President and VP be impeached?
California, the biggest seller of municipal bonds, had their credit rating outlook on $48.2 billion of its debt lowered by S&P as tax revenue falls short of forecasts because of a slowing economy. Credit was lowered to stable from positive – a warning signal that the state is unlikely to win a higher ranking. California has been A+ since 2004. In 2008, the state says the short fall will be $10 billion; we expect it to be considerably higher.
The outlook preceded the state’s planned sale of $1 billion of general obligation bonds next week. Present yield is about 4.95% for similar traded bonds. The outlook is not good.
Sales of existing homes fell in 46 states during the third quarter as the housing market’s slump worsened. Only Vermont and North Dakota showed sales increases, up 0.8% and 2.9% respectively. Median prices fell by more than 10% in parts of Florida and California yoy.
Existing home sales fell 13.7% yoy. The biggest drops were in: Nevada down 35%; Florida 32%; Arizona 30.9% and California 27.8%.