Perhaps what is "coming" is better described by a different cycle - One I posted in another forum and called The "6L Cycle": LIQUIDITY caused the âdot.com bubble.â When it burst Greenspanâs FED, fearful that the world was heading into recession, possibly becoming a depression, pumped out more money. This lead to: LOANS to unqualified people, who could not afford the house they bought, but both buyer and lender were confident that rising home prices would bail them out of any trouble, and it did for several years. The buyers refinanced their mortgage at lower rates provided by the FED and often for longer terms with lower monthly payments once they had some unrealized capital gain. This put cash in their pockets, which they quickly spent. This lead to a: LINKAGE between increasing home price and the general economic prosperity, but jobs were being exported and âMac âJobsâ replaced the lost higher-paying factory jobs. Joe Americanâs real wages went down for a several years and his ability to carry his mortgage decreased. That is his home became a: LIABILITY, not an asset that he could borrow more against to live better but business, importing more services and goods from cheap Asian sources was prospering as never before, even when selling less in many cases. The US might have been able to avoid depression and only have mild recession if it were not for the LEVERAGE, which pooled many of these low quality mortgages together in packages (diversifying the risk, while keeping their high rate of returns, especially as the ARMs in the package reset to higher rates). These packages were very attractive and supposedly âsecureâ because of this diversity so banks* and brokerage firms allowed large investors to buy them with only small fraction of the face value. These investors and private equity firms resold the packages among themselves and to ETFs and used them as collateral for other bank loans to buy more. Perhaps at the end of the chain, only one dollar was buying 25 dollars of face value assets. But then the âfailure to performâ (mortgage default rate) went up and exposed the last buyers in the chain to bankruptcy and the: LIQUIDATION that is happening today, not only in the US, but in EU also. A large French firm*, tied to the US mortgage market, just went under and hundreds of billions (if not trillions?) of stock values have evaporated over night around the world in one day. - High leverage means that only a few percent drop in homes values or increase in the default rates completely wipes out all equity of the investors holding the bag at the end of the re-sale chain. It threatens the entire banking system, but I expect that it will still be possible for central banks to save the system one more time with more LIQUIDITY (starting this â6L cycleâ again) before this house of cards all comes crashing down in historyâs worst depression with the dollar collapsed to pennies of current value. The EU central bank is trying. It pumped out 125billion dollars today alone! - Here we go again, but this is the last time, I predict, before the crash. Originally posted some time ago at: http://www.sciforums.com/showpost.php?p=1502039&postcount=1 with many following posts there about the "6L cycle" and its effects. ------------------------ *Norther Rock collapse, etc. had not yet occcured when above was written.
people would rather live in a SFR than an apartment - yuou musta gone to coolege to come up with that gem! the paper may be in Yourope, but the collateral is here. asset prices will get hit here. credit drying up will impact conditions here. and on and on. we did screw Nipon extra hard in late-1980's real estate deals though. that still feels so good! yeah, all the immigrants will find min wage jobs - we're saved! you totally disregard the impact of a wave of willing low-wage workers on overall wages in typically well-paying industries such as manufacturing, construction, etc. wages may stagnate, but those ARMs will adjust. im sure everyone in Socal wants to grab a $700,000,2br/1bth, starter casa (900SF) but that aint happening w/o without multiple familes and sometimes accompanied by multiple generations banding together to buy the place. what MENSAS like you ignore is the IMMEDIATE impact on neighborhoods when clown houses start sending their herd of kids to schools - demanding that they be taught in their native toungues. the infrastruture bends and then breaks. a minimum wage worker with 4 kids earns like $20k annually - Cali schools average $8k/year per child for education costs - thats $32,000 for a guy that aint paying a penny in Fed or State taxes. he is however collecting food stamps an/or WIC, free school lunches and many times breakfasts, free school trasnport, etc. shit adds up - so do the math before you yell: Savior! immigration will blend into the American fabric, just as i did from immigrant parents. dumb money is always the last money in; thats the cycle we jsut went through in r.e. GDP has been supported by massive borroiwngs, first homes, now CC, and then ??? the stuff just takes longer than play out, particularly if the FED keeps real rates NEGATIVE and govt turns a blind-eye to fraudulent lending, liar loans, etc.
If it was normal and expected I think the economy would have seen one, they keep playing with the rates and propping up the stock market to avoid such a thing.
Mayhaps a couple of you might want to wander over to the NBER site (use Google, I'm feeling too lazy to pull the link), where they keep the more-or-less official dates on the cycle here in the US, and realize that these days, the average cycle runs about 8, 9, 10 years even. In the middle of such looong expansions, you get a pullback, like the one we're going through now. Technically, it might make recession territory, once all is said and done, but if it does, it might last for a quarter or two, at most. We're still in Bretton Woods II, which means long periods of stable growth. Only when this breaks down will the cycles become shorter. It hasn't broken down yet. It's starting, as China et alia diversify out of the dollar, but it's a long way from actually happening yet. There's at least two more years left in this cycle, maybe longer. After that, things get more exciting. Not before.
The more I dig into this the less deluded I become... real wages have fallen? I'm not so sure, what if after tax wages are higher due to tax cuts? I recall earlier that George Soros was predicting a recession for the US late in 2007... well, it's late in 2007, there goes another expert opinion circling the drain. Sure, house prices are going to fall, they always do... and it will take another few weeks for the subprime thing to settle in and be priced in to all the sectors properly.. so what? And we had a rate cut today... doesn't that do good things for the economy typically?
it's your purchasing power relative to all other currencies that is getting butchered.... forget that the plasma TV at Wal*Mart is 30% cheaper than last year... dont drink the kool-aid that wall street tries to feed to dollar denominated bond buyers... the biggest suckers on the planet.... an opinion of course and I could be wrong
I live in Brazil and fully agree: FINALLY !!!! Brazil will create a sovern fund! Backward as it is in good government, even Brazil now knows it is losing money by buying US treasury bonds. Because of the enormous influx of investment dollars into Brazil and the high price of the commodities and food stocks it exports, Brazil's currency (the Real) has been in great demand (to make these investments and pay for these exports). Thus there are many wanting to buy Real and few wanting to buy dollars. This imbalance in supply and demand has greatly elevated the value of the Real. (About 4 years ago a dollar would buy 4 R$, but yesterday a dollar could only buy 1.73R$.) Thus, when an exporter of shoes sold to US {Brazil sold many there 4 years ago, in part because Brazil has been the world's leading exporter of beef and both leather and labor were cheap in Brazil.} it was very profitable. For example, if a pair sold for $40 that gave maker 160 R$ and the cost of the workers, materials, equipment amortization, shipping, and taxes perhaps totaled only 100R$. Now that $40 converts to only 69 R$ for a loss of 31 R$ on each pair sold, so the factories are closed and the workers are out of a job. These workers (not only those making shoes) vote and are not happy with this process of "de-industrialization." So the government has become the buyer of last resort for the un wanted surplus dollars. In approximately the last 4 years, the dollar reserves went from less than 40 billion to the current 160 billion dollars (mainly invested in US Treasury bonds). Although the government has been earning roughly 6% interest on those bonds, they now are worth much less when it comes to paying the government's expenses (in Real, of course). Now the 120 billion dollar increase in reserves was not all purchased with the same exchange ratio. Initially it cost 4 and now less than 2 Real to buy those dollars. Letâs use 3 as and average. With this estimate, the government paid 480 billion R$ for the 120 billion dollar increase in reserves, but now that 120 billion will only buy 208 billion Real. Thus, the Brazilian government has lost 272 billion Real trying to keep the dollar from falling more only due to the exchange rate changes. However, that 57% loss is only part of the losses. To get the Real (with which to pay the local sellers of the dollars the government is buying) the central bank issues bonds locally. Brazil's current interest rate is about 11% but 4 years ago it was 29% for an average of 20%, but it was getting 6% from the US Treasury so the net interest cost of supporting the dollar is approximately 14% per year. The 120 billion dollars increase in reserves was acquired over 4 years so on average the duration of this interest loss was only 2 years. Thus, the net interest paid is (120x0.14) x0.14 = 22 billion dollars. This makes the total loss 292 billion on a 480 billion dollar investment, or 61%. As bad and corrupt as Brazil is there were probably many other losses associated with "kick backs" from the favored agents used to make these transactions etc. but we will ignore that, even though it is probably part of why Brazil continued to behave so stupidly. But as I said at the start, FINALLY, Brazil will at least decrease the buy of US Treasury bonds, like most every well managed central bank is now doing. I.e. Brazil is now in the process of creating a "sovern fund" to invest its reserves more profitable, or at least not lose 61% in 4 year (a 15% negative return annually by holding Treasury bonds.) The FED is "between a rock and a hard place." -If it cuts rates or even keeps them at 4.5% for long, essentially only the mint's printing presses can pay off the maturing Treasury bonds. (Very few will "roll them over" into new bonds to continue losing value.) If it raises rates to make Treasury bonds attractive to foreigners, then the already "wobbly" domestic economy (Houses no longer functioning as ATMs to give consumers cash to spend, etc .)* the US will definitely slip into recession, perhaps changing to depression. Thus, as I have been warning for several years, "stagflation" in the US is guaranteed now. That the US can survive, but as it appears impossible with the main tax payer (the peak earning "baby boomers") retiring to collect their Social Security and interest on the accumulated debt growing larger every year, it seems very likely to me that the current drop of the dollar will accelerate into a "run to get out" with a severe depression as a result. I wish it were not so, but see no way out of this fate now. ----------------------- *Possibly the day of reconing can be post poned a couple of years more. The US consumer is still spending money he does not have. In some cases by borrowing against other assets, or more often by dipping into his already inadequate saving for retirment (even 401K plans etc). This decrease in savings is of course by itself a reduction in the funds available for modernazation of factories, research, even education - all the more reason why the US future looks very bleak. above also posted at: http://www.sciforums.com/showpost.php?p=1607127&postcount=35 in thread called "Sovern Funds" - the rapidly increasing trend of most governments to cease in vesting in US Treasury bonds.