On Jan 14, 2008, at 12:13 AM, Julio Huato wrote:
> Although I hadn't read this, again, I thought I had noticed that Doug
> was shifting his expectations. Perhaps I wasn't clear enough, but
> that's what I tried to tell Patrick in my posting -- that Doug appears
> to be more bearish now than he was a few months ago.
I'd been pretty bearish on the U.S. housing market since I wrote this piece in the summer of 2005. I am now dislocating my arm patting myself on the back for prescience:
<http://www.leftbusinessobserver.com/Housing.html>
> What next
>
> As with all speculative markets, prices could rise further and for
> longer than seems rationally possible. But, whether it takes two
> months or two years, the housing market will run out of steam, and
> a great stimulus to U.S. economic growth will be lost. MEW—financed
> ultimately with the cash coming from the Asian central banks who
> keep buying U.S. Treasury bonds—has goosed up consumption. Merrill
> Lynch estimates that a mere flattening in house prices would knock
> 1 percentage point off economic growth. That would bring us down to
> what economists call a "growth recession"—not a contraction, but
> growth slow enough to feel like rather bad times. The cooling of
> the Australian housing boom has knocked over a point of GDP growth,
> and it looks like something similar is unfolding in Britain.
>
> But knocking a point of GDP growth is a dull conclusion to this
> piece. We've had a ripping boom with little historical precedent,
> and it would be strange if it ended in a mere whimper. It's kept
> consumption far above its long-term trend, with hardly an
> interruption during the 2001 recession. Much of the capital
> imported into the U.S. over the last five years has gone into
> financing the mortgages that powered the boom.
>
> You might think that after a boom without precedent you'd get a
> bust without precedent. We got something like that with the stock
> market, but it never ran its full course: a mild recession with
> almost no anti-business political backlash is a strange sequel to a
> severe bear market. Housing just took up the baton after the stock
> market collapsed from exhaustion.
>
> A serious decline in housing prices and a rise in interest rates
> could throw a lot of households into the tank. But it must be
> admitted that the U.S. economy has shown an enormous capacity to
> take a lickin' and keep on tickin'.
What I was unconvinced about was the apparent certainty among bears that the subprime financial crisis that broke out over the summer would spread into a generalized financial crisis. It's had some contractionary effect but hasn't yet turned into that sort of broader crisis - yet. It still could. But it looks like the liquidity problems of the summer and fall are receding; interest rate spreads are falling back to more normal ranges. But the solvency problem - whether people can service their mortgage debt in the coming years - has not yet worked itself out. That's going to take time.
It's pretty clear the U.S. economy is either in or close to recession. But how deep? Can't say. What I'm still allergic to is the tendency to scream "Crisis! Crisis!" at the first sign of financial difficulties or a business cycle downturn. Recessions are pretty ordinary things. We've had 10 or 11 of them since the end of WW2. There are plenty of reasons to suspect this one could be pretty severe, following two relatively mild ones in 1991 and 2001. But sovereign wealth funds are shoring up our banks, and the USG could soon be applying $100 billion in fiscal stimulus.
Doug