Schwab strategist sees high risk of recession

[TexasLawyer]

Schwab strategist sees high risk of recession
San Francisco Business Times - 8/23/06 Wednesday
by Mark Calvey


Charles Schwab & Co. Chief Investment Strategist Liz Ann Sonders told investors this month that Wall Street is underestimating the risk of recession. "Don't be snookered by the consensus," Sonders wrote in her Schwab (NASDAQ: SCHW) report. "We typically don't know we're in a recession until after it's either well under way or even over.

"Three of the most common traits leading to recessions historically are all flashing warning signals -- an inverted yield curve (when longer-term rates are lower than shorter-term rates,) an oil price shock and a severe real estate crunch."

Although many on Wall Street don't anticipate a recession, the speed at which the housing market is slowing is alarming. Home sales are coming off a historic boom as the Fed's rush to boost liquidity following the tech-and-telecom bust pushed down interest rates. The Fed has spent the last two years raising interest rates to rein in inflation.

Wednesday's report from the National Association of Realtors showed existing home sales fell to the lowest level since 2004 and the inventory of unsold homes rose to the highest level since 1993. "Reality is shifting, and it's shifting rapidly," she said.

<snip>

http://www.bizjournals.com/sanfrancisco/stories/2006/08/21/daily28.html

[fed-up]

1. MORE FEAR Mongering-home sales in past few years driven by investors

are now leveling out-sales are steady in our area with only a slight dip from last year.

Inventory of unsold homes is high because a 4X the normal amount of homes are on the market right now and a zillion investors are trying to cash in on their profits before the market does crash.

This puts us normal homeowner's that are trying to sell for various reasons in a really carpy position....

These headlines may sell papers, but they also put fear into the heart of a homebuyer and now many buyers are frozen with fear and not buying. A little self-fulfilling (SP?) prophecy.

[leesa]

2. Duh.

[Warpy]

3. What a DUH moment this is

The only thing holding the consumer economy up in this country was the amount of debt being leveraged against escalating house prices. Credit cards that would have been maxed out by 2002 were paid off by those refinancing jobs. People got fooled into thinking that sort of thing was permanent and went out and charged the cards back up.

What they have now is DEBT and the realization that their wages are flat, prices are rising, and that house may soon be worth a bit less than they owe on it. They're certainly confronting the reality of heating and cooling a McMansion if they've traded up that far. They are also insecure in their jobs, most of which are vulnerable to outsourcing, illegals, or mechanization.

The system of offshoring paychecks and onshoring debt is simply an unsustainable one. The only new thing in this particular article is that somebody at Schwab was honest enough to say we're headed for trouble.

[TexasLawyer]

4. and yet...

Here's who the Fed is listening to.

Harvard's Feldstein Says U.S. Economy Likely to Dodge Recession

By Kathleen Hays and Simon Kennedy

Aug. 24 (Bloomberg) -- The U.S. economy should dodge recession, said Harvard Professor Martin Feldstein, who heads the panel of economists which dates U.S. business cycles. "If I had to make a likely guess, I would say slow growth, but not recession,'' Feldstein said in an interview in Jackson Hole, Wyoming, where he's attending the Federal Reserve's annual economic symposium.

A slump in housing, near-record oil prices and the highest Fed interest rates since 2001 have prompted some economists to speculate the world's largest economy may slip into recession next year as the economy slows after five years of expansion. David Rosenberg, chief North American economist at Merrill Lynch & Co., has said there is a 40 percent change of such a downturn.

Feldstein, who chairs the National Bureau of Economic Research, said a recession could occur if households made a "decision to start saving again" rather than keep spending as the housing market fades. New-home sales in the U.S. fell more than economists forecast in July and the number of unsold houses climbed to a record, the Commerce Department reported today.

``Household savings is now negative and that was driven by the fact that house wealth was up and that mortgage refinancing was very, very appealing,'' Feldstein said. ``People took that money and they went and spent a lot of it. So if that goes into reverse, that could tip the economy.''

Still, he noted a "lot of positives that could keep the economy moving along." Few imports should help gross domestic product, he added. As chairman of Cambridge, Massachusetts-based NBER, Feldstein helms its Business Cycle Dating Committee. The last recession, according to its calculations, began in March 2001 and ended the following November.

<snip>

http://www.bloomberg.com/apps/news?pid=20601087&sid=aQsXCvBzopNo&refer=home

[GreenTea]

5. Wars, real estate, low interest rates, China & dollars for oil, have been

keeping us afloat...with the huge deficit growing & growing, the real estate market sliding, interest rates climbing, along with inflation and some OPEC nations wanting to jump ship and sell oil for Euros & Rubles...How much longer will China stay aboard?

While the whole world is detesting our imperialistic wars.

We can't last this way for much longer, we are in deep shit!

[TexasLawyer]

6. I'm concerned too

Plus, this Harvard guy I'm sure is very smart. but ya gotta wonder at remarks like these:

a recession could occur if households made a "decision to start saving again" rather than keep spending as the housing market fades.

I don't think a lot of average people are going to start saving any time soon. You can't save what you don't have.

But I guess inflation guarantees that we'll all be super consumers-- you have to spend ALL your salary just to keep going.

[Selatius]

7. He's afraid people will stop spending disposable income

If everybody simply started saving money for just food and gas and the bills and foregoing everything else, then the rest of the economy will slow down. There is nothing wrong if people stopped spending more than they can afford, but if everybody went beyond that and started hording cash for what I mentioned, the economy will contract violently. The service sector would be hit the hardest followed by manufacturing as people wouldn't buy as many non-essential goods.

[SoCalDem]

8. Millions of people have already "disposed" of their

disposable income.. They have maxed out their home equityATM...they have maxxed out their credit cards, they are blowing big bucks filling their gas tanks, and maybe their employer is one of those companies that improve the bottom line by getting rid of employees..

[LaPera]

9. Your right...2005 was the first year, American's as a whole have spent

more than they've taken in...I heard this on Thom Hartmann today..(something to this effect) consumers are now maxed out and can't be counted on to bail out this Bush economy. They, the banks keep pushing more credit to put us so far into debt they'll own everything we've worked for..but that's the whole point, to bankrupt this country...no social programs can be funded, the neocons have stolen our treasury (our tax dollars) and will continue to wage war for more profits, stealing oil & fighting to keep the dollar for oil, as the corporate thugs continue with their never enough sickness mentality...fuck everything and everybody else....Is this what 40 years of the republicans "think tanks" have come up with...Yes! But when the worst comes, they figure FEAR and pushing Jesus will bail them out. With less & less health care coverage for the buck (not to mention the 67 million without health care). Just don't get sick.... or the AMA and their corporate hospitals will get your assets even faster.

[Selatius]

11. The trend with negative saving is unsustainable; that's true

Eventually there will be a "correction" to resolve that problem. The only question is whether we want Bush to dismantle social programs when people fall down. Progressive taxation and social spending worked, but it won't work if you have a regressive tax code that bails out the rich and taxes the poor and no social spending or minimal social spending.

[TexasLawyer]

10. consumer spending represents two-thirds of the US economy

Some interesting and relevant factoids:

In the U. S., consumption equals 70% of GDP; 65% in the UK; 58% in Germany; and 57% in Japan. Knowing this fact, reporters often follow retail spending patterns as the key to future economic behavior and the stock market because, they note in the U. S., “consumer spending represents two-thirds of the economy.”

http://www2.gsb.columbia.edu/ipd/j_gdp.html

[Hugin]

12. *yawn* -- This news is soooo first quarter 2006.

Maybe even 4th quarter aught five.

Some might even say... Early oh, four.

[TexasLawyer]

13. Tech bubble v. Housing bubble

I thought this was interesting:

Posted on Fri, Aug. 25, 2006

The Economy | What would a housing recession mean?
By Andrew Cassel
Inquirer Columnist

http://www.philly.com/mld/inquirer/business/15354641.htm

<snip>

The Economist magazine reminds us how the real estate boom is different from the tech bubble. Even though a lot of money was lost chasing dot-com stocks, that earlier mania spawned some very important companies and technologies. Google alone has permanently changed the way we look at information, for example.

Soaring house prices are much more ephemeral. Yes, the boom brought needed residential investment to cities such as Philadelphia, but it's still unclear how that will produce better long-term growth.
In many places, moreover, house-price inflation merely redistributes wealth, rather than creating it.

In any case, the end of the real estate boom puts a new importance on other sectors, such as research, manufacturing and global trade. Our prosperity will depend on what we can produce and sell to the rest of the world, as opposed to simply swapping what we already have for ever-larger numbers on paper.

It could be a difficult transition, to say the least.

[ProfessorGAC]

14. There Is ALREADY A Recession Sonders, You Dunce!

The real growth rate, employment levels, inflation, and productivity for the last 4 years are all in the bottom quartile of the last 30 years. That is, by any statistical definition, recessionary.

Just because somebody picked "two years of negative growth" as a guess (at best) to define recession doesn't mean something isn't recessionary prior to that.

This is a weak, unsustainable economic condition by any historical point of reference.
The Professor