Look for a decline in third quarter real GDP to be reported next Thursday. That is likely to prompt the Fed to ease further, probably with a one-half percentage point cut in the Federal funds rate to 1.0% from its current 1.5% level. That should open the door for additional easing by other central banks around the globe. Together with other initiatives, that should help further thaw the freeze-up in the global money markets. But, even another round of central bank easing on top of the US Treasury, Fed, FDIC and foreign government initiatives will not be enough to stem the recessionary decline in US and global equity and commodity markets. Global demands and profits are slip sliding away far too fast for that.
Judging by the relentless market price declines last week, the global equity and commodity markets appear to be finally awakenening to the realty of the steep world-wide recession. That should not be surprising considering that there is an outright contraction in real growth across the advanced industrial world and at the very least a marked slowdown in emerging market economies. Even China's growth is slowing so significantly as to prompt their talk of the need for economic stimulus.
This downturn is far more than merely a global credit crisis, though that crisis has been a significant contributory cause. The economic contraction is cutting demand across the spectrum: for consumer goods, inventories, capital equipment,services, raw materials, and employment. The result is a precipitous decline in prices for commodities. While that benefits some, the adverse consequences of the recession, the loss of business, more intense competition, a resultant decline in corporate profits, with reasonable expectations of far more to come, have put prices for equities and commodities in a tail spin.
Though there are guideposts that can be utilized, there is no way of telling exactly how low the prices of equities or commodities will go. There is also uncertainty over where the bottom is for interest rates, including Central Bank rates and Treasury bond yields. The only realistic answer is lower.
Since the contraction in credit is deeper than any of its post 1930-depression predecessers, the consequent drop in the various indices are likely to also be steeper. The largest peak-to-trough drop in the Dow since World War 11 was the 45% decline in the 23 months between January 1973 and December 1974. The 44% drop the past 54 weeks is almost the same, but the monthly pace has been almost twice as fast. The current drop was only exceeded in extent by the 49% decline between March 1937 and March 1938, though the monthly pace of the decline was identical to the current period. Thus, with the current recession only now deepening sharply, it appears prudent to expect both a longer period of decline and a consequent larger decline in equity prices. That would be consistent with a continuation of the average 3.7% per month decent in equity prices thus far experienced, though by no means necessarily in a straight line.
Commodity prices are likely to overshoot on the way down, dropping below the marginal cost of production as inventories are exhausted and producers sell even at prices below cost to generate cash to meet their financial obligations. That has aleady happened in oil with an estimated marginal production cost of some $70 to $80 a barrel. $50 to $60 per barrel oil is certainly possible.
Treasury yields are projected to drop substantially further as inflation first slows, then turns into outright deflation, with current price indices below year earlier levels. That would suggest a return to at least the 3.1% low on the ten-year Treasury experienced in the previous cycle. That would be consistent with a market projection of zero CPI inflation. With deflation and a Federal funds rate below 1%, a distinct possibility, the ten-year Treasury yield could easily fall to and below 3.0% from its current 3.7%. The maturity yield spread between the ten-year and thirty-year is also likely to narrow further, contrary to widespread expectations to the contrary.
This week Chairman Greenspan in testimony before Congress admited surprise at the financial crisis. He will go down in history as the worst Fed Chairman ever. And that is saying something. His was a dereliction in duty to not only properly supervise financial institutions but to prevent excesses in speculation in the equity markets, in housing, in consumer credit, in financial engineering, and in grossly excessive financial institution leveraging. We are paying the price for a return to sanity in the deleveraging process. We need Fed Chairmen that do not need to be liked as they do their job of taking the proverbial credit punchbowl away whenever the speculative economic party really gets started.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Email address: philipbraverman@Gmail.com
Saturday, October 25, 2008
Saturday, October 18, 2008
The recession distress is intensifying, threatening outright deflation
There is as yet no realistic basis for equity or credit market optimism, despite the rapid fire changes in Admistration efforts to rescue the financial markets and prevent the rapidly deepening recession from turning into a depression. The initiatives miss the mark. They do not solve the the basic problems besetting the housing sector, the financial markets or the US and global economy.
There was ample evidence this week that financial and economic problems not only remain severe, they are intensifying. That mandates aggressive easing by central banks around the globe, including the Fed, before price deflation has the perverse effect of tightening real central bank policy. That would make it all the more difficult for the Fed stem the tide toward the deepest recession since the great Depression.
Oil prices tempoarily fell below $70 a barrel on reduced global energy demands this week. Expect further declines across the spectrum of commodity prices. Retail sales plunged a steep 1.2% in September. This is the third consecutive monthly drop in consumer retail sales. Considering that consumer spending accounts for some seven tenths of GDP, it is also a clear indication of a recessionary contraction of real GDP to be reported for the third and fourth quarters this year and undoubtedly through most or all of 2009. Despite the decline in energy prices, it also suggests mounting problems for consumers, holders of consumer credit and auto debt, as well as for retailers and the global economy, which depends on US consumer purchases. That dire prospect was reinforced this week with the report of an August decline in consumer credit. This is the first time this type of credit has fallen in a decade. Consumer sentiment as measured by the University of Michigan fell sharply to 57.5 in October from 70.3 in September. Housing starts plunged 6.3% in September to a 17 year low. There was something of a run on hedge funds in the third quarter, forcing them to dump liquid securities at fire sale prices to meet withdrawal demands. There is no reason to expect that hedge fund contraction process to end any time soon, at least not before a substantial number fold.
True, some widely respected technical analysts are trumpeting the sharp rebound in equity prices from their seeming double bottom (a technical buy signal), while fundamental analysts are equally impressed by historic low price-earnings ratios as a significant buy signal. And the legendary investor Warren Buffet's equity purchases, fueled by his sale of Treasuries, and his comment that he intends to be fully invested are powerfully persausive confidence builders. But, there remains far too much contrary evidence to believe in a sustained improvement in any beleagured market, whether equities, debt (other than Government-guaranteed debt), commodities or real estate. They are all going lower in price. So much so that outright deflation, which would be a real economic and financial calamity, must be considered a realistic risk.
The credit crunch remains very much in evidence. The Treasury injection of up to $25 billion in capital in individual selected banks through preferred stock purchases does not adquately restore confidence in interbank lending. The still unrecognized losses on junk assets held on the books of far too many financial institutions (because they would have to declare themselves bankrupt if they did recognize the full extent of the losses) make them vulnerable to unanticipated runs on uninsured deposits. And because virtually every financial institution recognizes that reality, they are hesitant to trust that other institutions will repay any loans made to them. The increase of FDIC deposit insurance to $250,000 per depositor and on noninterest bearing deposits is still not 100% deposit insurance. Despite the injection of Fed and Treasury funds, there is still a pronounced unwillingness to lend that is producing a significant reduction in the availability of credit in the US and globally.
Mortgage interest rates rose this week. The market interest rates on all medium to long term debt rose further above Treasury yields this week as the markets shunned even the slightest form of debt risk. Many shippers cannot get adequate credit and thus can not ship. Even if customers with anything less than pristine credit want to buy a car, they cannot secure financing. GMAC is cutting its lending. Businesses that rely on commercial paper must depend on the direct commercial paper lending from the Fed to pay off maturing loans. It remains a dire financial crisis. Even the temporary suspension of required mark-to-market accounting rules for recognizing current values, a change I suggested, would be no panacea.
The root cause of the financial industry problem is plunging home prices. Soaring home mortgage deliquencies, defaults and foreclosures make still lower home prices a virtual certainty. This promises to undermine the market value of mortgages and mortgage-related paper still further, creating even larger losses for those institutions holding this toxic paper. That requires more and larger injections of capital so that the financial institutions can recognize the losses and still survive. Until this vicious cycle is broken, with an end to the drop in home prices, there can be no confidence that either the underlying or consequent probems of the financial system are being resolved.
There are a number of approaches that can hope to be sucessful in ending the decline in home prices. A Federal, State and local program to buy vacant homes at depressed prices could help. It might well encourage private vulture funds to accelerate their real estate purchases. A moritorium on foreclosures would also accomplish much. Offering home owners in mortgage distress an opportunity to sell an equity stake in their homes in exchange for a partial paydown of their mortgage might also ameliorate the problem. There could also be a temporary or permanent reduction in onerous mortgage terms for homeowners confronted with foreclosure. These suggestions are merely a variation on approaches tried sucessfully in the Depression and during the housing collapse in Mexico in the mid-1990s. Until home prices stabilize and the various other underlying problems besetting financial institutions are effectively resolved, it is only prudent to remain cautious, liquid and safe in your investments.
Philip Braverman, President
Braverman Economic and Finance Consulting
One Hewitt Square #249
East Northport, New York 11731
Email address: philipbraverman@Gmail.com
There was ample evidence this week that financial and economic problems not only remain severe, they are intensifying. That mandates aggressive easing by central banks around the globe, including the Fed, before price deflation has the perverse effect of tightening real central bank policy. That would make it all the more difficult for the Fed stem the tide toward the deepest recession since the great Depression.
Oil prices tempoarily fell below $70 a barrel on reduced global energy demands this week. Expect further declines across the spectrum of commodity prices. Retail sales plunged a steep 1.2% in September. This is the third consecutive monthly drop in consumer retail sales. Considering that consumer spending accounts for some seven tenths of GDP, it is also a clear indication of a recessionary contraction of real GDP to be reported for the third and fourth quarters this year and undoubtedly through most or all of 2009. Despite the decline in energy prices, it also suggests mounting problems for consumers, holders of consumer credit and auto debt, as well as for retailers and the global economy, which depends on US consumer purchases. That dire prospect was reinforced this week with the report of an August decline in consumer credit. This is the first time this type of credit has fallen in a decade. Consumer sentiment as measured by the University of Michigan fell sharply to 57.5 in October from 70.3 in September. Housing starts plunged 6.3% in September to a 17 year low. There was something of a run on hedge funds in the third quarter, forcing them to dump liquid securities at fire sale prices to meet withdrawal demands. There is no reason to expect that hedge fund contraction process to end any time soon, at least not before a substantial number fold.
True, some widely respected technical analysts are trumpeting the sharp rebound in equity prices from their seeming double bottom (a technical buy signal), while fundamental analysts are equally impressed by historic low price-earnings ratios as a significant buy signal. And the legendary investor Warren Buffet's equity purchases, fueled by his sale of Treasuries, and his comment that he intends to be fully invested are powerfully persausive confidence builders. But, there remains far too much contrary evidence to believe in a sustained improvement in any beleagured market, whether equities, debt (other than Government-guaranteed debt), commodities or real estate. They are all going lower in price. So much so that outright deflation, which would be a real economic and financial calamity, must be considered a realistic risk.
The credit crunch remains very much in evidence. The Treasury injection of up to $25 billion in capital in individual selected banks through preferred stock purchases does not adquately restore confidence in interbank lending. The still unrecognized losses on junk assets held on the books of far too many financial institutions (because they would have to declare themselves bankrupt if they did recognize the full extent of the losses) make them vulnerable to unanticipated runs on uninsured deposits. And because virtually every financial institution recognizes that reality, they are hesitant to trust that other institutions will repay any loans made to them. The increase of FDIC deposit insurance to $250,000 per depositor and on noninterest bearing deposits is still not 100% deposit insurance. Despite the injection of Fed and Treasury funds, there is still a pronounced unwillingness to lend that is producing a significant reduction in the availability of credit in the US and globally.
Mortgage interest rates rose this week. The market interest rates on all medium to long term debt rose further above Treasury yields this week as the markets shunned even the slightest form of debt risk. Many shippers cannot get adequate credit and thus can not ship. Even if customers with anything less than pristine credit want to buy a car, they cannot secure financing. GMAC is cutting its lending. Businesses that rely on commercial paper must depend on the direct commercial paper lending from the Fed to pay off maturing loans. It remains a dire financial crisis. Even the temporary suspension of required mark-to-market accounting rules for recognizing current values, a change I suggested, would be no panacea.
The root cause of the financial industry problem is plunging home prices. Soaring home mortgage deliquencies, defaults and foreclosures make still lower home prices a virtual certainty. This promises to undermine the market value of mortgages and mortgage-related paper still further, creating even larger losses for those institutions holding this toxic paper. That requires more and larger injections of capital so that the financial institutions can recognize the losses and still survive. Until this vicious cycle is broken, with an end to the drop in home prices, there can be no confidence that either the underlying or consequent probems of the financial system are being resolved.
There are a number of approaches that can hope to be sucessful in ending the decline in home prices. A Federal, State and local program to buy vacant homes at depressed prices could help. It might well encourage private vulture funds to accelerate their real estate purchases. A moritorium on foreclosures would also accomplish much. Offering home owners in mortgage distress an opportunity to sell an equity stake in their homes in exchange for a partial paydown of their mortgage might also ameliorate the problem. There could also be a temporary or permanent reduction in onerous mortgage terms for homeowners confronted with foreclosure. These suggestions are merely a variation on approaches tried sucessfully in the Depression and during the housing collapse in Mexico in the mid-1990s. Until home prices stabilize and the various other underlying problems besetting financial institutions are effectively resolved, it is only prudent to remain cautious, liquid and safe in your investments.
Philip Braverman, President
Braverman Economic and Finance Consulting
One Hewitt Square #249
East Northport, New York 11731
Email address: philipbraverman@Gmail.com
Saturday, October 11, 2008
No bottom yet in equity and home prices, credit crunch, deflation or recession pain
Despite signs in the futures market of an equity market rally Monday on the new G-7 and EU coordinated policy initiatives, there is still almost certainly more financial and economic pain to come.
The cyclical lows are virtually certain to be still ahead in the equity price indicies. This dire forecast is despite the steep declines of 18 percent last week in both the Dow and S&P 500 indicies, the worst one-week recession decline since 1933. Over the past twelve months, the Dow is down 40%, while the S&P 500 is down 43%. These twelve-month percentage drops now exceed the total cyclical equity market decline associated with every post World War II recession with the sole exception of the 45% drop in the Dow from January 1973 through December 1974. But that decline was extended over 23 months, not 12 months as in the current more precipitous drop. Moreover, that cyclical equity market decline hit bottom only four months before the recession ended. In the current recession, the economic decline is only now intensifying significantly and is likely to extend for a number quarters, quite probably through all of 2009 and perhaps into 2010. Given a typical 5 months between the end of the drop in equity prices and the subsequent end of the recession, it would seem to be far too soon ahead of the probable end of this extended recession for the cyclical decline in equities to come to an end. Even an optomistic view that put the end of the recession this Spring would place the bottom of the equity market decline at year end.
The current widespread and increasingly proliferating credit crunch and housing debacle are far more reminiscent of the the 1930s depression than of the typical post World War II recessions. If that is even an approximate template for the current cycle decline in equity prices, we are in for a further steep slide. In the March 1937 through March 1938 period the Dow fell 49%, while between September 1929 and July 1932 the drop was an horrendous 89%. Considering that despite colossal mistakes currently, we are still doing far more things right now than in the Depression. Thus a judgement call would suggest an equity price drop far closer to the 49% than the 89% ends of that unpleasant spectrum. But, that does not imply that prices will continue falling in a staight line. There are almost always sptacular bear market rallies on the way to the bottom. And sometimes those short-covering rallies are so virulent as to be mistaken for a cyclical turnaround.
To some observers, equity prices are already low enough to be considered highly attractive. And for some stocks the lows might even be in place, especially for some financials. But that is not a sufficient reason for the overall stock market decline to come to its cyclical end. Certainly not when the decline in corporate profits is projected to accelerate amidst an intensifying global recession, a consumer and business spending contraction, a worsening housing slump, a yet to be alleviated credit freeze and a commodity price slide.
Perhaps most worrisome is the historical precedent that seems to dictate that whenever the ten-year lagged average of the price-earnings ratio of the stock indices exceed 20, as they have in recent years, this measure ultimately falls to 9 or below. That was the experience following the above 20 price-earnings peaks in 1901, 1929 and 1966. And it is likely to also be the experience currently. To repeat that pattern would require a substantial drop from here, especially considering that corporate earnings are also receding.
The dividend return on equities is also still well below its historic mean, let alone the traditional rule of thumb rule that calls for buying equities only when the dividend return is 6%, and selling when the divdend return declines to 3%.
The dividend rate of return is still far from that traditional buying trigger.
As if this equity market plunge and the consequent loss of wealth was not enough of a source of financial and economic distress, the banking system is frozen. Because bank deposits are not completely insured, banks are fearful of an unanticipated run by large depositors (in excess of $250,000), as has occurred with investment banks , hedge funds and insurance companies. That risk encourages banks to conserve cash and short term assets instead of expanding lending. The reported US Treasury proposal to temporarily insure interbank lending would certainly help free up such lending. The injection of Government funds in the banking system would also help shore up bank solvency. However,there seems to be no end to the array of problems besetting the financial markets and the economy despite the desperate efforts of the authorities to solve them. Thus, I am far from optimistic over likely sustained rally prospects for the equity market or an early recovery in the economy.
Philip Braverman, President
Braverman Economic and Finance Consulting
One Hewitt Square #249
East Northport, New York 11731
E-mail address: philipbraverman@Gmail.com
The cyclical lows are virtually certain to be still ahead in the equity price indicies. This dire forecast is despite the steep declines of 18 percent last week in both the Dow and S&P 500 indicies, the worst one-week recession decline since 1933. Over the past twelve months, the Dow is down 40%, while the S&P 500 is down 43%. These twelve-month percentage drops now exceed the total cyclical equity market decline associated with every post World War II recession with the sole exception of the 45% drop in the Dow from January 1973 through December 1974. But that decline was extended over 23 months, not 12 months as in the current more precipitous drop. Moreover, that cyclical equity market decline hit bottom only four months before the recession ended. In the current recession, the economic decline is only now intensifying significantly and is likely to extend for a number quarters, quite probably through all of 2009 and perhaps into 2010. Given a typical 5 months between the end of the drop in equity prices and the subsequent end of the recession, it would seem to be far too soon ahead of the probable end of this extended recession for the cyclical decline in equities to come to an end. Even an optomistic view that put the end of the recession this Spring would place the bottom of the equity market decline at year end.
The current widespread and increasingly proliferating credit crunch and housing debacle are far more reminiscent of the the 1930s depression than of the typical post World War II recessions. If that is even an approximate template for the current cycle decline in equity prices, we are in for a further steep slide. In the March 1937 through March 1938 period the Dow fell 49%, while between September 1929 and July 1932 the drop was an horrendous 89%. Considering that despite colossal mistakes currently, we are still doing far more things right now than in the Depression. Thus a judgement call would suggest an equity price drop far closer to the 49% than the 89% ends of that unpleasant spectrum. But, that does not imply that prices will continue falling in a staight line. There are almost always sptacular bear market rallies on the way to the bottom. And sometimes those short-covering rallies are so virulent as to be mistaken for a cyclical turnaround.
To some observers, equity prices are already low enough to be considered highly attractive. And for some stocks the lows might even be in place, especially for some financials. But that is not a sufficient reason for the overall stock market decline to come to its cyclical end. Certainly not when the decline in corporate profits is projected to accelerate amidst an intensifying global recession, a consumer and business spending contraction, a worsening housing slump, a yet to be alleviated credit freeze and a commodity price slide.
Perhaps most worrisome is the historical precedent that seems to dictate that whenever the ten-year lagged average of the price-earnings ratio of the stock indices exceed 20, as they have in recent years, this measure ultimately falls to 9 or below. That was the experience following the above 20 price-earnings peaks in 1901, 1929 and 1966. And it is likely to also be the experience currently. To repeat that pattern would require a substantial drop from here, especially considering that corporate earnings are also receding.
The dividend return on equities is also still well below its historic mean, let alone the traditional rule of thumb rule that calls for buying equities only when the dividend return is 6%, and selling when the divdend return declines to 3%.
The dividend rate of return is still far from that traditional buying trigger.
As if this equity market plunge and the consequent loss of wealth was not enough of a source of financial and economic distress, the banking system is frozen. Because bank deposits are not completely insured, banks are fearful of an unanticipated run by large depositors (in excess of $250,000), as has occurred with investment banks , hedge funds and insurance companies. That risk encourages banks to conserve cash and short term assets instead of expanding lending. The reported US Treasury proposal to temporarily insure interbank lending would certainly help free up such lending. The injection of Government funds in the banking system would also help shore up bank solvency. However,there seems to be no end to the array of problems besetting the financial markets and the economy despite the desperate efforts of the authorities to solve them. Thus, I am far from optimistic over likely sustained rally prospects for the equity market or an early recovery in the economy.
Philip Braverman, President
Braverman Economic and Finance Consulting
One Hewitt Square #249
East Northport, New York 11731
E-mail address: philipbraverman@Gmail.com
Saturday, October 4, 2008
Even with the rescue package, a deepening recession is confirmed by the latest data
Expect the recession to worsen, the credit crunch to remain pronounced, corporate profits to weaken, equity prices to decline further and Treasury yields to trend lower with the decline in commodity prices and lessening in inflation. The yield spreads from Treasuries to lesser credits will continue wide or probably widen further as doubts over credit quality proliferate. And the Fed will ease further.
The enactment of the $700 billion Federal rescue package, together with $150 billion in other financial sweeteners, will only mitigate the severity of the deepening recession clealy evident in the latest slate of economic data.
The September employment report with its 159,000 drop in nonfarm payrolls, substantially worse than in preceding months, hints at worse to come. This is the average monthly level of nonfarm payroll declines in the last recession. Moreover, much of the rise in weekly initial claims for unemployment benefits came late in September, well after the roughly midmonth timing of the nonfarm payroll survey, For example, initial claims were at 497,000 in the week ending September 27, 496,000 in the week ending Septmber 20, clearly above rule of thumb recession levels, and up from 461,000 the week before. Thus, there is reason to expect the next nonfarm payroll drop, in the October report, to be at least as large if not larger than the latest plunge, especially with the Boeing strike. This appears confirmed by the Challanger, Grey and Christmas report of announced and planned layoffs, which are up a third from a year ago. With the credit crisis and consumer spending constraint, expect a continuing wave of layoffs even worse than the 159,000 in September.
Aggregate hours worked in the employment report declined in September, probably sufficient to create a slight negative in third quarter real GDP growth. That sets the stage for a more significant drop in fourth quarter real GDP growth despite the recent decline in energy prices.
The Institute for Supply Management manufacturing Index fell to sharply to 43.5 in September, below the 44 level that is considered a clear indication of recession.
Car sales plunged in recent months. Even with special sales incentives, GM sales were down sharply, though not as severly as the drop in Ford sales. Foreign car producers also experienced a considerable decline in their US sales. With the worsening credit crunch now affecting auto credit and consumers forced by adverse circumstance to curtail discretionary spending, there is every reason to expect the weak auto sales to persist for an extended period.
The stock market's continued selloff after the enactment of the Federal rescue package indicates that the market correctly expects that the set of initiatives will not prevent the credit crunch or the recession from continuing or deepening. The Federal efforts will not prevent home prices from declining further or materially lesson homeowner distress. Losses on mortgage paper will persist, as will the need for financial institutions to raise additional capital just in order to take losses. That is a long step away from an expansion of credit. The Fed will find it neceesary to lower the funds rate further, probably by at least a half percentage point.
The Friday decline in Treasury yields reinforces the view that Treasury yields are still in a downtrend even with the prospect of a substantial increase in borrowing. The reason is that inflation expectations, the prime determinant of Treasury yields, are declining with the deepening recession.
Philip Braverman, President
Braverman Economnic And Finance Consulting
One Hewitt Square #249
East Northport, New York 11731
E-Mail Address: philipbraverman@Gmail.com
The enactment of the $700 billion Federal rescue package, together with $150 billion in other financial sweeteners, will only mitigate the severity of the deepening recession clealy evident in the latest slate of economic data.
The September employment report with its 159,000 drop in nonfarm payrolls, substantially worse than in preceding months, hints at worse to come. This is the average monthly level of nonfarm payroll declines in the last recession. Moreover, much of the rise in weekly initial claims for unemployment benefits came late in September, well after the roughly midmonth timing of the nonfarm payroll survey, For example, initial claims were at 497,000 in the week ending September 27, 496,000 in the week ending Septmber 20, clearly above rule of thumb recession levels, and up from 461,000 the week before. Thus, there is reason to expect the next nonfarm payroll drop, in the October report, to be at least as large if not larger than the latest plunge, especially with the Boeing strike. This appears confirmed by the Challanger, Grey and Christmas report of announced and planned layoffs, which are up a third from a year ago. With the credit crisis and consumer spending constraint, expect a continuing wave of layoffs even worse than the 159,000 in September.
Aggregate hours worked in the employment report declined in September, probably sufficient to create a slight negative in third quarter real GDP growth. That sets the stage for a more significant drop in fourth quarter real GDP growth despite the recent decline in energy prices.
The Institute for Supply Management manufacturing Index fell to sharply to 43.5 in September, below the 44 level that is considered a clear indication of recession.
Car sales plunged in recent months. Even with special sales incentives, GM sales were down sharply, though not as severly as the drop in Ford sales. Foreign car producers also experienced a considerable decline in their US sales. With the worsening credit crunch now affecting auto credit and consumers forced by adverse circumstance to curtail discretionary spending, there is every reason to expect the weak auto sales to persist for an extended period.
The stock market's continued selloff after the enactment of the Federal rescue package indicates that the market correctly expects that the set of initiatives will not prevent the credit crunch or the recession from continuing or deepening. The Federal efforts will not prevent home prices from declining further or materially lesson homeowner distress. Losses on mortgage paper will persist, as will the need for financial institutions to raise additional capital just in order to take losses. That is a long step away from an expansion of credit. The Fed will find it neceesary to lower the funds rate further, probably by at least a half percentage point.
The Friday decline in Treasury yields reinforces the view that Treasury yields are still in a downtrend even with the prospect of a substantial increase in borrowing. The reason is that inflation expectations, the prime determinant of Treasury yields, are declining with the deepening recession.
Philip Braverman, President
Braverman Economnic And Finance Consulting
One Hewitt Square #249
East Northport, New York 11731
E-Mail Address: philipbraverman@Gmail.com
Subscribe to:
Posts (Atom)