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Global Recession

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sandiegosmith
Foreign Minister

Tue Oct 09, 2007 8:18 am

Ever since the US Federal Reserve began the latest series of interest rate increases under Greenspan, I had expected the US and the world to enter into a recession. The present Fed Chairman recently cut interest rates by .5% due primarily to two concerns: the coming global recession and to prop up the world's stock markets. By cutting interest rates he has fueled inflation and accelerated the decline of the US dollar versus other floating currencies.

Since the beginning of the summer, my main stock trading strategy has been to place selected bets on stock share price declines. It's been a lot easier to predict losers than gainers. The US stock market has been held up mainly by wishful thinking in the past few months.

As the latest proof that we are at the beginning of a global recession I offer this article in today's Los Angeles Times.

Quote:

...
Cargo containers crammed with foreign-made goods that were supposed to set a record in August at major U.S. ports took an unexpected turn, with imports sinking 1.4% in another sign of the slowing of the economy.

Imports of items as diverse as toys and tiles could also be lower in September and October, when retailers will be stocking shelves for the holidays, because shell-shocked shoppers are expected to continue to pull back.

...
The falloff "reflects the consumer-demand-driven weakness in the U.S. economy," said Paul Bingham, an economist with Global Insight, a research firm that monitors cargo movements for the nation's top retailers.

The slump in oceangoing imports unloaded at the 10 largest U.S. container ports in August was the first drop since Global Insight began its monthly Port Tracker report in 2005. The number stunned some port watchers.

"When I first saw these numbers, I called the researchers and asked them if they had left a column out of the spreadsheet. I thought it was a typo," said Craig Shearman, vice president of the National Retail Federation, which pays Global Insight to conduct the trade research.

In Fountain Valley, Gary Bedrosian wasn't surprised. The owner of Bedrosian Tile & Stone said he had cut orders by about 15% this year compared with 2006 because new-home construction has plummeted.

"Anybody doing business for the housing market has to be off," he said.

When the Commerce Department on Thursday issues its report on international trade for August, both imports and exports are expected to decline after having jumped in July, according to Global Insight.

The firm said exports would far outpace imports -- no doubt because of the weak U.S. dollar, which makes foreign products more expensive.

"The dollar has depreciated so much that American goods are more competitive," said Sung Won Sohn, chief executive of Hanmi Bank in Los Angeles. On the other hand, the import decline "tells you about what retailers are thinking about the holiday shopping season. They've cut back orders."

"Some of our bank customers who are retailers catering to the Hispanic population -- they are having tough times," Sohn added. "They're ordering less because they're not selling as much."

Retailers have been planning for sluggish holiday sales based on recent blows to shopper confidence from high energy costs, a soft employment picture and pricey mortgages.

In addition, slowing home sales mean that furniture, light fixtures and the like are gathering dust in overseas warehouses.
...
From 1997 through 2006, the number of containers handled by the twin ports grew by about 10% a year -- from 6.5 million 20-foot containers to 15.8 million. But through August, the two ports were running less than 1% ahead of last year's record pace of imports and exports.

"It doesn't appear that there will be any real growth this year," said Don Snyder, director of trade relations for the Port of Long Beach.

Imports of building materials plunged 20% in the second quarter from year-earlier figures, the most recent period for which detailed statistics are available. Furniture imports fell 17%, clothing declined 10% and footwear was down 8%, he said.

At the Los Angeles facility, the "ongoing slow-to-flat season is reflective of the weak holiday growth in the retailers' expectations. It would have to be a pretty terrific October to change the overall pattern here," said Jim MacLellan, director of trade services.
...

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posts: 1700 | location: San Diego, Ca. USA | joined: 19 Dec 2001

sandiegosmith
Foreign Minister

Thu Oct 18, 2007 5:45 pm

This article by John Markman. It provides more of the framework of how the recession is coming about. Primarily it's about over-leveraging those high interest rate subprime loans that are now going into default. Far too much speculation has been built into the Bush Jr. recovery. Unfortunately for the Republican party, the economy will be even worse next year than this.

Quote:

...
One of the world's leading experts on credit derivatives, Das is the author of a 4,200-page reference work on the subject, among a half-dozen other tomes. As a developer and marketer of the exotic instruments himself over the past 30 years, he seemed like the ideal industry insider to help us get to the bottom of the recent debt crunch -- and I expected him to defend and explain the practice.
...
Das is pretty droll for a math whiz, but his message is dead serious. He thinks we're on the verge of a bear market of epic proportions.

The cause: Massive levels of debt underlying the world economy system are about to unwind in a profound and persistent way.

He's not sure if it will play out like the 13-year decline of 90% in Japan from 1990 to 2003 that followed the bursting of a credit bubble there, or like the 15-year flat spot in the U.S. market from 1960 to 1975. But either way, he foresees hard times as an optimistic era of too much liquidity, too much leverage and too much financial engineering slowly and inevitably deflates.
...
According to Das' figures, up to 53% of the $2.2 trillion commercial paper in the U.S. market is now asset-backed, with about 50% of that in mortgages.

When you add it all up, according to Das' research, a single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion -- or eight times total global gross domestic product of $60 trillion.
...
As subprime loan default rates doubled, in contravention of what the models forecast, the CDOs those mortgages backed began to collapse. Because they were so hard to value, banks and funds started looking at all CDOs and other paper backed by mortgages with suspicion, and refused to accept them as collateral for the sort of short-term borrowing that underpins today's money markets.

Through late last month, according to Das, as much as $300 billion in leveraged finance loans had been "orphaned," which means that they can't be sold off or used as collateral.
Video on MSN Money
Jim Jubak
What the Fed can’t do
Investors are abuzz over the Fed’s interest-rate decision, but the Federal Reserve can’t fix everything, cautions MSN Money’s Jim Jubak. Lower interest rates alone won’t boost confidence in the debt market.

One of the wonders of leverage is that it amplifies losses on the way down just as it amplifies gains on the way up. The more an asset that is bought with borrowed money falls in value, the more you have to sell other stuff to fulfill the loan-to-value covenants. It's a vicious cycle.
...
As subprime loan default rates doubled, in contravention of what the models forecast, the CDOs those mortgages backed began to collapse. Because they were so hard to value, banks and funds started looking at all CDOs and other paper backed by mortgages with suspicion, and refused to accept them as collateral for the sort of short-term borrowing that underpins today's money markets.

Through late last month, according to Das, as much as $300 billion in leveraged finance loans had been "orphaned," which means that they can't be sold off or used as collateral.

One of the wonders of leverage is that it amplifies losses on the way down just as it amplifies gains on the way up. The more an asset that is bought with borrowed money falls in value, the more you have to sell other stuff to fulfill the loan-to-value covenants. It's a vicious cycle.
...

posts: 1700 | location: San Diego, Ca. USA | joined: 19 Dec 2001

SLOTerp
Dignitary

Thu Oct 18, 2007 7:39 pm

sandiegosmith wrote:

You got that last part right, a poor economy never helps the party at the top. Will the Democratic Congress feel some of that pain too? You imply a connection between speculation (real-estate?) and the Bush recovery. I'm curious as to what you believe that connection is. I would put that on the Fed before I dump it on Bush Jr., not that I mind a good dumping on Bush Yes

Cheap money fuels highly leveraged speculative buying, not tax-cutting and war/homeland security spending.

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sandiegosmith
Foreign Minister

Wed Oct 31, 2007 6:03 pm

Phoenix is having a housing problem; one third of those for sale are sitting empty It doesn't appear likely to me that the US housing and related sectors are going to recover anytime soon, even with the help of Bernake cutting interest rates.

From a US export boosting perspective this is great news as it further weakens the US dollar. Which is why oil and gold continue to go up along with the Euro. Oil now sits at a record high of over $94 per barrel.

Bernake apparently feels that it is more important to minimize the recession than inflation.

I like the idea of a weak dollar and hope Bernake continues to weaken it with further interest rate cuts. It will be a US job booster which is needed with housing's crash.

Quote:

...

At least one out of every three homes for sale across metropolitan Phoenix is empty, and owners are motivated to cut prices to sell.

Many empty houses are owned by investors who can't find renters and need to sell. Others are owned by people who moved to other houses in the Valley or elsewhere and can't afford two mortgages. Some empty homes for sale are new houses that home builders are offering deals on. And a growing number of vacant houses are owned by lenders that foreclosed on the properties and want to cut their losses by selling them quickly and often cheaply.
...

posts: 1700 | location: San Diego, Ca. USA | joined: 19 Dec 2001

sandiegosmith
Foreign Minister

Wed Oct 31, 2007 6:12 pm

SLOTerp wrote:

You imply a connection between speculation (real-estate?) and the Bush recovery. I'm curious as to what you believe that connection is. I would put that on the Fed before I dump it on Bush Jr., not that I mind a good dumping on Bush Yes

Cheap money fuels highly leveraged speculative buying, not tax-cutting and war/homeland security spending.

Tax cutting for the speculative class that seek high returns on investments along with easy and cheap credit from the Fed provided the air for this bubble. Little of this money was used to build additional manufacturing capacity in the USA.

The biggest job growth in the Bush Jr. recovery has been in the various levels of government or government dependent businesses.

posts: 1700 | location: San Diego, Ca. USA | joined: 19 Dec 2001

Pigmalia
Dignitary

Wed Oct 31, 2007 7:21 pm

Vote for Ron Paul and support the gutting of the Fed.

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posts: 4729 | location: Autonomous Inland Empire - Occupied | joined: 02 Feb 2006

Riaz
Foreign Minister

Thu Dec 06, 2007 1:55 am

Two questions arise...

Since when does slow growth in the USA mean a Global Recession? The irresponsible language used in articles is getting tiresome. This is why uncertainty gets worse.

Secondly, how does the word recession get used? A recession is two consecutive quarters of negative growth. Can anyone find me even a single document that shows that the USA had 1 negative growth quarter in the last year, let alone 2? I can assure you that every market has had positive growth.

Is there a major problem out there? Not yet. It is the financial sector that is taking a beating, other sectors are doing ok. And, it shouldn't all be blamed on sub-prime lenders. Yes, they were foolish. But, what about hedge fund managers, and banks that purchased the sub-prime loans? It is their stupidity that has caused all this mess. Think about it, you lock into a hedge fund (and you did no research - shame on you), and then when the crisis comes, you can't get out of it. So, what do you do? You have to sell your good equities. As a result, the price of good equities goes way down and bad ones go up. Thats the opposite of what logic would dictate.

There are excellent returns to be made folks. Invest in Canada and Asia right now. Canada is great, because you will get currency appreciation to go along with other gains. Plus, its my home Smile

If something is too good to be true, don't put your money into it.

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sandiegosmith
Foreign Minister

Wed Dec 19, 2007 7:40 pm

Canada and Mexico's economies remain directly dependent on the USA for their well being. If the USA sneezes they will catch a cold.

This article by a private economic forecaster sees a recession coming in the USA. With the USA accounting for about 21% of the global GDP and it being such a profligate importer, if it's economy slows down so will much of the world's.

Quote:

WASHINGTON (MarketWatch) -- The U.S. economy is teetering on the brink of recession, with a contraction likely in the current quarter, says David Resler, the winner of MarketWatch's Forecaster of the Month award for November.

"Lots of things have to happen quickly to avoid it," Resler said of the possibility of recession.

Resler, chief economist of Nomura Securities, figures the economy is shrinking at a 0.3% annual rate in the current quarter and he fears that the credit squeeze could have "significant impact on business borrowing and capital spending, and on consumer credit."

So far, however, the credit squeeze hasn't shut down the economy. "It's hard to quantify what you can't see," he said.
"If it isn't as bad as it sometimes looks, we're likely to get through this without being seriously scathed," Resler said.
...

posts: 1700 | location: San Diego, Ca. USA | joined: 19 Dec 2001

rickyp
Statesman

Thu Dec 20, 2007 5:23 pm

Quote:

Small point, but the expansion of the Chinese economy at a 12% rate, and the expansion of the Indian economy as well may make up for much of this. Particularly for economies that are bouyed by increasing energy and raw material importation by China. (See Canada and Mexico) As well, since much of the export from Mexico and Canada into the US is energy ..... to a large extent this is not as deeply affected by recession.. (Fuel is pretty much a required purchase for most American commuters and truckers...)

There is some talk in Canada that we might not feel the effects of an American recession all that deeply. Especially as the Canadian dollars relative rise has begun to make many imports to Canada cheaper. Don't know about the view from Mexico, but I'm guessing that their number 2 source of foreign capital, remitances from US workers, will continue unabated.

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Danivon
Ambassador

Fri Dec 21, 2007 12:29 pm

Riaz wrote:

Since when does slow growth in the USA mean a Global Recession? The irresponsible language used in articles is getting tiresome. This is why uncertainty gets worse.

It has to be said that constant predictions of doom in financial markets will make it more likely. Investors will be bullish or bearish depending on their confidence, not necessarily out of some innate ability to predict the future. A significant trend can be exacerbated by panic.

Quote:

Is there a major problem out there? Not yet. It is the financial sector that is taking a beating, other sectors are doing ok. And, it shouldn't all be blamed on sub-prime lenders. Yes, they were foolish. But, what about hedge fund managers, and banks that purchased the sub-prime loans? It is their stupidity that has caused all this mess. Think about it, you lock into a hedge fund (and you did no research - shame on you), and then when the crisis comes, you can't get out of it. So, what do you do? You have to sell your good equities. As a result, the price of good equities goes way down and bad ones go up. Thats the opposite of what logic would dictate.

The problem is that the lenders and the people who bought the loans are all far more wary than they were just a few months ago. This is causing market interest rates to go up and loans to be much harder to come by. The number of take-overs has slumped because companies are finding it harder to leverage the debt they need to buy out. This is having an impact in other sectors, and it has spread to Europe (which has seen better growth than the US recently).

Additionally, if residential borrowers are finding it harder to borrow, or they find it harder to service their current debts, that will mean less cash being spent, which can affect all sectors gradually.

Ultimately, the current situation is bad, but not recession. However, with the current climate another reversal (say, something that caused a spike in unemployment) could trigger major problems. I wouldn't say that recession is inevitable, but it is more likely. As it is, I think that the Fed had little choice but to cut interest rates, and like many central banks, it is trying to help banks to be able to borrow with more confidence in order to smooth the path.

Quote:

There are excellent returns to be made folks. Invest in Canada and Asia right now. Canada is great, because you will get currency appreciation to go along with other gains. Plus, its my home Smile

If something is too good to be true, don't put your money into it.

So, should I invest in Canada and Asia or not? Only it sounds too good...

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Tezcatlipoca
Civilian

Fri Dec 21, 2007 1:08 pm

Don't go too overboard with the "expansion of the Chinese economy" stuff... recently adjusted estimates by the World Bank state that China's economy is only half of what was previously estimated at and what Beijing said.

How do the Chinese get 9-12% growth every year?

That's what they decide they want to put in the newspapers, economic statistics be damned... that's not to say that China's economy isn't growing, but not quite as much as it's been ballyhooed.

Danivon
Ambassador

Fri Dec 21, 2007 4:00 pm

Gosh! do you think that the CPPRC has been indulging in propaganda!! Who'd have thunk it?

China should not be overestimated, but it should not be underestimated either. Certainly they are very good at undercutting Western suppliers for manufactured goods (just as India is good at undercutting Western suppliers for services). It seems to me that the Chinese economy is also reliant on expanding markets, and the continuation of a market in the USA. If the USA continues to lower the dollar, it will hit Chinese exports. If the US economy contracts, it will hit Chinese exports. If the EU economy is also affected by changes in the US, it will hit Chinese exports. If Chinese exports are hit, then China will have a problem with their own foreign investments and imports of raw materials. That would have a knock on effect on South East Asian economies and now Africa.

posts: 8520 | location: Rugby, Warwicksire, UK: Home of the oddly-shaped ball | joined: 15 Apr 2004

sandiegosmith
Foreign Minister

Sat Dec 22, 2007 7:07 pm

This report by the US government illustrates pretty well who are the major trading partners with the USA. What it doesn't show is the smaller nations of the world who's largest or 2nd largest export market is the USA.

Quote:

...
Goods by Geographic Area (Not Seasonally Adjusted)

* The goods deficit with the European Union increased from $6.4 billion in September to $11.9 billion in October. Exports increased $1.0 billion (primarily nuts, precious metals, nonmonetary gold, and civilian aircraft engines) to $21.7 billion, while imports increased $6.5 billion (primarily pharmaceutical preparations and passenger cars) to $33.6 billion.
* The goods deficit with Japan increased from $6.2 billion in September to $8.0 billion in October. Exports increased $0.3 billion (primarily nuclear fuel materials) to $5.6 billion, while imports increased $2.1 billion (primarily automotive vehicles, parts, and engines) to $13.5 billion.
* The goods deficit with China increased from $23.8 billion in September to $25.9 billion in October. Exports increased $0.1 billion (primarily soybeans) to $5.7 billion, while imports increased $2.2 billion (primarily toys, games, and sporting goods; TVs and VCRs; computers; and telecommunications equipment) to $31.6 billion.
...

My main point of contention is that a slowdown or recession in either of the world economies that are the major import markets, i.e. Europe and the USA will immediately ripple back to the countries that depend on exports to these markets, which is most of the world.

China, India, Japan, Brazil, Indonesia, and Russia will be in a similar position in the world economy only when they develop a taste for imported goods, which will mean that they have developed a significant middle class. These nations can have financial crisis that will cause the the big importers to sneeze, but not catch cold. The damage from their crises is limited mainly to the big lenders and hedge funds. One has only to look to the immediate past and see that this is true.

If the US and/or European middle class has less discretionary money to spend on their trinkets or services to whom will China and India sell to make up the shortage? Their workers remain pitifully underpaid and represent a market mainly for staples such as food, shelter, and clothing, predominantly at the low price end of the commodity range. Sure they are discovering fashion, but it is through cheap counterfeit goods.

This lack of a middle class market is also one of the main reasons why the "gold rush" mentality of the westerners to export to these nations has failed. Another major reason being that these markets remain largely closed to foreigners through high tariffs, currency manipulation, and other import discouraging dodges. Contrary to WTO propaganda, there is no such thing as "free trade" with these nations. However they are free to feel the middle class pain in the West as their export markets decline in the near future due to the looming recession in the USA.

posts: 1700 | location: San Diego, Ca. USA | joined: 19 Dec 2001

SuperAnt
Dignitary

Sun Dec 23, 2007 8:46 pm

You're over-estimating the actual effect of the US economy on the world economy. No one will ever say the US has no effect. It is the biggest importer in the world. But thus far, the other major markets have only experienced a slight dip, while most minor markets have varied only slightly from that dip. The Euro has strengthened against the US dollar, but slipped slightly overall. The Chinese economy has slowed slightly, but that's also due in part to the economic over-heating that is occuring over there. The Canadian economy (as an example of a minor market) has actually strengthened substantially because of its strong base in energy and oil. Other minor economies that depend on the US don't tend to make the luxury items that Americans use. Most of these economies deal in energy, oil, natural resources, etc....markets that don't fluctuate that much.

What you have to remember is that the domestic US economy and the international economy are not tied together 100%. Yes, they have effects on each other on many different levels, but they are not going to walk in sync all the time. For 50 years, the US economy was over-inflated compared to it's actual value. The huge demand for the greenback between the 1940's and 1990's sent it's value through the roof. But the Euro's rise, and the growth of China, Japan and India have reduced the demand for the US dollar. The current withdrawal of the US economy, and the lack of any major ripples internationally, appears to indicate that the US economy is simply retreating to what it actually is....one of the 3 1/2 major economies in the world (USA, Europe, China, Japan getting the 1/2). The US decline won't bring the world into a recession by any means.

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sandiegosmith
Foreign Minister

Tue Jan 15, 2008 12:20 pm

This article on the Dow Jones News wire shows how more and more companies are publicly acknowledging that the Recession is either here or almost. Unfortunately it is on a secure link. The Fed is so desperate to head it off that they are expected to cut interest rates by 500 points.

Quote:

CONSUMER UNDER STRESS: US Companies Sound Warnings
Dow Jones Newswires - January 11, 2008 10:48 AM ET

Recent comments from U.S. companies indicate the national may be closer to a recession than many expected.

Goldman Sachs & Co. (GS) on Thursday said an "outright" U.S. recession may have already arrived, and looking at warnings from U.S. companies over the last week, it would be hard to argue.

December's retail sales results and other warnings over the last week imply that consumers are already feeling the pinch as falling home values and tightening credit work together to sap spending. Investors will be looking for further evidence of a downturn as earnings season picks up next week.

In the conference call discussing his company's take over of Countrywide Financial Corp. (CFC), Bank of America Corp. (BAC) Chief Executive Kenneth Lewis said he expects "weakness in housing throughout 2008 and mortgage volumes to continue to decline as a result." KB Home (KBH) and M/I Homes Inc. (MHO) expressed similar sentiments earlier this week.

Unemployment last month jumped and economists have dramatically raised the odds of a recession to 42%, according to the latest WSJ.com survey, compared with 23% six months ago.
...
In a sign that economic difficulty may spreading to more affluent consumers, credit card company American Express Co. (AXP), whose customers are known for their affluence, said it would take a $275 million fourth-quarter charge to cover all pass-due loans and increase its charge-card reserves as well. Until recently, companies focusing on the relatively well-off were thought to have sidestepped the dip in the U.S. economy. Even high-end retailer Tiffany Inc. (TIF) on Friday reported some U.S. weakness.
...

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