by Calculated Risk on 4/22/2005 11:26:00 AM

It appears that oil prices have started to slow the US economy. But less developed countries are really feeling the pinch. Speaking at the Asia-Africa summit in Jakarta, Indonesia, Philippine President Gloria Macapagal-Arroyo warned that oil prices could lead to a "global recession".

Arroyo told the meeting in Jakarta, featuring some of the world’s leading oil consumers, that unsustainable prices were driving many countries to the brink of financial instability.

“There’s no question that the rising price of oil has the potential to put the brakes on economic expansion,” Arroyo said, urging delegates to work together to “prevent such a crisis”.

The rising trend of oil prices could worsen to levels that could halt economic growth or even prompt global economic recession, Arroyo said.

“It is stripping oil-importing Asia and Africa of our ability to manage for global competitiveness. It is preventing us from pursuing our economic development programmes with vigor. It is requiring us to face the spectre of economic decline,” she said.

Philippine Foreign Affairs Secretary Alberto Romulo made similar comments at the ministerial meeting of the conference.

"The current trend in oil prices points toward a situation that could halt global economic growth and further widen the gap between the rich and poor countries," Romulo said.

Spot oil prices reached $55 per barrel earlier today.

by Calculated Risk on 4/21/2005 09:01:00 PM

It is common wisdom on Wall Street that the market predicts recessions. This story today quoted a market analyst as saying: "The market typically turns down six months to a year before a recession. We could be seeing a recession in 2006."

We might see a recession in 2006, but the markets are not a good predicting tool.


Click on graph for larger image.

Here is the DOW's performance before and after the start of the last 5 recessions. For each recession, the DOW's value was normalized to 100 12 months prior to the start of the recession. The graph shows the median value, and the minimum and maximum for the DOW.



The best that can be said for the market is that it is a solid coincident indicator of a recession.


Here is a graph from a previous post about recession indicators. This shows the SP500's performance and the 1990's recession. The SP500 rallied into the recession and only sold-off after the recession started.

This is another common Wall Street "wisdom" that is incorrect.


UPDATE: Fixed typo on graph.

by Calculated Risk on 4/21/2005 02:36:00 AM

"There are serious pocketbook issues lurking in America," said Rep. Jim Leach (R- Iowa).

On the front page of Thursday's Washington Post is this analysis by Weisman and Balz, "Economic Worries Aren't Resonating on Hill" The authors make the argument that main street concerns are being ignored by Washington and the media.

The disconnect between pocketbook concerns of ordinary Americans and the preoccupations of their politicians has helped send President Bush's approval ratings on the economy down, while breeding discontent with Congress.

And more:

"Many are rather upset at the Terri Schiavo issue," [Rep. Vernon Ehlers (R-Michigan)] said, even "moderately pro-life" voters. "I'm getting a lot of the, 'Why are you spending time on that when we don't have jobs?' type of thing."

In Michigan, jobs and the economy have vaulted to the No. 1 concern of 34 percent of voters, with the closest other issues, health care and education, at a distant 15 percent, said Ed Sarpolus, an independent Michigan pollster. "I haven't seen anything like that since the early '90s and crime," he said.

And this piece only scratches the surface of the serious economic challenges facing America.

by Calculated Risk on 4/20/2005 10:04:00 PM

At the Milken Institute Global Conference 2005 in LA, several Real Estate executives argued that there is no real estate bubble. A few comments from the "Real Estate: Investing for the Future" panel:

"We're in a market with real depth and real legs on it," said M.D.C. Chief Executive Larry Mizel.

"The big boom of the last 10 years was not seen all through the United States," KB Home Chief Executive Bruce Karatz said. "There's a supply-and-demand balance that I think will stay good for many years."

"The housing bubble has been created more by the business press than reality," said Sam Zell, chairman of Equity Office Properties Trust and Equity Group Investments LLC. "You can't have a crash without oversupply."

I will address the supply issue in a future post. But the final comment from the article is worth highlighting:

"The executives pegged the southwestern U.S. and Florida as best real estate buys"

Enough said.

by Calculated Risk on 4/20/2005 05:36:00 PM

The Economist asks: Will the walls come falling down?

A few excerpts:

The increasing riskiness of mortgages is not the only sign that America is experiencing a housing bubble. The ratio of house prices to rents is well above its historical average, as is the ratio of prices to median incomes. And people seem increasingly to be basing their house-buying decisions on the notion that the large capital returns of the past few years—house prices in America are up by 65% since 1997—will continue indefinitely. As with a stockmarket bubble, if this confidence is shaken, prices could begin to fall rapidly.

More likely prices will deflate slowly over a multi-year period. Housing: After the Boom on Angry Bear looked at the impact on prices and volume transactions in previous busts. Prices deflated slowly, but transactions dropped precipitously.

A fall in American house prices could be bad news not just for American homeowners, but for the rest of the world. Robust American demand has supported export-driven growth in many economies, particularly emerging markets and Asia. If American consumers have to raise their abysmal savings rate, exporting nations will feel the pinch.

And finally this:

Most worryingly, a collapse in American export demand could trigger a vicious cycle. In order to keep their currencies low against the dollar, and thus boost exports to America, Asian central banks have been accumulating dollar reserves, which they have poured into Treasury bonds. This has increased the supply of capital in America, and thus been at least partly responsible for the borrowing binge that fuelled the housing boom. If house prices fall, and suddenly poorer Americans have to cut back on their purchases, this will shrink the supply of cheap credit from Asian central banks, pushing up interest rates and causing house prices to fall even further. Those who thought that housing was a haven may be in for a nasty surprise.

Emphasis added.
For a diagram on how this might work, see Housing and Trade: Virtuous Cycle about to Become Vicious? Check out The Economist article and the interesting chart on the global nature of the housing boom.