Dr. Jim Willie, (Ph.D. in Statistics from Carnegie Mellon) writes about the ripple effect from the housing downturn, the momentum gathered as this huge market falls, and the feedback loop. Very good stuff.
Excerts of his article follow:
It is clear to all but the most blind mavens that the USFed is finished with interest rate hikes. Inflation fears are cited only by goofy Fed Governors, paid to speak stupidly. The USFed will, just like in 2001, suddenly act to stimulate the USEconomy in a matter of a few months, with interest rate cuts. Gold will love it.
My forecast is that retail spending will be the last piece to fall into place. Ironically, that is precisely what financial market observers are looking for in order to conclude an economic slowdown. THEY AWAIT THE LAGGING INDICATOR, NOT ANY LEADING INDICATOR LIKE RANK AMATEURS. Cut in half, home equity extraction no longer comes to the economic rescue. The peak annualized cash jerked out of homes was $732 billion in 3Q2005. The latest recorded figure is $327 billion in 2Q2006, down by over half. Retail consumption and the ability to sustain households are at great risk.
Beware that the US tendency to devote the majority of construction outside the sectors known for productive capacity is a defect of the USEconomy. Houses do not generate ongoing income like a factory. This is precisely where the ripple effects will be felt, the initial damage. Building of homes, shopping malls, and retail shops is not a viable foundation for any economy, since no productive output. Instead they are severe misallocation of resources, labor, materials, and equipment. We are a nation avidly building bubbles, whether financial or residential. Approximately 90% of US economic growth in recent years is derived from the housing bubble and consumer spending, a dire signal. Meanwhile in the last year, consumer spending growth has outpaced income growth by a 3:1 factor.
…my forecast is for a major home builder to declare bankruptcy sometime next year in a major shock announcement. KB Home is the prime candidate. The HGX home builder stock index is likely to lose over 75% of its peak value.
Domestic housing pain will force the USFed to cut interest rates, as economic and political forces prevail. The USDollar smells it, or one should say FOREX currency traders smell it. They have delivered a serious blow in the last three weeks to the clownish USDollar whose fundamentals resemble a Third World currency. More USDollar declines lie directly ahead. Gold, silver, oil, and natural gas will love it, and jump for joy in a higher price.
The momentum effect will gradually dishearten US policy makers in the banking community. The soft landings in both the USEconomy and the US housing market are fairy tales. As the tale is let go in favor of more reality, the US Federal Reserve will be forced to lower interest rates.
We have yet to hear much of foreclosure home sales by banks, which is two stages away on the staircase of events. The final signal of the housing bust will be the sale of realtor agent homes, after they go bust. You will hear about it in California and Denver first in a river of tears.
The worst will be over only after at least one and possibly two national home builder companies go bankrupt. They still are logging huge land lease losses. At the current pace, home builders continue to add 1.7 million units onto the market, almost 50% above demand, and clearly above population growth. When completed, they will add further to inventory.
He predicts, “Expect the USFed to surprise the markets sometime between January and March with a desperate rate cut. Watch the USDollar then descend rapidly, then approach the DX=80 mark. Gold will react positively in anticipation.”
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