A theme of this column for almost a year has been the contrast between
apocalyptic views in the financial markets about the earth-shattering
consequences of the credit crunch and the rather more mundane evidence from
the real economy of a mild recession, at worst. My view has been - and
remains - that this episode is likely to be remembered as one of those
extremes of panic or euphoria in financial markets, which tend to reoccur
once or twice every decade, when market prices - of bank shares, of oil, of
the dollar and of several other assets - turn out to be simply wrong.
In making this argument, I have been accused of ignoring market realities and
being blindly contrarian. And I fully agree that contrarian thinking as a
general philosophy is often financially dangerous and intellectually
self-deluding. Oddly enough, though, it seems that at present the analysts
who are doggedly pessimistic are being contrarian and defying economic
evidence. Meanwhile relative optimists, especially about the American
financial system and housing markets, which are generally believed to be the
source of all the world's economy problems, are merely putting forward a
straightforward conventional view.
The consensus view among economists, as opposed to financiers, at present is
that the United States is experiencing, at worst, a mild recession and
perhaps only a typical mid-cycle slowdown. This consensus view is reflected,
for example, in new economic forecasts published by the US Federal Reserve
Board and the IMF in the past two weeks, both of which were revised
significantly higher relative to their expectations of a few months ago.
This relatively benign consensus view is also shared by stock market
analysts outside the financial sector, who generally expect rising profits
in most businesses apart from banking, retailing and real estate.
I would argue, therefore, that the true contrarians at present are the bankers
and headline-writers who keep predicting economic Armageddon. And in the
past two weeks the markets themselves seemed to be coming round to this
viewpoint, taking heart especially from the government guarantees offered to
Fannie Mae and Freddie Mac, the US mortgage giants. Hence the 40 per cent
gain in financial stocks on Wall Street in the week since the US Government
made its mortgage announcements - the biggest weekly gain ever recorded by
any market sector monitored by the Standard & Poor's.
So the financial and economic world appeared to be moving towards a fairly
benign convergence - until the end of last week, when the world economy was
again hit by a flurry of shockingly bad news. Consider some of the
announcements made over a few hours last Thursday and Friday: Britain
revealed the biggest monthly fall in retail sales on record, combined with
an abrupt slowdown in GDP growth. In continental Europe, there were plunging
business confidence and industrial order figures in Germany, France and
Italy. Japan saw its first monthly fall in exports for five years, while
America reported worse than expected figures on home sales and unemployment
claims. Does all this mean that the earlier pessimism in financial markets
is proving to be right, after all?
Let me begin with the bad news. Conditions in Britain and continental Europe
are certainly deteriorating faster than many investors had expected. But the
shock about bad figures from Europe - for example, the biggest monthly fall
in German business confidence since 9/11 - mainly reflects the refusal of
euro-bulls to acknowledge previous evidence of a European slowdown, rather
than any genuinely “new” news. It has been obvious for several months that
British housing and retailing were on the verge of a breakdown and the
continental economy's apparent strength in the first quarter was an
illusion.
In Germany, for example, the swing from boom to bust had long been clearly
visible in the statistics and government spokesmen had already said that the
economy was in a period of negative growth. Retail sales in Germany have
been falling almost continuously since the beginning of 2007, when the
Government imposed a misguided VAT increase, while the growth of German
exports was always dependent mainly on the unsustainable consumption and
housing booms in France, Britain and Spain.
Elsewhere in Europe a similar, but perhaps even more alarming story, has also
been unfolding for months - and all that occurred last week was a
confirmation of evidence that the markets should already have taken on
board. Key measures of business activity and confidence fell much more than
expected this week in France and Italy, as well as in the eurozone as a
whole.
Meanwhile, British retail sales suffered their biggest monthly fall on record,
Spanish unemployment jumped to 10.4 per cent- much more than expected - and
Danish consumer confidence plunged to a 16-year low and Swedish unemployment
suddenly jumped from 5.9 per cent to 8.1 per cent. In Japan, too, the
weakness of exports revealed last week should have come as no surprise. It
has long been obvious that Japan, like the rest of Asia, was in a transition
from export-led to domestic-led growth.
But if Europe or Japan were really the biggest worries for investors, then the
main reaction in the markets would have been to sell the euro and the yen
against the dollar, rather than trashing equities around the world. Instead,
the euro and the yen strengthened, as did the price of oil. Which leaves the
other economic disappointments that supposedly hit financial sentiment last
Thursday - the apparently terrible American housing and employment news. And
here we come to the relatively good news about the state of the world
economy today.
Last week's sudden reversal in asset prices was mainly attributed to
ever-deeper anxieties about the US real estate market, where home sales fell
by more than consensus expectations in June. The impact of these
disappointing figures was then aggravated by a paper by Bill Gross, the
influential chief executive of the world's biggest bond investor, Pimco,
which predicted that US banks would lose at least $1 trillion in the credit
crunch, rather than the $400 million to $500 million already discounted in
the value of bank shares. To explain these alarming figures, Mr Gross
maintained that no end was in sight for the housing slump: US housing, he
insisted, is the world's “one asset class that all observers can agree is
going down”. Except that it isn't.
The median existing-home sale price surveyed by the National Association of
Realtors in June was $215,100. Bloomberg and Reuters reported this as 6.1
per cent lower than a year earlier. But it was 3.5 per cent higher than the
median price in May - and that price, in turn, was 3.3 per cent above the
price in April. In fact, US house prices, which almost everyone believes to
be in freefall, have actually been going up for the past four months, after
reaching a trough of $195,600 in February.
Of course, there are strong seasonal factors in house prices and the NAR
cautions that its house price index should be used primarily for
year-on-year comparisons. But even on this basis, June's 6.1 per cent
year-on-year drop was smaller than the 6.4 per cent drop reported in May and
a marked improvement on the record declines of 8 per cent plus in each of
the previous three months. At the same time, the inventory of homes for sale
was steady at 4.49 million homes, which amounted to 11.1 months of supply,
down slightly from the supply level in April. In Britain and the rest of
Europe, by contrast, house prices have started falling only recently, are
still much higher above historical averages than in America and are
suffering a rapidly accelerating rate of decline. The oversupply of unsold
housing is also growing by the day.
In short, the housing correction - and related credit crunch - appears to be
at or near its low point in America, while in Britain and the rest of Europe
the trouble has only just started. Of course, it is possible to cite
different housing indices, on both sides of the Atlantic, which tell
different stories (although the NAR index is the one with the longest
statistical history and most timely of all the indicators of house prices).
All I want to emphasise at this point is that signs of stabilisation are
starting to appear in US housing statistics, while all the economic figures
from Europe continue to deteriorate fast. This is a contrast the markets do
not seem to have noticed - yet.
anatole.kaletsky@thetimes.co.uk
when will Bruin realise that you cannot have an economy based on advertising and hairdressing?Maggie's ill- founded belief in a service based economy was foolish and so is Bruin's
peter c, Devizes, Wessex
Anatole, great article and I hope you are right about it all.
Mac, Manchester, UK
Anatole,
Are you blind? New news: USA house prices declining today (Case Schiller, 17% market is repossesions, etc). Inflation is high globally (& long bonds down). Stock markets are down 2 yrs (and that is real pockets). Borrowing is expensive today, slowing investment. Defaults rising.
Mark Burton, London, UK
stocks are bullish (make no mistake we have based), oil is due to steadly fall all the way back to the $50 mark over the next 2 years and the USD is due to strengthen from here to the end of the year. the uk housing market will continue to fall well into 2009 but that aside the world is fine
mk, london,
Anatole,
Unfortunately, you are very very wrong!
You are basing your analysis on the position today. Look ahead and you will see that these events have only just begun. By Spring 2009, what we are about to experience should have become more apparent.
I hope you are right!
Clive, Cambridge,
Anatole, the worst may be over as regards inflation but this is a full blown recession, make no mistake.
peter, athens,
I think this guy is just weeding out the information of value from the noise.... Isinit that right?
slawek, london, uk
Re:
"Anatole, help me through this confusion; what should I be investing in now if this is really the bottom?"
paddles, London,
Ask your mates at the water cooler sir, I am sure they will help you sincerelily.
Regards
slawek, london, uk
Re:
" Inflation has now showed up in Japan and if the Japanese decide to turn the on the monetary brakes, a huge supply of liquidity to the rest of us disappears. Then What?"
Liquidity is not the solution
slawek, london, uk
Week after week we get this same unbelievable Goldilocks Fairy Tale. I am here in North America not sitting behind some desk in the City sipping tea and enjoying a view of the Thames. Here in N. America we say: “Give me a break!”, as Gas Stations suck all our remaining cash away. Cheers.
William Kent, Brandon, Canada
Articles like this abounded right up until Stock Market went over Niagara Falls in 1929 ditto in 1932. People were writing Articles like this in Pompeii up to the very last minute before Vesuvius blew its top. Pollyanna optimists will always be with us. All is well! Bad things can't happen! Cheers
William Kent, Brandon, Canada
Dear Mr. Austin Tassletine, South West , UK:
Make that two of us!
Cheers.
William Kent, Brandon, Canada
At the end of the day, water finds its own level. Same with economics: given all the obsession with gloom & doom, we all survive & many of us move on to better things.
ian cheese, london, uk
If only Britain had increased VAT to 19% like Germany in January 2007 perhaps consumers would have realised that loans to buy 50 inch plasma televisions were risky given that the good times have limited durations. Now credit is no longer available and HMG is short of cash after Northern Rock.
richard bond, London, England
CDO market 1998 $300mil in 2007 $4 Trillion. IMF valuation 75% overvalued. So Anatole where is the other $2.5 Trillion of losses. Ever wondered why they had to safe Bear Stearns. All CDOs would have to have been sold in the open market. Then a value establish. Then the others go bust too!!! Simple!!
Richard , Neuchatel, Switzerland
But the bad news is still coming out: "Wall Street tumbles as IMF warns America's housing slump is not over"- this was in the times today!!
barry dupont, brighton, east sussex
Today's home buyers largely have to have a 20% down payment. A couple of months ago it was 10%. Six months ago, it was 0%. Qualification guidelines are enormously more stringent. Many Americans now can't get a mortgage - the air supply of the housing industry. The adjustment will be long & painful.
Dick Poe, Menlo park, U.S.A.
The Fed's inflationary policies have put a question mark over the tuture of the US$ as world's reserve currency. The property, banking and financial crisis deteriorates daily. The US deficits - federal and current account - are unpayable. Hyperinfaltion is the de facto policy. Crisis, what crisis!?
Frank, London, UK
The IMF said today that the credit markets are still deteriorating and the problem is spreading to developing countries. Who to believe...........
boris venter, HORSHAM, SUSSEX
Seriously, for the "americans" who have "seen it all" and claim, for some reason, that it is almost like a "depression" and the worst situation in their lifetime,should quit speaking for the ninety nine out of a hundred who pay their mortgage on time on homes bought for living in not flipping over
brett, chicago, usa
You are cherry picking data and are not looking at the whole picture.
John, London, UK
Is it just me or can anyone else see the lack of any statistics or logical mathematic process to back up this view. Sorry Anatole I am not being disrespectful but I don't see your view backed up with any figures - or perhaps you will correct me?
Austin Tassletine, South West , UK
An informative article.
American has a huge and broad based economy. While some States are in a recession other States, whose economy is energy or agriculture based, are booming. Thus there is no overall recession.
I am less sanguine that property has already bottomed, wait another 3-6 months.
Ian, Madison, USA
Anatole, help me through this confusion; what should I be investing in now if this is really the bottom?
paddles, London,
Either in America or Europe we have not seen 2 quarters or negative growth. Its silly to claim the world is in a recession if not depression when its clearly not. I see the markets turning into a bull early/mid year, we can already see improvements with money coming from oil back into equities.
Scott, Cambridge,
Too many people in 'ivory towers' are talking a numbers game. For real people life is hard & getting harder. Talking this problem away or pulling an interest rate lever won't work. The cost of the state must be reduced to lift the yoke of excessive taxation from the backs of ordinary people.
Steve Marchant, Newton Abbot, UK
When I left high school in 1967 in Kansas, my first job paid enough for me to marry and let the wife stay home to raise the kids. Alone, I had the money to go to a restaurant and a film once a week, have a nice car, and rent a nice apt. plus save 10%. Now 2 people work for the same and are in debt
victor compton, Cherbourg, Kansas
oh please stop this hype business.usa is in a full recession and please do not try to pull more investors in to this mess.people have lost enough and they dont need journalists like you to give them hope or encouragement.
ebbi britt, valencia, spain
maybe you should read more and write less when it comes to finance.can you think of just one reason why the markets should bounce back in near future?just one.
the banks will never be lending like mad as in the past ten years and if credit is tight the market will go nowhere.
ebbi britt, valencia, spain
While everthing you say may yet be proven true I think it is more likely that consumer debt is slowly driving the world economy to a first class train wreck.
Stephen Hargreaves, Hobart, Australia
Anatole you are demonstrating why economists are a doomed breed. You rely on government produced propaganda for your forecasts. Even you must realise that interest rates in the US are being kept at an absurdly low level because of the upcoming election - the real credit crunch will begin in 2009.
Peter Delany, West Kirby, UK
All I have to sy for my tuppence worth is: Brilliant article Mr K. Thank you. Maybe just another point: The world 'consensus' when referring to the pontifications of those modest geniuses, economists stinks. Many a financial ill can be traced back to hypwed reaction to 'consensus'.
pete laubscher, League City, TX, USA
The US will almost certainly have to allow hundreds of banks to go bust and will nationalise Fanny and Freddy.That will triple the national debt from 3 trillion to 9 trillion.What house prices are doing at the moment is immaterial - the lenders are bust and the US taxpayer picks up most of the bill.
eric campbell, harrogate, uk
I remember Kaletsky telling us some years ago that it was fanciful for anyone to think that the USD was on the slide because of its current acccout deficit.
Ken Beard, Oswestry, England
I am an American and I've got news for the economists -- they're wrong!!! I'm old enough to have been around the block a few times and I am seeing (or not seeing) things I have never seen before.
Bella, Chino Hills, US
Apparently November the 15th is a date for the diary, this is the date that new US accounting rule SFAS157 comes into effect, it requires banks to divide their tradable assets into three "levels" and disclose their values. It will be interesting to see what values the assign..
David Holden, Chester, England
It's Watership Down. Bulldozers are coming. Game's over. Consumers, govts crazily over borrowed, over spent, under saving. Mountains of unsustainable debt. Corporations run badly, glossed over Enron style. Global warming ratcheting up social chaos. As ever, economists getting it wrong.
Leigh Vernier, Riyadh, Saudi Arabia
Easy credit meant UK houses that are unaffordable were still obtainable to those who were reckless or foolish enough. The credit crunch is the excuse for the banks to shut up shop, the real reason is that they know their capital isnt covered by the assets any more. It's a 5 year unwind, minimum!
Andy, Bath,
The tightening of credit will reduce the trend growth rate.
As lending criteria or capital adequacy ratios find a new level this trend will become entrenched.
Financial stocks are up because prices fell too far. The cartel now has a smaller market with better margins on less risky borrowers.
Richard Boyce, Haywards Heath, UK
Anatole
The numbers coming out of the States may be a little better because of the tax rebate. Most of that went to OPEC. Inflation has now showed up in Japan and if the Japanese decide to turn the on the monetary brakes, a huge supply of liquidity to the rest of us disappears. Then What?
Alan, Paris, France
One of the reasons for current consumer problems is the lack of control of interest rates - credit card interest should be fixed by law at a maximum of 2% over prime p.a. - banks make huge profits - except when they're fooling around with sub-prime instruments!
James, bangkok,
the banks and the government have run out of money and the consumers are addicted to unavailable credit. we cannot afford oil and our manufacturing industry has vanished into Asia. House prices are still nearly double the affordable level.
still, should all be over by Xmas, eh anatole?
nigel, ryde, uk
Economists have a terrible track record and are usually wrong, Very few economists correctly predicted the Asia credit crisis which was very similar to today's UK/US credit crisis. The Asia crisis was caused by banks' loose lending disciplines, then property price crash then job loses and recession.
Ron, OXON,
This would be amusing if you weren't being serious! The bottom of this cycle is in several years time, nobody knows exactly wwhen that will be but it sure as hell isn't now! Look at The Nationwide's graphs, that's the most cconvincing thing of all, and by my plotting we'll see the bottom in 2014
george, aylesbury,
Kaletsky - do you get some strange pleasure from being proved wrong? For nigh on 12 months you have been banging the drum that this is all a 'storm in a teacup' , and for 12 months you have been proved categorically wrong. Why not quote the Case-Shiller data for unbiased US housing information?
Paul Hobby, London,
Only time will tell! No doubt you will "Eat Your Words" when reallity is out! Which will be by 30/09/08!
Paul, Newtown, Powys, UK
A mild recession for the rich, who are doing just fine, a recession for vast majority of us.
Richard Sheridan, Virginia , US
Can we talk recession in the U.S. without talking consumer spending: 70 % of GDP? The house equity ATM is shut; unemployment is up; credit sources are max-ed out; no savings; rebates came and went. Spending, thus corporate earnings, are falling. This means recession, and not mild.
Walter , East Hampton, USA
You are obviously buying in at the bottom then?
Personally I see a long way to play out yet. Inflation has not even finished its' grand entrance, watch what Global inflation will do to all those price discounted imports. How long can the populous pay for business failure before wages rise ?
Joe, Geelong, VIC Australia
close your eyes
you are growing very sleepy
very sleepy
everything is good
you are very comfortable
there's nothing to worry about
we have everything under control
when you awake you will remember nothing-
glenn schaefer, holbrook, ny/usa
Perhaps you would like to come to the US and live with a family of four earning $30,000/year. This is not a mild recession. This is nearer to being a DEPRESSION with home prices falling, foreclosures escalating, banks failing, food prices and gasoline rising and more than 15% of Ohioians now living in poverty. Economists do not live in the real world. They live in theory. That doesn't cost much anywhere.
meggie, Columbus, Ohio, USA
Anatole, how can you class over four years of housing supply as the bottom of the market?
Its not even started. Just wait till the banks reveal the full extent of their dirty little secrets. If everything is a bed of roses, why are the Fed pumping 300 billion into the mortages market?
Sam Smith, South, Uk
I think you are ninety percent correct. However, what is happening in the US at the moment is that credit contractions are starting to have a negative effect in the real economy. Banks are withdrawing credit, and projects are failing for lack of capital. As usual, everyone is headed for Court.
jon livesey, Sunnyvale, CA/USA
Linking credit crunch to UK housing prices is misleading since affordability, not credit availability drives housing transactions in the UK. At 8% mortgage rates, mortgages would be freely available but they can't be afforded! Even at 6-7 they can't. Getting to 5% means major price falls. UK not US!
Mike, UK,