Friday, April 07, 2006


A Global Recession, Post Housing Bubble?

Reuters has some price action. "Gold futures in New York tumbled from a 25-year high on Friday morning, pressured by speculator and trade selling as the dollar climbed after a closely watched U.S. jobs report and as oil prices eased. Silver moved lower, after stretching up to a new 22-year peak above $12 an ounce, on further speculative buying. Platinum and palladium also pulled back."

A Market Watch report looks at the chances for a global post-housing bubble recession. "The U.S. economy has in recent years been a key driver of global growth, and a sharp downturn would certainly have an impact around the world. The Federal Reserve could fail in its effort to slow the economy just enough to relieve inflationary pressures without triggering a recession."

"In fact, most of the Fed's major credit tightening moves in the last sixty years have ended in recession, often because an energy crunch, war or terrorist attack occurred just as the Fed was at a delicate stage in the interest raising process."

"Possible triggers for a recession next year, besides a miscalculation by the Fed, include an oil supply interruption, a precipitous drop in inflated home prices, or a crisis in foreign confidence that slowed the inflow of investment dollars the U.S. has come to depend on, driving long-term interest rates sharply higher."

"Chinese manufacturers accustomed to rapidly rising exports to the U.S. would be hit hard if exports to the U.S. suddenly leveled off or declined. It's impossible to predict how many Chinese workers would lose jobs. However, Chinese companies probably have built huge inventories of materials because of worry about shortages. They could be clobbered the way U.S. manufacturers were in the recession of the early 1970s, which followed a period of materials shortages and soaring materials prices."

"Metals and other materials prices could drop sharply, depressing stocks of producers in developing countries. Also, if oil demand dropped simultaneously in the U.S. and China, two leading importers, oil prices could collapse. That probably would trigger a painful drop in energy stocks. However, 'we'd regard that as a tremendous buying opportunity," said Arvind K. Sachdeva. He's bullish about the long-term outlook for energy and assumes oil prices would rebound as the recession ended."

"The whole U.S. housing sector, from homebuilders and related building materials and service industries to recent home buyers, is cited by many observers as the most vulnerable U.S. economic sector. Home prices in much of Florida, parts of California and other states along the East Coast and Southwest could drop fairly sharply."

"Some economists think the blow would be tolerable because most people could stay in their homes and wait for price recovery. Others think as much as 40% of U.S housing is extremely over valued and vulnerable to major price decline. Inventories of unsold homes are at near record highs, and a recession often quickly turns a modest surplus into a huge overburden that drives down prices."

"A home price decline could further slow the rest of the economy, said Raj Aggarwal, 'because people are spending their houses these days' by re-mortgaging or taking out second mortgages to pay off credit cards or make major purchases.'"

What's that quote I always see at PrudentBear? Oh yes...

"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."
- Charles Mackay

Sounds like one more's coming round.
I love this quote:

"Some economists think the blow would be tolerable because most people could stay in their homes and wait for price recovery."

ASSuming they could, you can be assured they won't be spending a thin dime on SUVs, plasma screens and stainless steel appliances!
Its not clear to me that metals would as the article states, shed value along with everything else in a post housing recession. I could just as easily see capital flight out of equities and *in* to precious metals.

I think the big question is: where is the safe haven? A mixed currency basket? "Recession proof" equities? Oil?

This needs to be a weekend topic... it keeps coming up.

Specifically, "How will PMs fare in the coming recession / depression?" with the sub-topic "What other safe-havens are there and how would they rank?".

Agree with you TJ. Any extra money will be going to gasoline, food and shelter. There is going to be one big fire sale on these big ticket items.

I need to buy a car this year. Actually, I am however planning on buying a Honda, my first new car ever. Is it possible Honda prices will actually go up instead of down because they are imports from Japan and because they are good on gas? Anyone have any ideas?

Most Hondas sold here in the US are also made here in the US.

I would expect a huge drop in car sales come the recession, regardless of mileage. When that happens, the car dealers will cut prices to the absolute bone, undermining all resale values.

That said, Hondas are excellent vehicles that maintain value better than most.
Hi TJ,

There is plenty of room for them to come down in price, cars have been going up steady for 10 years now. I dont believe salesmen when they say their cars are only $500 dollars over invoice. I dont know about all Hondas - but the CR-V is made in Japan, while some models are made in Canada. These CR-Vs must be in demand because I can't find a used one for sale by owner, which I would prefer to brand new. Hopefully, my current car can hold out so that I can take advantage of the new car fire sale-hopefully by the end of the year.
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