Not to steal the thunder from Mr. Greenspan…
The markets’ slide that occurred on Tuesday has been a while in coming. It was no surprise that it happened, but the efficient market hypothesis makes it impossible to nail down the exact time. The Wall Street Journal reported the slide on the front page Wednesday with an article entitled “Markets’ Slide Spotlights Risks”. In this article, several points were made only a month after similar concerns were brought up in this very blog.
I have mentioned the pressure on the Chinese economy in several previous posts, stating that the Chinese government would sooner or later be forced to take action to slow the inflation pressures that were building due to the restrictive control the Chinese government exercises over the exchange value of its money (Chinese Currency and Inflation). Not to steal the thunder from Mr. Greenspan, but I have expressed concern over a looming recession in China in my December post, stating that I thought it unlikely that the current expansion could continue. According to this recent article, “…investors wanted to get out of the soaring market before the Chinese government made any moves to cool the markets…”
We should expect some increased level of risk
More to the point is the parallel that we have been discussing between the history of the U.S. and that of China with respect to the migration of a large portion of the population from agricultural based economy to manufacturing based economy. This period of time in the U.S. represented some of the most volatile times in the U.S. economy. Granted there are many reasons for this volatility, not all of which are present in China, but such a close parallel to an historic precedent shouldn’t be looked upon too lightly. We should expect some increased level of risk.
Even more to the point are the domestic components mentioned in the article. I spoke in the post “Response to Housing” that there was no reason to believe that the slump in housing and auto manufacturing, usually leading indicators for the economy as a whole, would not again be leading indicators. It would seem that the opinions expressed by the Fed are just now catching up. Orders for factory goods fell sharply in January, “…rais[ing] questions about the strength of capital spending which the Fed…has been counting on to offset the drag of a weak housing market.”
I am not very surprised in the reduction in consumer spending
Of course, the defaults in the sub-prime lending market are just now hitting the news. Let’s just revisit a quote from a previous post, “…as these laborers loose their income a few months later, they will begin to spend less.” I am not very surprised in the reduction in consumer spending. I mentioned before that the largest relevant moderator to the slowing economy would be change in the strength of the dollar also mentioned in the article.
So, hindsight is great, but what should we expect to happen now. I still believe that the strong housing market numbers for January do not show that the economy is out of the woods, or even that the housing market is out of the woods. As the default rate on the sub-prime mortgages continues to climb, and there are fewer lenders willing to bail out the affected (or should I say, afflicted) homeowners, these homes will be coming back on the market. We may see the number of home sales increase, but I don’t believe that we will see an increase in the median house prices for some time to come. I am anticipating a slow housing market until late spring. Beyond that, the outside forces begin to swamp the housing trends and it is difficult to predict, but I don’t see a sharp rise in home prices in the foreseeable future.
… I don’t believe that we have seen the last dip…
As for the stock markets, they usually lead the economy as a whole. China still has some issues to work through and the recent events have certainly indicated that the markets are more closely correlated than perhaps we would like. The recent drop in the Chinese stock market may make the Chinese government’s job a little easier. We can all hope that the landing is soft rather than hard, but I don’t believe that we have seen the last dip in the Chinese market or its overall economy. If no one makes rash decisions and panics, we should see a little stability on the way down, though.
The markets’ slide that occurred on Tuesday has been a while in coming. It was no surprise that it happened, but the efficient market hypothesis makes it impossible to nail down the exact time. The Wall Street Journal reported the slide on the front page Wednesday with an article entitled “Markets’ Slide Spotlights Risks”. In this article, several points were made only a month after similar concerns were brought up in this very blog.
I have mentioned the pressure on the Chinese economy in several previous posts, stating that the Chinese government would sooner or later be forced to take action to slow the inflation pressures that were building due to the restrictive control the Chinese government exercises over the exchange value of its money (Chinese Currency and Inflation). Not to steal the thunder from Mr. Greenspan, but I have expressed concern over a looming recession in China in my December post, stating that I thought it unlikely that the current expansion could continue. According to this recent article, “…investors wanted to get out of the soaring market before the Chinese government made any moves to cool the markets…”
We should expect some increased level of risk
More to the point is the parallel that we have been discussing between the history of the U.S. and that of China with respect to the migration of a large portion of the population from agricultural based economy to manufacturing based economy. This period of time in the U.S. represented some of the most volatile times in the U.S. economy. Granted there are many reasons for this volatility, not all of which are present in China, but such a close parallel to an historic precedent shouldn’t be looked upon too lightly. We should expect some increased level of risk.
Even more to the point are the domestic components mentioned in the article. I spoke in the post “Response to Housing” that there was no reason to believe that the slump in housing and auto manufacturing, usually leading indicators for the economy as a whole, would not again be leading indicators. It would seem that the opinions expressed by the Fed are just now catching up. Orders for factory goods fell sharply in January, “…rais[ing] questions about the strength of capital spending which the Fed…has been counting on to offset the drag of a weak housing market.”
I am not very surprised in the reduction in consumer spending
Of course, the defaults in the sub-prime lending market are just now hitting the news. Let’s just revisit a quote from a previous post, “…as these laborers loose their income a few months later, they will begin to spend less.” I am not very surprised in the reduction in consumer spending. I mentioned before that the largest relevant moderator to the slowing economy would be change in the strength of the dollar also mentioned in the article.
So, hindsight is great, but what should we expect to happen now. I still believe that the strong housing market numbers for January do not show that the economy is out of the woods, or even that the housing market is out of the woods. As the default rate on the sub-prime mortgages continues to climb, and there are fewer lenders willing to bail out the affected (or should I say, afflicted) homeowners, these homes will be coming back on the market. We may see the number of home sales increase, but I don’t believe that we will see an increase in the median house prices for some time to come. I am anticipating a slow housing market until late spring. Beyond that, the outside forces begin to swamp the housing trends and it is difficult to predict, but I don’t see a sharp rise in home prices in the foreseeable future.
… I don’t believe that we have seen the last dip…
As for the stock markets, they usually lead the economy as a whole. China still has some issues to work through and the recent events have certainly indicated that the markets are more closely correlated than perhaps we would like. The recent drop in the Chinese stock market may make the Chinese government’s job a little easier. We can all hope that the landing is soft rather than hard, but I don’t believe that we have seen the last dip in the Chinese market or its overall economy. If no one makes rash decisions and panics, we should see a little stability on the way down, though.
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