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U S Signals Recession -- As Close To Certain As It Could Be

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Monday view: Storm clouds gather over a US economy heading for icebergs

By Ambrose Evans-Pritchard (Filed: 12/06/2006)

Like a thunder clap too close for comfort, the US bond market last week issued its time-honoured warning of recession. This time for real. The yield on 10-year Treasuries slid below the short-term rates, an emphatic signal that investors are more worried about a US housing bust than surging inflation.
Bernard Connolly, global strategist for Banque AIG, says the Fed, now chaired by Ben Bernanke, has already gone too far by raising rates sixteen times from 1pc to 5pc since June 2004, too much for an overspent economy running on fumes.
"Unless the Fed begins cutting rates by this summer, which it won't, then the US economy could be in for a nasty recession. The stock market has not yet woken up to the full gravity of this," he said.
Mr Bernanke is counting on a "soft-landing" for the housing boom, the central pillar of the US consumer economy.
It provided $600bn of spending last year from home equity withdrawals - ie, from ever-bigger mortgages entailing ever-more debt.
This rosy assumption is looking shakier by the day. The inventory of unsold new houses is now at the highest level in a decade, rising by 1m properties to 4m over the last year.
The Philadelphia index of US construction equities has crashed 23.3pc since early May, pointing to an immediate wave of lay-offs.
Some 32pc of the 4.22m jobs created by the US economy since the expansion began in 2001 have been in the housing sector, more than four times the usual ratio, according to a study by Merrill Lynch. HSBC warns that US property has already tipped into a downturn, with the likelihood of outright price declines in the overheated markets of the East and West coast.
Ian Morris, the bank's chief US economist, said the combined cost of mortgage payments and house insurance for new buyers in California takes up 70pc of pre-tax income.
"Affordability is now worse than in 1981 when mortgage rates were 16pc.
This is pretty scary stuff," he said, predicting a property slump lasting four to five years.

Some of this sounds familiar doesn't it--affordability issues.

"Controlled" deflation of those assets that became over-inflated during the era of low IR driven irrational exhuberance is next on the world economic agenda. Al Greenspan hinted that he would sacrifice the "froth" (over inflated housing markets that have drifted from the fundamentals--UK is a prime example) for the greater good and if the Fed can contain the damage to a short, sharp shock to house prices all will be well in the long term. HPI-MEW must be tamed and IR hikes are the best medicine to shrink the monster. Gordon will be seeing No. 10 slip further and further away as each week passes unless he makes a move quickly on the back of today's ODPM data.

Edited by Realistbear

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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