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Pax Americana: Was It Really That Bad?

As I reviewed this weblog’s statistics earlier today, I noticed a significant uptick in readers from outside of the United States. In the late nineties and earlier this decade, I had the pleasure of doing a bit of traveling overseas when the currency exchange rate still favored the U.S. dollar. On some of those excursions, I noticed quite a bit of anti-American sentiment. For example, in 1999, there was the graffiti in Barcelona that wasn’t too complimentary of President Clinton. Or Monica either. No mention of Hillary though. In 2001, there was the young lady in the Glasgow pub who I had it out with after she told me what she thought of Americans and President Bush. Interesting side note- the girl worked for a local politician and invited me to visit their office the next day. After things simmered down, of course. Splendid people, those Glaswegians.

Love us or hate us, after World War Two the influence of the United States around the world was significant, whether it was economic, military, cultural, etcetera. Some have even referred to the period in the West after 1945 as the “Pax Americana,” or “American peace.” Yet, what have we witnessed throughout time when it comes to the longevity of Pax whatever? Quite simply, what goes up, must come down. One day, Pax Americana will be a thing of the past too. Some argue that America’s “dominance” is already a footnote in the history books.

So, my question to our overseas readers is, was it really that bad living during Pax Americana? Is the following YouTube video a correct depiction of how you see the United States and its “influence?”

Number Of Foreclosures May Top Great Depression

On Tuesday, I read a press release from Housing Predictor on PR Leap with the headline “Real Estate Foreclosures Topping Great Depression.” On June 5, I talked about Housing Predictor and their latest forecast regarding foreclosures in the U.S. housing market. I wrote:

The latest predictions of foreclosures paint a grim picture. HousingPredictor.com forecasts more than 250 local housing markets futures in all 50 states, and has maintained more than an 85% accuracy rating. Based on a survey of the nation’s 100 largest real estate markets, HousingPredictor.com predicts that at least 2 million residential properties will be foreclosed within the next two and a half years.

It appears that Housing Predictor has now revised that estimate upwards. From their November 27 press release:

Home foreclosures will worsen reaching new record highs in 2008 as a result of the credit crunch, topping the Great Depression, according to a new report by Housing Predictor…

Housing Predictor analysts forecast the national economy is moving into a recession, which will become apparent at the latest in the third quarter of 2008…

Housing Predictor forecast early this year that 3 million foreclosures will occur through 2009. More than one million homes have already been foreclosed, most of which have been subprime mortgages. But defaulting mortgages are also growing in exotic conventional loans, also known as Alternative A mortgages.

Spooky stuff.  Then again, should a mortgage bailout take place…

Yale’s Shiller Warns Of Major Global Correction

Somehow, I missed this story. Didn’t see it in the mainstream financial media, as it was probably deemed too gloom-and-doom to print. On November 18, ArabianBusiness.com talked about this year’s Dubai International Financial Centre (DIFC) Week. At the gathering, Robert Shiller, the Stanley B. Resor Professor of Economics at Yale University and author of the New York Times bestseller Irrational Exuberance, warned that a sharp downward correction is due in the global markets as real estate, stocks and energy soar to record highs. You may recall that in his bestselling book, Shiller waned that the U.S. stock market of the late nineties had become a bubble that would eventually pop. These past few years, he told anyone who would listen that the U.S. housing boom that came on the heels of the bust on Wall Street also shared the characteristics of a bubble.

According to the website, Dr. Shiller told attendees that while emerging markets like China, India, and Brazil continue to grow, speculative “bubbles” are appearing in the global markets, which could pop and cause a major global recession. He explained:

Perhaps we have gotten a little too confident in the global economic growth. The problem is high oil, stock and real estate prices. I believe that a substantial part is speculative bubble thinking. We have gotten too confident of the prices in these markets.

The global credit crunch has curtailed the lending and borrowing frenzy that fueled price run-ups in energy, stocks, and real estate. As a result, the markets could face significant corrections ahead. Professor Shiller said, “The unwinding of these markets is the most serious risk facing these markets today.”

Russia’s Gazprom May Say No To Dollars

When I see what’s happened to the U.S. dollar, I think of Rodney Dangerfield and him always joking “I don’t get no respect.” And according to Bloomberg this afternoon, the greenback took another one on the chin as Gazprom, the world’s largest natural gas exporter, announced it may start selling its crude and gas production in rubles rather than dollars and euros.

Alexander Medvedev, Gazprom’s deputy chief executive officer, told reporters in New York today that, “We are seriously thinking about selling our resources in rubles.” The gas giant’s chief financial officer, Andrei Kruglov, told the same members of the press that the switch would happen “sooner, rather than later.”

According to New York Times reference material on Gazprom:

What former General Motors president Charles E. Wilson said of his company – “what was good for our country was good for General Motors and vice versa” - could well apply to Russia’s Gazprom, the nation’s largest company. The line between state-owned Gazprom and the Russian state is often blurry. The monopoly’s primary activity is selling natural gas in Europe at market rates to subsidize energy prices domestically. Several board members wear two hats and also work in government; for example, Dmitri A. Medvedev, a first deputy prime minister, is chairman of Gazprom. Still, the company controls more hydrocarbon reserves than the country of Iraq. So when it opened to foreign investors earlier this year, the capitalization spiked over $200 billion. Gazprom produced 545 billion cubic meters of natural gas in 2004.

Bloomberg noted that the dollar has fallen 11% against the euro so far this year, which has reduced the value of exports by oil-rich nations and contributed to a 49% increase in crude oil prices. This announcement comes on the heels of the secretary general of the Gulf Cooperation Council saying last week that six Gulf Arab states will discuss a proposal next month to revalue their currencies against the U.S. dollar.

Why Wall Street Bonuses Aren’t All That

On Wednesday, CNN Money, in conjunction with Fortune, talked about end-of-the-year Wall Street bonuses. Guess what? CNN Money is referring to the bonuses as “golden shackles,” with good reason. According to their report:

…bonus pay this year is going to come with a hitch: more stocks, less cash. The bigger the bonus, the more of it will be given in equity, say compensation experts at Armstrong International. The reason? Banks desperately need to hold on to their people; stock makes it tougher for their stars to take the money and run to, say, Goldman Sachs.

It’s ironic that as stocks are being doled out as holiday bonuses, Jim Rogers, legendary investor and founder of the Quantum Hedge Fund with billionaire George Soros, is betting hard against the sector.

Back on October 31, Rogers told Bloomberg that he was increasing his bets against U.S. securities firms because of salary “excesses” and money-losing investments. He increased his year-old short positions in U.S. investment banks in the 6 weeks prior to the interview.

Regarding salary excesses, Rogers told Bloomberg that:

You see 29-year-olds on Wall Street making $10 million to $20 million a year, and they think it’s normal. There have been lots of excesses.

The chairman of Beeland Interests also talked about the money-losing investments by the firms. Rogers said, “Who knows how bad the balance sheets are. They took on gigantic amounts of bad paper.” In a follow-up interview with Bloomberg on November 2, he added:

I am short the investment banks, as you know. I added more not too long ago. There’s a lot of phony bank bookkeeping going on. You should learn the word level 3 accounting, level 3 assets, because you’re going to hear a lot about it in the next 6 months.

In a bear market, the famous commodities investor predicted that stocks of U.S. investment banks could fall as much as 70%. So much for those bonuses…

The Wall Street Shuffle

Today, the Dow Jones Industrial Average gained 331 points (2.6%) to end at 13,289.5. The rally was led by the recently-battered financial sector.

In honor of such a feat, I would like to dedicate the following song to you by the band 10cc. By the way, how many of you Wall Streeters were even around when this song came out in 1974?

Enjoy…

“The Wall Street Shuffle”

Do the Wall Street shuffle
Hear the money rustle
Watch the greenbacks tumble
Feel the Sterling crumble

You need a yen to make a mark
If you wanna make money
You need the luck to make a buck
If you wanna be Getty, Rothschild
You’ve gotta be cool on Wall Street

You’ve gotta be cool on Wall Street
When your index is low
Dow Jones ain’t got time for the bums
They wind up on skid row with holes in their pockets
They plead with you, buddy can you spare the dime
But you ain’t got the time
Doin’ the….
Doin’ the….

Oh, Howard Hughes
Did your money make you better?
Are you waiting for the hour
When you can screw me?
‘Cos you’re big enough

To do the Wall Street Shuffle
Let your money hustle
Bet you’d sell your mother
You can buy another

Doin’ the….
Doin’ the….

You buy and sell
You wheel and deal
But you’re living on instinct
You get a tip
You follow it
And you make a big killing

On Wall Street

Why A Mortgage Bailout Is A Mistake

This morning I read an article on Yahoo! Finance entitled, “Mortgage Bailouts, Who Should Be Helped, and How.” The author of the piece, David Wessel, argues in favor of “bailing out” American mortgage borrowers who are in danger of losing their homes. At first, I thought the article was a hoax. Then I realized we’re a long way from April Fool’s Day. Wessel says:

While we’re sorting out the big question about the subprime debacle, how to preserve the good (hard-working, bill-paying people once barred from the American dream becoming homeowners) without repeating the bad (fraud, reckless lending and fast-talking salesmen peddling mortgages to folks who simply can’t afford them), there’s an issue that can’t wait: a tidal wave of foreclosures.

My turn. A big deal is always being made about homeownership as part of the “American dream.” The reality is, homeownership IS a dream, NOT A RIGHT. Whatever happened to work hard and earn enough money to afford the initial downpayment and subsequent installments on a home mortgage? Someone forgot to tell this to the 43% of first-time homebuyers in 2005 who acquired their homes through “no money down” arrangements.

Sure, “fraud, reckless lending and fast-talking salesmen peddling mortgages” were an unfortunate sign of the times. But a number of these “hard-working, bill-paying people” were just plain irresponsible. Back on November 6, I noted the following:

A recent study conducted by D.C.-based Peter D. Hart Research Associates discovered the following characteristics among borrowers:

• 51% say they are very informed about their mortgage’s terms and conditions
• 18% say they don’t know their current interest rate
• 25% say they don’t know when their lender will next be able to raise their rate
• 73% say they don’t know how much their monthly mortgage payment will increase the next time their rate goes up
• 40% say they don’t know whom to turn to for guidance if they have difficulty paying

On November 2, Brian Montgomery, Assistant Secretary for Housing with HUD, told a congressional hearing that more than 40% of delinquent borrowers do not respond to contact from their lenders until it is too late. Which is really quite sad, considering that industry sources say 50% of those who seek counseling or go to their lenders for help end up staying in their homes with new mortgage products.

Wessel says that mortgage rate resets will be the breaking point for vulnerable borrowers:

Interest rates on about two million once-popular, subprime mortgages known as 2/28 or 3/27 (because the rate for the first two or three years is lower) are poised to jump in the next year. Many will rise to a range of 9.5% to 11% from 7% or 8%. That would boost a typical subprime borrower’s payment by roughly $350 a month. For many of those borrowers, that’s the difference between affordable and not.

The Chicago Tribune reported on November 18 that:

In a poll of 1,004 mortgage holders commissioned by Bankrate.com, 34 percent didn’t know whether their mortgage had an adjustable rate or not. And in a survey of 500 owners with adjustable rate mortgages commissioned by the AFL-CIO, 49 percent say they don’t know the terms.

So who cares if the rates reset higher, because the borrowers sure didn’t.

Wessel explains that while it was foolish, these homeowners should not be made to pay for their mistakes:

Sure, a lot of these mortgages shouldn’t have been made. It was foolish for lenders and homeowners to bet housing prices would keep rising. But allowing millions of foreclosures to punish the imprudent isn’t smart. It’ll damage entire neighborhoods.

You bet it was foolish to bet housing prices would keep rising. I recall that some time ago a survey of Los Angeles residents revealed that they actually expected home values to keep appreciating at or around 20% every year. That’s just crazy-insane. California is notorious for its real estate booms and busts. What were they thinking? Had housing hit a “permanent plateau?”

“But allowing millions of foreclosures to punish the imprudent isn’t smart.” It might be what the doctor ordered. As I noted in a post on September 3, BusinessWeek discussed different bailout proposals on August 28 in “What Will Fix the Mortgage Mess?” They had this to say:

But foreclosures—widespread foreclosures—are inevitable. The days of easy money meant that many people borrowed much more than they could afford—and keeping them in their dream houses will only penalize other taxpayers and encourage more uncontrolled borrowing in the future. Risk, as Wall Street veterans like to point out, can be risky.

“It’s sometimes better to let the market cleanse itself out,” Kathleen Camilli, a member of the National Association of Business Economics, told BusinessWeek.

Many economists believe that bailouts usually are not the best solution. “Our focus is on liquidity, not a bailout,” said Doug Duncan, chief economist at the Mortgage Bankers Association in the BusinessWeek article. With a bailout, “You’re going to change behavior in the marketplace in ways you hadn’t foreseen.”

Wessel says:

So the public-policy questions are: Who should be helped, and how?…

It’s the folks in the middle who need and deserve help from the industry and, if need be, the government: those who are making payments, would have refinanced easily if not for the housing bust and dysfunction of mortgage markets and can’t afford the reset payments…

It would be nice if all this could be handled with taxpayer money…

In my August 13 post, Jonathan Hoenig for SmartMoney talked about a proposed mortgage bailout by 2008 presidential candidate Hillary Clinton. Hoenig had this to say about bailouts:

But the real reason to oppose a bailout isn’t that it’s impractical, but that it’s immoral.

To live freely means to act in accordance with your own rational beliefs and to accept the consequences of your decisions, no matter how unwise they might seem after the fact. Those individuals who made financial commitments they can no longer afford to honor have no right to demand taxpayers bail them out. In America, we have the right to “life, liberty and the pursuit of happiness,” but not the guarantee we can live in the four-bedroom Colonial that’s priced way beyond our means. It might sound cold, but homeowners who can’t pay their mortgages should not expect to be able to keep their homes.

Forgetting the fact that these individuals willingly took out loans well beyond their means or didn’t plan for a rainy day in which the real estate market wasn’t soaring, politicians on both sides of the aisle say they are entitled to keep their home. So they plan to take other people’s hard-earned money and give it away… not because these individuals did anything to deserve it, but simply because they need it… When Hillary pledges $1 billion in financial aid for homeowners, however, it’s not her money; it’s the taxpayers’, many of whom would undoubtedly prefer to give to any number of other deserving recipients.

Goldman Sachs Says Risk Grows For 2008 Recession

Earlier today, Goldman Sachs economists announced that they expect the U.S. Federal Open Market Committee to cut interest rates to 3% from the current rate, which stands at 4.5%. According to Bloomberg, Goldman is predicting interest rates will bottom out at 3% in the next 6 to 9 months because “the worsening housing downturn has pushed the risk of a U.S. recession in 2008 to 40%-45%, from around 30% previously.” The new target replaces an earlier forecast of 4% by the New York City-based global investment bank.

In addition, Goldman Sachs is forecasting that the unemployment rate is likely to rise from the current rate of 4.7% to 5.5% by the end of 2008. According to Reuters today, Goldman predicts that U.S. gross domestic product growth will be “well below trend” for an extended period of time, even without an outright contraction.

Paulson Predecessor Says U.S. Recession Likely

In Sunday’s Financial Times (UK), former U.S. Treasury Secretary Lawrence Summers said that the odds now favor a U.S. recession that will slow growth significantly on a global basis. Summers, who served with the Clinton administration and now teaches at Harvard University in addition to serving as a managing director at hedge fund D.E. Shaw Group, concluded that the U.S. economy will stall out, based on the following:

1. The U.S. housing slump marches on.

Several streams of data indicate how much more serious the situation is than was clear a few months ago. First, forward-looking indicators suggest that the housing sector may be in free-fall from what felt like the basement levels of a few months ago. Single family home construction may be down over the next year by as much as half from previous peak levels. There are forecasts implied by at least one property derivatives market indicating that nationwide house prices could fall from their previous peaks by as much as 25 per cent over the next several years.

2. The U.S. financial sector will be rocked— hard.

Second, it is now clear that only a small part of the financial distress that must be worked through has yet been faced. On even the most optimistic estimates, the rate of foreclosure will more than double over the next year as rates reset on subprime mortgages and home values fall. Estimates vary, but there is nearly universal agreement that – if all assets were marked to market valuations – total losses in the American financial sector would be several times the $50bn or so in write-downs that have already been announced by big financial institutions. These figures take no account of the likelihood that losses will spread to the credit card, auto and commercial property sectors. Nor do they recognise the large volume of financial instruments that depend for their high ratings on guarantees provided by credit insurers whose own health is now very much in doubt.

3. Credit, necessary for economic expansion, will become tougher to come by.

Third, the capacity of the financial system to provide credit in support of new investment on the scale necessary to maintain economic expansion is in increasing doubt. The extent of the flight to quality and its expected persistence was powerfully demonstrated last week when the yield on the two-year Treasury bond dropped below 3 per cent for the first time in years. Banks and other financial intermediaries will inevitably curtail new lending as they are hit by a perfect storm of declining capital due to mark-to-market losses, involuntary balance sheet expansion as various backstop facilities are called, and greatly reduced confidence in the creditworthiness of traditional borrowers as the economy turns downwards and asset prices fall.

Add the following:

Then there are the potentially adverse effects on confidence of a sharply falling dollar, rising energy costs, geopolitical uncertainties especially in the Middle East, or lower global growth as economic slowdown and a falling dollar cause the US no longer to fulfill its traditional role of importer of last resort.

And you have the recipe for an economic recession in the United States. Summers said:

Even if necessary changes in policy are implemented, the odds now favour a US recession that slows growth significantly on a global basis. Without stronger policy responses than have been observed to date, moreover, there is the risk that the adverse impacts will be felt for the rest of this decade and beyond.

Trends Expert Says Dollar May Fall 90%

Not surprisingly, the following story wasn’t picked up by the mainstream financial media. Back on November 19, UPI reported that Gerald Celente, trends researcher and director of the Trends Research Institute, told the Hudson Valley Business Journal (NY) that the United States is headed towards “The Panic of 2008,” where a financial crisis will send the U.S. dollar tumbling as much as 90% and the price of an ounce of gold soaring to $2,000. Celente told the paper:

We are going to see economic times the likes of which no living person has seen… The bigger they are, the harder they’ll fall.

Celente, who correctly forecast the subprime mortgage crisis, the dollar’s decline, and gold’s rise, said that the subprime fiasco was just the first “small, high-risk segment of the market” to collapse. He predicts that derivative dealers, hedge funds, buyout firms and other market players will also unravel. Massive corporate losses will also be an integral part of the “Panic,” which will result in a lower U.S. standard of living.

The Two Week Rule

It was the end of July 1996, and I was sitting in my downtown Chicago office where I worked as a U.S. Senator’s aide. Trans World Airlines Flight 800 had just crashed days earlier in the Atlantic Ocean off New York City. As I read a list of not-too-funny jokes that airline passengers were overheard making (and subsequently detained for) in the aftermath of the incident (“Is that a bomb in your pocket or are you just happy to see me?”), I remarked that Americans have an incredibly short attention span. Despite all the theories being discussed in the media as to what had brought down the massive Boeing 747, I told a co-worker that in two weeks you’ll hardly hear a peep about the incident. And I was correct. I started calling it my “two week rule,” where the American media and public focus on a incident for two weeks or so, at which point our attention shifts to something new.

During the evening rush hour of August 1, 2007, the I-35W Mississippi River bridge, the fifth-busiest in Minneapolis, collapsed and fell into the river and onto its banks. 13 people died and approximately 100 more were injured as a result of the accident. The day after incident, USAToday reported:

Across the nation Thursday, there was a fresh urgency on improving infrastructure — the roads, bridges, utilities and other basics of modern life that aren’t always the most popular spending priorities for governments… In Minneapolis, there was grief, outrage and questions over whether government officials could have done more to prevent the disaster. “A bridge in the middle of America shouldn’t fall into a river,” said Sen. Amy Klobuchar, D-Minn., whose home is near the span.

The American Society of Civil Engineers says that $1.6 trillion is needed for infrastructure improvements. The most recent ASCE report card gives America’s infrastructure a grade of “D.” Experts say the main reason the country’s infrastructure is in such horrendous shape is because most of it was built in the 1950s and 1960s with a lifespan of about 50 years. Do the math and you’ll figure out why our bridges are falling down, falling down.

As the dog days of August waned, so did our interest in the Minneapolis bridge collapse and the larger issue of a decaying national infrastructure. As I leafed through the Sunday paper last night, I came across the following story in the Parade magazine:

“More for Pork, Less for Bridges”

After the horrific collapse of a highway bridge in Minneapolis in August, politicians nationwide called on the federal government to repair America’s infrastructure. Now the politicos who control the purse strings have spoken. Though $1 billion for bridge repairs was added to the transportation/housing bill just approved by the Senate, an amendment to stop funding “pork” until all of the at-risk bridges have been fixed was rejected, 82 to 14. Instead, $2.5 billion will go toward pet projects like these:

• Volcano monitoring in Alaska, $3 million
• A hiking and biking trail in West Virginia, $1 million
• A prototype streetcar in Oregon, $750,000
• A minor league ballpark in Montana, $500,000
• Renovation of a peace garden in North Dakota, $450,000

So the two week rule had played out once again. And what was the headline on CNN this afternoon? “Who’s going to win ‘Dancing with the Stars’?”

Sunday Edition: November 25, 2007

Subprime Mortgage Crisis Growing
According to the Wall Street Journal yesterday, calculations by the Bank of America Corp. show that interest rates are set to rise on $362 billion worth of adjustable-rate subprime mortgages in 2008. Banc of America Securities, a unit of Bank of America, estimates that $85 billion in subprime mortgages will reset this quarter, another $85 billion will reset in the first quarter of 2008, and $101 billion of mortgages will reset in the second quarter of 2008. The estimates include loans packaged into securities and held in bank portfolios. In addition to the $362 billion of subprime ARMs that are scheduled to reset during 2008, Banc of America Securities said $152 billion in other loans with adjustable rates are scheduled to reset next year, including “jumbo” mortgages of more than $417,000 and Alt-A loans, a category between prime and subprime.

According to the Journal:

Many of the subprime mortgages that have driven up the default rate went bad in their first year or so, well before their interest rate had a chance to go higher… Now the real crest of the reset wave is coming, and that promises more pain for borrowers, lenders and Wall Street. Already, many subprime lenders, who focused on people with poor credit, have gone bust. Big banks and investors who made subprime loans or bought securities backed by them are reporting billions of dollars in losses… The reset peak will likely add to political pressure to help borrowers who can’t afford to pay the higher interest rates.

The Mortgage Bankers Association estimates that 1.35 million homes will enter the foreclosure process this year with another 1.44 million homes in 2008, up from 705,000 in 2005.

U.S. Recession May Harm Emerging Markets
London-based HSBC Asset Management told Reuters yesterday that an economic recession in the United States will affect emerging markets, even though some believe that decoupling from U.S. growth has taken place. Christian Deseglise, head of HSBC AM’s $85 billion global emerging markets business, told Reuters that the possibility of a U.S. recession was looking real now compared to earlier this year. Deseglise said:

Talk of recession in the US economy has increased lately so the story of decoupling from the US economy is being looked at more carefully … this may be causing the latest bout of nervousness. In February-March, there were fears but no evidence of slowdown. Now we are not dealing just with fears, but with something that is really out there. There are real issues with many sectors that may have a slowdown impact on the rest of the world.

Deseglise talked about the fallout from a U.S. recession:

If the US were to go down to one percent growth, emerging markets have the inner strength to grow within themselves. But if the US were to enter into a prolonged and severe recession that will have a detrimental effect. Emerging markets don’t need a fast growing US economy but they still need a growing US economy… I don’t think a recession is priced into the market.

HSBC Asset Management wouldn’t be the first to dispel the notion of decoupling from the United States. On November 2, I talked about how Stephen Roach, Chairman of Morgan Stanley Asia, told an audience in Mumbai, India, that he didn’t buy into the theory of decoupling:

I think the thing that worries me the most, and this is where I would really underscore the point for you in India, is that equity markets in this region, including your own, are discounting this optimistic, rosy scenario called decoupling. There is the strong belief that because the US has slowed so far, and Asia hasn’t, that any further slowdown will leave Asia unscathed. Think about it for a second. The slowing that’s occurred in the US right now has been in homebuilding activity. It’s America’s least global sector. You stop building a house in America, there’s almost no impact on Asian exports to the US. The slowing that will be coming over the next year will be in the consumer demand sector, which is America’s most global sector. So, we are going to see the US slowdown go from a domestically driven to a globally driven slowdown. I am sorry, as bullish as I am about Asia, Asia will not be an oasis of prosperity in a softer global demand climate. To the extent that emerging market equities are buyers of the global decoupling thesis, including in your own market right here, I think there could be a significant correction in emerging market equities that certainly could hit the Indian stock market quite hard.

Supporters of decoupling disagree. Reuters said:

Some observers say solid fiscal and monetary policy, healthy balance of payments, and China’s rise as a counterweight to the United States has helped emerging nations decouple from US growth and act as a safe haven from developed market turmoil.

In addition, they argue that the United States takes in just 16% of emerging market exports now, compared with 25% in 2001. In 2006, exports to other emerging nations overtook the volume of goods and services sent to developed nations.

Parting Shot
On the Euro Pacific Captial website, president and investment advisor Peter Schiff talked about how the actions of Wall Street and the U.S. government are forcing Gulf and Asian nations to reconsider their efforts in propping up the U.S. economy. In “Heads We Win, Tails You Lose” from November 23, Schiff said:

Perhaps the icing on this “let them eat cake” mentality was provided by Wall Street itself. In a year with record losses, Wall Street firms announced that they would also be paying record bonuses to their employees. The rationale for this PR fiasco was that since the losses were not the fault of the employees (really?), they should not be made to suffer. So rather than sharing the pain being endured by their firms’ shareholders (clearly even less culpable then themselves), Wall Street’s fat cats will rub salt in their owners’ wounds by compounding their losses with the additional expense of lavish bonuses. Following the outlandish pay packages already given to ousted CEO’s who clearly were responsible for the losses, Wall Street’s “heads we win, tails you lose” attitude will not go over well abroad.

Enjoy it while it lasts… which won’t be for much longer.

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com

Dutch Bank Predicts U.S. Recession In 2007

Yesterday, Dutch bank ABN AMRO announced it expects the U.S. economy to “dip into a slight recession in the fourth quarter and the first three months of 2008,” according to Reuters. ABN AMRO economist Ruben van Leeuwen pointed out that higher gas prices and a weakening labor market are taking its toll on U.S. consumers, who have been keeping the economy afloat. “The outlook for consumption is definitely more negative than it was a few weeks ago,” van Leeuwen said. The economist added, “Most say employment growth is positive and that will support consumption, but we think it will turn negative.”

ABN AMRO analysts predict that U.S. gross domestic product (GDP) will shrink by an annualized 0.2% in both the fourth quarter of 2007 and the first quarter of 2008, with the U.S. economy recovering afterwards. Meanwhile, U.S. imports are projected to decline due to lower domestic demand, while exports will hold up due to the low value of the U.S. dollar against other major currencies.

Analyst Says U.S. Banking Crisis Has Begun

Earlier today, The Globe And Mail (Canada) reported that a major U.S. banking crisis is underway. Myles Zyblock, chief institutional strategist at RBC Dominion Securities Inc. (owned by Royal Bank of Canada), said that problems with the U.S. housing market have spilled over into the financial sector, setting off the third major banking crisis in the United States since the Great Depression. While Zyblock said he didn’t expect bank failures to be the “main problem” this time around, he wouldn’t discount the possibility “of a few sinking ships.”

According to The Globe And Mail:

In arguing his point about the likelihood of a major banking crisis, Mr. Zyblock trots out some disturbing statistics on the U.S. housing market and the fallout on the financials. He noted, for example, that more than 20 per cent of the value of U.S. mortgage loans made in 2005 and 2006 is linked directly to subprime situations, and another 19 per cent is linked to alt-A loan situations. Both are types of loans made to those who don’t qualify for prime mortgages.

And it is those loans that are running into trouble, as evidenced by the fact that 16 per cent of subprime mortgages are now past due. To make things worse, problems are starting to rise in the prime mortgage space as well as in the face of what he says is the worst case of national price deflation in the U.S. housing market in at least 40 years. And inventories of unsold houses are nearing multidecade highs with foreclosures adding to the supply.

Mr. Zyblock believes that the worst is probably still to come in terms of bank writedowns arising out of the real estate situation.

Zyblock said he “would not be surprised” if the U.S. government attempts some sort of bailout to deal with the situation.