Today's buzz in most of the financial press is the dreaded "R" word - recession. Obviously, this sort of thing matters to the mortgage finance industry, too; the housing market isn't likely to recover in 2008 or even in 2009 if a recession occurs. Caroline Baum over at Bloomberg takes a look at the state of the dollar and how it will affect monetary policy:
"It's 'check' for the economy now; it's facing 'checkmate,'" says Paul Kasriel, director of economic research at the Northern Trust Corp. in Chicago. "Checkmate is the dollar. Bernanke's problem is that if he cuts, the dollar will go down even more. He may not be able to provide as much support for the economy as his predecessor." That's not good because, if Kasriel's correct, the economy is showing signs of moving toward recession: two months of soft chain store sales; an increase of 0.1 percent in real consumer spending in September; a "loss of altitude" in the Institute for Supply Management's manufacturing index; and a sharp decline in consumer sentiment, with the University of Michigan's expectations index down 22 percent in the past year.
Business Week notes that "it's not just you — the U.S. economy really is bewildering," in covering the "R" word:
What we're observing, in all its bizarreness, is the ancient paradox of what happens when an irresistible force meets an immovable object. The irresistible force in this case is the U.S. economy, which has managed to expand through all kinds of adversity for more than 15 years, aside from one brief recession in 2001. The immovable object is a wall of debt that accumulated during several years of profligate lending and now can't be paid back. The risk has increased for a generalized credit crunch that puts both borrowers and lenders in dire straits. So, either the U.S. economy will overcome the debt crisis and keep growing, or it won't. It's that simple — and that's important, with millions of indebted homeowners struggling to stay above water, the stock market seesawing uncertainly, and just a year to go before the next President is elected.
And a well-respected strategist at Morgan Stanley -- Teun Draaisma, whose team has correctly called the last two market turns this year -- is telling clients to cash in their equities, now:
"Until quite recently, we assumed that that this would be a fairly isolated financial crisis,� Mr Secker said. “What we underestimated was the depth of problems within the system." Morgan Stanley is not forecasting a recession but says the odds of one occurring are about 40 per cent. In a report studded with charts, the strategists spell out the risks of continued dislocation in the US credit market ... The equities strategists say the crunch has much longer to run as US subprime mortgages will increasingly be adjusted to higher interest rates, forcing more homeowners into repayment difficulties throughout 2008.
FWIW, I'd love to see those charts mentioned by FT story above, if anyone has access to the Morgan Stanley report and can share. My email is HW readers know that I've said since January that the 4th quarter of this year and the first two quarters of next year would be the roughest patch of the current subprime-driven debacle. We're now seeing evidence of that, and the question is now hanging: will we see a recession?