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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: russwinter who wrote (17695)	12/5/2004 4:26:12 PM
From: mishedlo	Read Replies (2) \| Respond to of 116555

Russ, you miss my point. I do not disagree with any of the mal-adjustments you mentioned. They are there and they are severe. Lets take SUVs. OK you conveniently point out sales up for the first 9 months of the year. Have you seen the latest round of DOUBLE 0% financing being ignored by customers? Do you agreee there are mammoth inventory problems on SUVs now? Are you aware GM and Ford are both cutting back production substantially. Have you seen sales fall at under the rate of inflation at walmart? You supplied a link on housing. Yep, the squeeze is on. 100% agreement. Not only is it on it was indeed brought on by loose credit. The fact remains that people overbought. They are struggling to keep up with house payments, and the fact remains that housing prices are falling in many places in California, Dallas, San Antonio, and Las Vegas. Now what? These problems were brought on by everyone "trading up", trading up to houses they simply can not afford. I believe we see 100% eye to eye on this so far. The stumbling block is that you absolutely refuse to believe that interest rates at 2.25% with stimulus being removed and falling housing prices can be restrictive. I believe 2.25% can be restrictive. I outlines what it takes to prove it. 1) falling retail sales 2) falling jobs 3) falling home prices regardless of what you think interest rates should be, we can and will see deflation if and when those happen. Inflationists simply have no answer for the trap of crashing home prices. It will kill employment, jobs, demand for appliances, etc etc etc. People are squeezed. Why are they squeezed. Because they are f*cking up to their eyeballs in debt and there is no way out. The other thing you absolutely fail to see is that prices can fall with rapidly expanding money. It happened in Japan and it can happen here. For the record, however, I do expect to see M3 falling or at the very least flatlining. If there are no jobs people will eventually be forced to stop buying whether or not someone is willing to extend them credit. All it takses for this to happen is rising bankruptcies. Credit WILL 100% without a doubt be shut off if housing drops and bankruptcies soar. You think it takes 6% or whatever for that to happen. I think it takes 2.25-2.50 to happen. If it starts happening, there will be no borrowers of money at current rates because lenders will not lend to people who want it (credit risk) and companies will not want to borrow it because they have no use for it. I believe I fully understand your points. In fact, I think we are in basic agreement on perhaps as much as 85% of things after all this yelling and screaming. The one thing we disagree on is how high interest rates must rise before this tipping point is reached before interest rates are restrictive. In this massivley over-levereged economy with job growth 100% tied to housing, I think it is far far far lower than you do. As best as I can tell this is our biggest point of contention. We would have an instant worldwide depression IMO if rates were hiked to 4% tomorrow. We might have one anyway if rates get even as high as 3%. BTW Watch the next two PPI's fall off the cliff. Mish