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

To: RealMuLan who wrote (72910)	12/27/2007 11:28:37 AM
From: RealMuLan	Read Replies (1) \| Respond to of 116555

Consumer Crush Update: The end of an interesting year December 24, 2007 by Stephen Church prudentbear.com This analysis brings our “Consumer Cash Flow”, “Real Estate and Money Supply”, and “The Interest Rate Conundrum” papers up-to-date. The latest economic statistics show that consumers have depended on new debt for 83% of their cash flow during 2007. Though this is an improvement over the 86% of 2006, it still represents insufficient income-based cash flow to pay current principal payments on debt. For 2007, we estimate that U.S. households will borrow about $240 billion just to pay scheduled principal payments on debt. For many of you, this is a Minsky Financial Instability theory situation known as “Ponzi finance.” It is more correctly described as “speculative finance”, but it may be appropriately described as “hedge finance.” In 2007, we now expect a 10% decline in cash flow. In comparison to our September update, our new expectation improved 4%. What happened? Starting in August, the Federal Reserve made massive efforts to boost mortgage debt flow. Their efforts appear to be working. Our annual review of residential investment documents the results of wayward monetary management. In a Say’s Law context, the residential over-building is testament to the Fed’s ability to supply/push excess credit. Imagine what might happen now in the mortgage market if the Federal Reserve was not again creating excess credit supply to drive interest rates down! Our Consumer Cash Flow model continues to track the consumer “liquidity drain.” In our last paper, our preferred measure was barely above 19 days. It is now at about 18.5 days and still declining. By comparison, households had about 50 days of liquidity in the 1990/1991 recession. In late October, we told clients that Santa Claus would appear as scheduled in November. Over the next few weeks, we tracked the “target” yield curve levels needed to generate sufficient cash flow for the holiday season. You might consider us the NORAD of the mortgage market. Santa and his reindeer landed a little behind schedule. The one-runner landing indicated that Santa might have enjoyed too much rum-spiked eggnog during his flight. We are not sure whether Santa was playing to the crowd or whether he really was a bit tipsy. We have no doubt about the Federal Reserve’s ability to manage the yield curve for its desired goals. The yield curve achieved the necessary interest rates at virtually the last moment that it could achieve them: Thanksgiving week. Even a one week delay would probably have created too little cash flow for the holidays. At Thanksgiving, we were thankful for the arrival of Santa. Conclusion The conclusion from our “Money Supply and Real Estate” paper has not changed: slowing home resales should cause a decline in M-2 growth. Liquidity continues to fall even as M-2 rises. It is an odd situation and looks like “Management by (numerical) Objective” to us. Of course, achieving poorly chosen objectives means that one achieves poor results. In September, we suggested that profit margins must decline dramatically to help lower nominal consumption. It looks to us like it is happening just as required to maintain the “real” (surreal?) economy. Be very careful about betting on a “recession.” Though it should happen, we would not be surprised if GDP accounting manages to count growth under these circumstances.