Monday, January 11, 2010

Party Like Its 1929

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6962632/America-slides-deeper-into-depression-as-Wall-Street-revels.html

America slides deeper into depression as Wall Street revels
UK Telegraph
By Ambrose Evans-Pritchard
Published: 6:35PM GMT 10 Jan 2010

Economic Indicators/factors mentioned in the article include:

1) Unemployment Rate

U6 Broad Measure of unemployment best measure because it includes people who given up looking for works. According to this measure unemployment is 17.3 pct.

2) The FED

a. Money Supply

The weak job market will decrease the potential for the Fed to tighten the money supply.

The Fed Money Multiplier reached an all-time low of 0.809 in mid December. MZM is contracting at 3 pct per annum and M3 (broad money) at 5 pct.

b. Interest Rates

Despite, a zero interest rate the economy has shown only weak signs of recovery.

3) Real Estate:

a. Foreclosure Rate

Foreclosures usually lag job losses by about one year so the foreclosure rate should be rising.
Federal and state governments may start moving temporarily to block foreclosures. This would prevent the market correcting itself and prolong the crisis. For example, banks and builders will continue to hide bad assets on their books.

b. Case-Shiller Index of Home Prices

On the positive side, the index is up over five months. Karl Case, however, does predict a further 15pct drop in the future.

c. Option ARM Resets

$134 billion in option ARM’s are schedule to reset upwards this year.

d. Mortgage Interest Rates

Have surged 40 basis points.

4) Stimulus Spending

Economic growth does not have legs. It is dependent entirely on the stimulus spending.

5) Growth Rate

Growth Rates are typically 7.3 pct per quarter during a recovery but the 3rd qtr 2009 growth rate was only 2.2 pct.

6) Inflation/Deflation

Inflation is not a problem. Core PCE (Personal Consumption Expense) 0.1 pct in November.

7) Intrinsic Value

Stocks are 25 pct overvalued according to Shiller on a ten year normalized earnings basis just like before the big crash of 1987. While I am not familiar with the particulars of this shiller measure of stocks values, it is alway impressive if one tries to predict the where stocks will go by trying to calculate their intrinsic value.

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