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January 25, 2006

Hard Landing? Still Waiting

Calculated Risk samples Brad Setser:

Thomas Palley is right: "Foreign flight" (a shock to the United States ability to borrow savings from abroad) is very different from "Consumer burnout" (a slowdown in US demand growth). In both the foreign flight and the consumer burnout scenarios, the US economy slows and the dollar falls. But in the foreign flight scenario, as Palley notes, the fall in the dollar and rise in US (market) interest rates triggers the US slowdown, while in the consumer burnout scenario, the US slump triggers dollar weakness. Foreign flight would combine dollar weakness with higher US (market) interest rates, consumer burnout combines dollar weakness with lower interest rates.

This morning's news brings this observation on the "consumer burnout" front, from Bloomberg...

Sales of previously owned homes fell in December for a third straight month, evidence that housing demand was starting to falter at the end of a record year, economists said before a private report today.         

Sales of existing homes fell to a 6.87 million annual pace last month, the slowest since March, from 6.97 million in November, according to the median of 59 forecasts in a Bloomberg News survey. Sales haven't fallen for three straight months since 2002. They are down from a record 7.35 million rate in June.         

Higher home prices and borrowing costs will curtail demand this year after home sales reached a fifth straight record in 2005, according to real estate industry forecasts.

... and this on the "foreign flight" business, from MarketWatch:

Treasury prices closed at their lows Tuesday, keeping yields higher, after lukewarm response to an auction of 20-year Treasury Inflation-Protected Securities re-inforced worries that there is not enough demand for this month's heavy fixed-income supply...

The weak response played into fears that an exceptionally plentiful amount of government and corporate bonds issuance this month is weakening demand and driving up borrowing costs.

On the bright side though, a full 56.1% of the bids came from indirect bidders, a category that includes foreign central banks. That result should help soothe concerns that foreigners may be backing away from U.S. assets.

Place your bets.

January 25, 2006 in Data Releases , Housing | Permalink


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i got my bets placed. i am pretty much 100% in stocks. and i was more than 50% out of stocks around 2000-2001.

stocks in the U.S. will go up this year.

Posted by: anon | January 25, 2006 at 05:17 PM

I've been about 45% gold and silver and 40% oil since 2001.

Thank heaven. It's been a very, very good run.

And the dollar adjustment hasn't even begun yet.

Posted by: RN | January 25, 2006 at 10:42 PM

Who knows? It would be easier if we knew what hedge funds are doing. For instance, how much of last year's 10 year note issuance was bought by offshore hedge funds?

Posted by: bailey | January 26, 2006 at 11:30 AM

Think it is interesting to note that yields on 10 year bund futures are rising too. (short term trading asof last few days)

Ironically, when the Fed is done, the futures will break (finally) I would be long S+P, and short the treasuries.

Posted by: jeff | January 27, 2006 at 04:51 PM

Maybe I'm crazy but the law of supply and demand leads me to put my bet on the next conundrum - a recession accompanied by rising or stubbornly high long term rates. Here's the scenario - consumer burnout leads to recession which includes a decrease in demand for imports. Recession leads to an increase in the budget deficit and an increase in Treasury issuance. Decreasing demand for imports leads to a reduction in the dollars flowing into central banks that are recycled into Treasuries. Rinse and repeat. Increased supply, reduced demand = lower prices = higher rates.

Posted by: mark | January 28, 2006 at 09:52 AM

Not that anyone should care but I'm 100% in Ford Interest Advantage notes (checking & wiring priv. (get your funds back in about 2 hours), adjusts weekly & oh yeah, it's yielding 5 1/4 & outperformed the s&p500 last year. Folks, thanks to the last 5 years fiscal mismanagement of our past, our present & our current President we're facing some $80 TRILLION liabilities. Our entile GDP is less than $12 Trillion, & I'd guess our federal budget is some $2.3 Trillion. What are we thinking, people? Have you read Max Sawicky's synopsis of our recent growth? "The upshot is that the triumph of Republican-conservatarian economic policy consists of an expansion of government jobs financed by loans from the Communist People's Republic of China."
Remember the old sage advice, it's okay to be right & it's okay to be wrong, just don't be stupid.

Posted by: bailey | January 28, 2006 at 11:27 AM


Feb 7, 8 and 9 will tell the tale, especially the new 30 year auction. If fact this quarter the U.S. government expects to borrow a record net $188 billion.


Posted by: The Nattering Naybob | January 31, 2006 at 12:15 AM

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