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January 25, 2006
Hard Landing? Still Waiting
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.
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