Signs Are Pointing South on Wall St.

From The Washington Post, 11/27/07:

http://www.washingtonpost.com/wp-dyn/content/article/2007/11/26/AR2007112602206_pf.html

Signs Are Pointing South on Wall St.

Credit Woes Foster Bets on Bad Times

By Neil Irwin

Washington Post Staff Writer

Tuesday, November 27, 2007; A01

Wall Street is betting on a recession.

Investors in stocks and bonds are paying prices that indicate they

believe a snowballing housing crisis and worsening credit crunch will

soon tip the U.S. economy into a recession, analysts said.

Many economists, including leaders of the Federal Reserve, don't think

things will get that bad, but some say the risk of a serious downturn

has risen in recent weeks.

Investors were so eager to buy ultra-safe government bonds yesterday

that they were willing to accept sharply lower interest rates.

The rate on the 10-year Treasury bond fell to 3.84 percent from 4

percent Friday.

The low rates indicate investors expect the Federal Reserve to cut

interest rates aggressively in the coming year to ease the pain of

recession.

Stocks are now down more than 10 percent from their peak in October.

The Standard & Poor's 500-stock index fell 2.3 percent yesterday,

dropping the market to a level that Wall Street analysts say reflects

an expectation that corporate profits will fall.

Taken together, those and other data indicate that financial markets

have a decidedly negative prognosis for the economy.

"They're saying the odds of a recession are pretty damn high," said

Diane Swonk, chief economist at Mesirow Financial.

There are reasons to think things will not get that bad, however.

Holiday sales started Friday with a strong 8.3 percent gain over last

year, and U.S. consumers have proven resilient in past periods of

financial distress.

With the dollar weakening, U.S. exporters will be at an advantage;

joblessness remains near historic lows, at 4.7 percent;

and the stock market, an old joke goes, has predicted nine of the past

five recessions.

Moreover, economic growth could slow sharply through the first half of

next year, as the Federal Reserve and myriad private firms predict,

without technically falling into recession territory.

A recession is defined as a significant decline in economic activity,

as measured by a variety of indicators, that lasts more than a few

months.

The nonprofit Conference Board said yesterday that its index of

leading economic indicators fell in October, but not by so much as to

suggest a recession is about to begin.

Other events yesterday showed how widely worry has spread.

The Federal Reserve Bank of New York said it would make at least $8

billion available so banks do not find themselves short of cash

through early January.

Former Treasury secretary Lawrence Summers said in a column in

yesterday's Financial Times that he now believes the odds favor a

recession, a view he did not hold a few weeks ago.

Housing prices are falling sharply in many of the nation's biggest

cities, and millions of foreclosures are forecast for the next two

years.

Oil prices are near $100 per barrel, which could thin out consumers'

pocketbooks if the winter is especially cold.

And as the value of the dollar drops, imports as varied as French wine

and Japanese electronics could become more expensive.

In a view increasingly typical among Wall Street economists, analysts

at Merrill Lynch published a research note yesterday with the

headline:

"We believe we are going to see a recession in '08."

Widespread expectations of a recession could be self-fulfilling

because of how financial markets and mainstream America are

interconnected.

If investors are sufficiently convinced a recession is ahead, they

would be reluctant to lend money to businesses that want to expand,

making it so.

Just a month ago, financial markets seemed to be healing from the

tumult of the summer, when fear of losses in the mortgage sector

caused many markets to effectively shut down.

But throughout November, the very institutions that were expected to

ease the blow to the economy have shown more evidence of trouble.

Investors are worried that major banks are suffering such severe

losses from mortgage and other risky securities that they will not be

able to lend as much money to consumers and businesses in the months

ahead.

The same fears apply to Fannie Mae and Freddie Mac, the

government-sponsored housing finance companies.

"It looked like the problems in the credit markets were going away or

at least calming down a few weeks ago," said David A. Wyss, chief

economist of Standard & Poor's.

"Now the signs are that they're not."

The credit problems are no abstraction.

They make it more expensive for individuals to obtain mortgages and

for businesses to expand.

Higher interest rates for risky mortgages, for example, could make it

difficult for would-be buyers to afford a home, which could cause

prices to drop further.

That, in turn, could spur more foreclosures, which could lead

financial institutions to further increase rates they charge on

mortgages.

"These things feed off of each other," Wyss said.

The same is true for businesses.

Continuing expansion of the commercial real estate sector, for

example, including office buildings and shopping centers, has been a

major cushion from the housing downturn in recent months and has kept

construction workers employed.

In February, owners could borrow against such properties at interest

rates about one percentage point above the rate for Treasury bonds,

based on a Morgan Stanley index for moderately risky commercial

mortgage-backed securities.

At the end of September, commercial property owners had to pay an

additional four percentage points. By yesterday, the premium was seven

percentage points.

Higher borrowing costs could make commercial builders less likely to

move forward with new construction, analysts said, eliminating a

crucial source of growth in jobs and in the gross domestic product.

The potential freeze in bank lending could mirror the savings and loan

crisis of the early 1990s, a major cause of the 1990-91 recession.

"In any recession, you get to a tipping point where sentiment unravels

and feeds on itself. Psychology takes over," said Mark Zandi, chief

economist of Moody's Economy.com.

______________________________________________________

Harry

Harry Hope wrote:

> From The Washington Post, 11/27/07:

> http://www.washingtonpost.com/wp-dyn/content/article/2007/11/26/AR2007112602206_pf.html

>

> Signs Are Pointing South on Wall St.

>

> Credit Woes Foster Bets on Bad Times

>

Over Thanksgiving I was amazed by the number of friends and family who

are moving their investments to Europe. Just about everyone thinks

there's going to be a recession, though of course the Fed can't say so

because then they'll be accused of creating a self-fulfilling prophecy.

--

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On Sat, 01 Dec 2007 15:27:57 -0500, Harry Hope <rivrvu@ix.netcom.com>

wrote, quoted or indirectly quoted someone who said :

>Wall Street is betting on a recession.

If interest rates are lowered, to help the credit crunch, that causes

inflation, devalues the dollar, and puts the country into deeper trade

deficit. Confidence in the dollar erodes, and more and more petroleum

transactions are done in non-US currencies. This further devalues the

dollar. This increases the prices of imported goods. The USA is the

world's biggest importer. They import more than they export. This

means buying power erodes. It also means the US has a harder time

borrowing money because it is not offering sufficiently attractive a

rate. The devaluing dollar makes US T-Bills even less attractive. You

have several vicious circles spinning away.

If interest rates are raised, that brings on recession by tightening

credit.

To get out of this predicament, the administration will have to use

some other tools besides the prime rate.

--

Roedy Green Canadian Mind Products

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