Sunday, February 11, 2007

Coming Home To Roost

As you may have learned in high school Economics class, the stock market is a lagging indicator of an economic recession. Even while it gathers new heights and has a dazzling period of increase, the country and its citizens goes to hell in a handbasket. Finally, however, everything runs out of steam and the markets collapse and that, generally, is what puts the average American into the frame of mind that we're in a recession.

That day may be coming. Despite the fact the warning signs have been there for a while now, the marketeers are finally getting edgy about making payments on their pied-a-terres on the Upper East Side:
NEW YORK (Reuters) - Volatility could be the name of the game on Wall Street next week as rising crude oil prices revive inflation fears and stock investors await congressional testimony from the Federal Reserve's chairman.

Investors hope the Fed's chief Ben Bernanke will speak plainly about how he sees the outlook for interest rates in the months ahead after data showing the economy is strong.

The outcome of this weekend's Group of Seven finance ministers' meeting will attract investors' attention early next week as they look to see what, if anything, is said about foreign-exchange rates.
Housing, oil prices, and exchange rates. All three of those have been at the heart of American economic woes (despite the "good news" of price indices and GDP "growth" for the past six months) for years.

Mortgage defaults are at record levels at three mortgage lenders who normally lend to people who's credit is less than A-1: Countrywide, they of the hideously often repeated commercials, announced Friday that they would be hit with enormous numbers of defaults and payments were slowing down on other mortgages nationwide, causing the Dow to slip 56 points. Further, HSBC and New Century Financial gave similar warnings.

Add to that, consumer spending dropped for the first quarter in 50 years last quarter (the Christmas quarter, no less!), and spending for new homes declined by near-record let's take the foreign exchange markets into account. These rates help determine the interest rates our deficit-financing notes and bills pay. After all, it's not enough that they pay, say, 5%, but if that five percent actually loses a foreign investor money in his own currency (say the dollar is trading six percent less than when he originally purchased them), he's going to dump them, which drives prices down and forces the US to issue additional debt in order to attract new investors, with higher interest rates.

Which get passed onto us in the form of higher taxes, and higher domestic rates. Which means more mortgage defaults, and bankruptcies.

And by now, we all know the effect higher oil prices have on us. Keep in mind that much of the larger oil producing nations are well past peak oil (some 30 years ago, the US hit peak oil production, which is why we import so much of the stuff...Iran, Saudi Arabia, Kuwait, Venezuela, Norway, the UK and Iraq all passed peak oil about the same time), so just to make up the shortfall of declining oil supplies, OPEC and other oil producing nations will have to "find" another 30 billion gallons of crude each year.

This doesn't take into account the fact that oil demand is increasing more quickly that oil production forecasts have allowed. It has been estimated that 2007 will see a tipping point in the oil industry that will skyrocket oil prices.

This may be the lighting of the fuse.

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