Saturday, December 15, 2007

Will Stagflation win ?

Alan Greenspan talks about increased odds of recession during his interview to NPR available at NPR site

According to Alan, it sounds like the housing market slump could have been inevitable due to the nature of recent global economic behavior catalyzed by long term interest rates that is out of Fed's control.

Knowing how the economic market works and the basic business cycles, I could only opine that the above is a weak defense. We will have to wait to see more analytical support from economists and media. I personally know few people who had bought hefty mortgage loans to join the bandwagon. In addition to new home supply, the volume of exchanges of used homes and leverage on home equities increased exponentially. In a booming market, one cannot agree more on the optimistic outlook and stretch goals to hit high returns. This has inarguably blinded the eyes of the public borrowing ARM's who are influenced by the positive marketing from the issuers and the media doing a great job on charting the facts around the increasing home return trends.

The reality that people not able to adjust when the Adjustable Rate Mortgages' rate stepped up from their comfort zone leading to increased rates. The inability of people not able to make their payments have resulted in the inability of the issuer's to meet their commitments to the whole another world of Mutual Funds and other Equity funds. While the homes are not selling anymore, the poor securities were being sold in all directions causing stress to Wall Street.

In short, while the global financial factors could have indirectly fueled the above, I think that the spark was the rock bottom Fed rate. Had we gone on a different tangent and asked, what if Fed didn't lower the rates in 2001. Would the US economy been in a better place today ? Maybe someone has already enjoyed analyzing this journey. Happy googling !!

Coming back to the topic, going by Alan's word that recession odds raise and with November CPI numbers hinting inflation, Details from Bloomberg

While this can be a good coincidence at a time in point, my forecast of stagflation on my post on Nov 7th encourages to follow up closely and look at future indicators and make adjustments. Considering the evils of stagflation, I wish I am wrong. I think this would be an interesting time to look back in history as to how these perils were defeated through financial and policy innovation or if US succumbed to it due to forces within and outside (oil price, pressure on dollar, cut-throat competition for resources from emerging economies) its control. I stress innovation because the market efficiencies have never been quick at work in the past. Thanks to the internet.

As always, I am not even going into war and other political aspects including the good Green forces at this juncture.

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