Sunday, December 31, 2006

Asia Times Commentator Bearish

Global economy faces a dangerous year
By Jephraim P Gundzik

From the article:

America’s economic fairytale has turned into a nightmare and very few investors realize it. In addition to producing a sudden and sharp decline in household income by eliminating the prospect of new mortgage refinancing for many Americans, declining prices for new and existing homes will have a strong negative impact on the US financial system, severely restraining credit growth. Falling home prices, especially in what were once the hottest housing and mortgage markets in the US, have caused mortgage default rates and foreclosures to surge higher.

The combination of rising defaults, foreclosures and falling collateral values is beginning to weaken the balance sheets of mortgage lenders, including several of America’s largest banks. Growing weakness in the banking sector is very alarming. Banking sector and economic crises in many countries over the past 25 years can be traced to overly enthusiastic credit growth used to finance either capital investment or real estate speculation, or both. Japan offers a stunning example of what can happen after a real estate bubble bursts.

The Federal Reserve appears determined to let financial markets “self-correct” in order to adjust interest rates to changing expectations for economic growth and inflation. Self-correction is a defining feature of financial markets. However, with the Fed rudderless, it is very unlikely that this self-correction will occur in an orderly and gradual manner. Rather, such self-correction will be sudden and sharp.

This is very similar to what bloggers Mike Shedlock (Mish's Global Economic Analysis), Barry Ritholtz (The Big Picture) and Charles Smith (Of Two Minds) have been saying. Calculated Risk leaves it open as a possibility. The Housing Bubble Blog is warning about such a collapse in housing.

Mr. Gundzik is just one opinion from Asia. Other than Fox News, I don't know of any commentators that are taking a contrary view. Does this view represent the consensus of the investment community? It's that "such self-correction will be sudden and sharp" that has me leery of investing in the stock market right now.

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