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Tuesday, September 27, 2005


collapsing confidence, flattening curves

today's reading of recent consumer confidence presents yet more convincing data that the american economy is heading into recession. as i posted some months ago:

the fed's handiwork to this point is having its effect in the economy -- consumer confidence data is weakening. while the february headline number looks encouraging, what is not is the most relevant measure to economic forecast -- future expectations (95.7) less present situation (a strong 116.4) equals -20.7. whenever this figure reads negative, it forewarns of a coming recession with an long lead time (often years). it first began to flirt with the zero line in early 2004, and has in recent months dropped several points. more considerable recessions often are preceded by a reading of less than -50.
the differential now rests at -37.2 -- driving ever further into recessionary territory. this is compounded by the continuing wane of the leading economic indicators, for which the august ecri figure was 137.6. while still expanding, the expansion is slowing into what may be a peak, which precedes recession.

the press is blaming these ominous signs on hurricanes katrina and rita, but the ecri makes explicit in its press release that "[t]he economic effects of Hurricane Katrina are not reflected in the August values". a greater tide is turning in the american psychology, i fear, as the steady diet of rising short rates works to invert the yield curve and eliminate the carry trade, the money machine upon which the american economy has become completely addicted to and engorged upon.

it must be said again -- the american debt bubble has reached potentially catastrophic proportions. this is particularly relevant to a discussion of the yield curve as put forward in some proprietary analyses i've read recently.

the lender, ultimately, is in control of this bubble -- the borrowers of the masses would likely immolate themselves on ever-more debt for so long as lenders grant them the rope with which to hang themselves. it is when the lender -- not the borrower, but the lender -- decides that the terms are no longer advantageous that the bubble will pop. banks will only lend for so long as there is money in lending; even as banks now function only as irresponsible pass-through fee generators, without actually having to profit from interest-rate differentials themselves, a disappearance of buyers for their mortgages (and securities backed with them) will be the consequence of unprofitability in lending long-term with funds borrowed in the short-term -- that is, when the yield curve inverts.

it is in this way that the end of the american debt bubble (and the housing bubble which is its primary component) hinges on the slope of the yield curve. a recent example of this in practice is provided by the british housing market, which responded to the bank of england rate inversion of mid-2004 by promptly flattening -- which is forcing the onset of a general consumer recession. another is in the manner in which the nasdaq bubble (also driven by money borrowed at low short-term rates and then invested willy-nilly in search of capital gain) collapsed in march 2000, only two months following the american curve inversion of that january.

the yield curve itself is now rapidly flattening in the united states, as the fed raises short rates and long-bond yields remained suppressed under foreign central bank purchasing demand. this is a warning to the observant. coincident with sharply lower future expectations and declining leading indicators, a bull-flattening curve signals an imminent end to lending expansion in the american economy and the onset of a contraction and recession -- if not worse, given the massive imbalances in the global economy and the need of an immense deleveraging of the kind not seen since the years 1914-45. such an event has been in the wings since the late 1990s, when analytical heads first began to talk about the frightening quantity of borrowing in the global financial system. the federal reserve bank under alan greenspan delayed that deleveraging by radically cutting rates in the aftermath of the 2000 curve inversion and the popping of the global equity bubble. but, in doing so, greenspan opened the floodgate to a massive and unanticipated expansion of consumer borrowing from those already lofty levels, making the eventual inevitable vastly more damaging, painful and uncontrollable -- uncontrollable, particularly meaning the vanishing authority of american policy over global economic management through the dollar, which has become a potential horseman of economic apocalypse.

weathering such a storm as we may be entering without sustaining traumatizing destruction -- globally, nationally and personally -- is a very difficult, perhaps impossible task. i wish you luck, as i hope you wish me luck.


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