Tilted Forum Project Discussion Community - View Single Post - 1992 Redux: Will "it's the economy, stupid", Be The Big Campaign Issue?

aceventura3 · 06-21-2007, 07:05 AM

One of the basic questions to ask when analyzing the economic impact of current events is who are the winners and who are the losers from an economic point of view. Short of major panic, when hedge funds fail the biggest losers are often the biggest risk takers. Buying a home has never been an overly risky investment. I guess some see the worst is yet to come, others don't.

From today's WSJ.

Quote:

This drama is being watched very closely on Wall Street for several reasons. One is the tangle that so many big Wall Street players now find themselves in over the hedge funds trades. Another is the scale of the hedge funds; as recently as March 31, they held more than $20 billion in investments in securities and derivatives, not to mention billions more in bets that certain markets would fall.

The problems are also a lesson in the perils of using borrowed money to make trades; one of Bear's funds was highly leveraged. Moreover, investors and traders are uncertain about what Bear's complex holdings are worth. If it can't fetch much for them in the market, others might have to mark down the value of their own holdings.

"There's fear of further liquidations," said Jeffrey Gundlach, chief investment officer at the TCW Group.

It all comes just as about $250 billion in junk bonds and corporate loans are slated to be sold to investors, much of it tied to the corporate buyout boom. The debt is expected to be issued in the next four to eight weeks. If worries about subprime woes spread, and investors suddenly become risk averse, it could lead to troubles for these debt sales.

Yesterday, a closely watched derivative index tied to junk-rated corporate loans fell for an eighth straight day, to a new low of 99.05, down 0.65 from a day ago, according to data from Goldman Sachs Group Inc. The index, called the LCDX, was launched just a month ago and dropped below 100 earlier this week for the first time.

Still, investors didn't appear to be anywhere near panic. The 10-year Treasury note, which investors typically flock to buy in times of trouble, fell instead, pushing its yield, which moves opposite its price, higher.

Gold, another favorite destination when markets are distressed, fell $4.60 to $656.10 an ounce. Volatility expectations in the stock and bond markets, derived from options prices, rose but didn't shoot higher like they usually do in panic situations.

"The world is nothing if not resilient," said Brown Brothers Harriman portfolio manager Richard Koss. "It's amazing how the market keeps on taking shots and keeps absorbing them."

http://online.wsj.com/article/SB1182..._whats_news_us

The folks at the Fed have been setting policy to slow the growth of the economy to fight inflation. They think inflation is now in their target range and have an optimistic outlook.

Quote:

Core inflation rose in early 2006, mostly as companies passed higher energy costs through to consumers in the form of higher prices for goods and services, and as rising home prices prompted more people to rent apartments, driving up "owner's-equivalent rent," a proxy for the cost of homeownership.
[Comfort Zone]

The increase in housing costs has since slowed as the rising supply of vacant homes restrains rents. The recent rebound in energy prices isn't expected to add much new pressure to core prices because they haven't exceeded last year's peaks.

But the Fed does still see risks of higher inflation from the lack of spare capacity in the economy, which means higher demand is more likely to translate into higher prices and wages. Despite a year of slow growth, the unemployment rate, at 4.5%, remains near a six-year low. Global growth is robust, boosting demand for U.S. exports.

In this environment, the Fed is still likely to express some concern that its forecast for inflation to moderate, dropping below 2% by the end of 2008, might go off track.

Despite indications the nation's economy has bounced back from a first-quarter slowdown, the Fed for now is sticking to a forecast of modest growth this year, principally because the housing market is taking longer to hit bottom than the central bank previously expected. Indeed, the recent rise in mortgage rates modestly boosts the risks to the housing market.

http://online.wsj.com/article/SB1182...lead_story_lsc

The size of our economy and its complexity says to me that the subprime issue will be but a small and temporary blip on the economic radar screen.

{added}

Here is more interesting info to put the "housing recession" into perspective (keep in mind that people gotta live somewhere)

Quote:

Building permits, which are required in most localities before construction can begin, rose last month. But much of the gain was a result of permits for apartment buildings. Demand for apartments has been growing as rising interest rates and tighter lending standards have encouraged more families to rent a home instead of purchase one.

Building permits overall increased 3% in May, but single-family home permits fell 1.8%, while permits for apartments gained 17%.

http://online.wsj.com/article/SB1182...lead_story_lsc

So we see building permits for apartments up 17%, I am sure some can rationalize why that is insignificant, I just bring it up to see how it is rationalized.