Wednesday, December 12, 2007

Morgan Stanley issues full US recession alert

UK Telegraph:
Morgan Stanley has issued a full recession alert for the US economy, warning of a sharp slowdown in business investment and a "perfect storm" for consumers as the housing slump spreads.

In a report "Recession Coming" released today, the bank's US team said the credit crunch had started to inflict serious damage on US companies....

"As delinquencies and defaults soar, lenders are tightening credit for commercial, credit card and auto lending, as well as for all mortgage borrowers," said the report, written by the bank's chief US economist Dick Berner. He said the foreclosure rate on residential mortgages had reached a 19-year high of 5.59pc in the third quarter while the glut of unsold properties would lead to a 40pc crash in housing construction.

"We think overall housing starts will run below one million units in each of the next two years -- a level not seen in the history of the modern data since 1959," he said.
The more conservative Standard and Poors calls for a 40% chance of recession next year - I can't locate an online link yet. Goldman Sachs also puts it at a 40-45% chance. The more conservative institutions like these are slower to change previous forecasts.

World banks are setting up emergency fund agreements to lessen chances of bank failures. That is not using the preferred language of the agreements but what it really means.

Treasury Secretary Hank Paulson: 2008 will be worse next year for banks and housing.

What isn't being reported much is all the financial maneuvering going on to avoid marking mortgages and debt to market. Even many prime mortgages are selling at a steep discount and most banks would technically be in default if true evaluations were made on all their debt. For a huge portfolio of many kinds of debt E*Trade received 27 cents on the dollar. (I feel Motley Fool's analysis does not recognize the variety of debt sold by E*Trade.)

I think many of the Wall Street analysts have forgotten what a true recession is. In most aspects the current problems are much worse than the 70's.

Bonddad's Big Picture:
The dollar is still in a downtrend, oil is still high and the Federal Reserve is looking like they are behind the curve. Housing is still a huge problem, corporate earnings are not good, and confidence is low.

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