Venda do Novo Banco pode representar 8% do M&A na banca europeia este ano

[Surfer]

With luck and perfect timing, the Federal Reserve has an excellent chance to get the Echo Stock Market Bubble and the Housing Bubble to pop at the same time. They have carefully engineered a major "Echo Bubble" in the stock market using 13 interest rate cuts - appropriately timing the last one to give an added boost to the third income tax cut and war spending. Moreover, the Fed, Washington and Wall Street have been cheerleading some modest data suggesting economic improvement and are down-playing the negatives from the employment front.
In the second quarter, GDP was growing at close to a 3% rate, though 70% of the growth was defense spending and employment dropped every month. The headlines should read, "Bush cuts taxes, Fed cuts rates, Chinese workers cheer!"

In July 2003, with tax cuts kicking in, retail sales were up around 1.4% and with hot weather electrical generation pushing up Industrial Production 0.5%, the US actually lost another 40,000 jobs. The Wall Street spin has gotten S&P PE multiples back to 35 times earnings and NASDAQ 100 PE multiples back around 80 times earnings. As yet, the momentum traders are still sticking with their happy view of corporate earnings and fail to notice that the dollar has just strengthened 10%, long term interest rates have surged 1.4% and energy prices have been rising. Prices at the gas pump could hit new highs just in time for Labor Day. For many firms, 30% to 50% of earnings gains had come from a weakening dollar. Rising energy prices are not what the Middle East war was supposed to be about. A stronger dollar, rising long term interest rates, rising oil prices and an extraordinarily over-priced stock market, are terrible for our economy.

The biggest negative going forward is coming out of the mortgage market and what it portends for borrowing, income, employment and housing prices. That "little rise" in mortgage rates has sent mortgage refinancing down over 70% from a peak, which had greatly helped consumer spending through the spring and summer. The Federal Reserve engineered the Housing Bubble by dropping interest rates for three consecutive years since the peak in stocks in 2000. The increase in home mortgage borrowing was running at about an $800 billion a year pace. (For spending, a dollar borrowed is almost worth two dollars of income, because a dollar borrowed can be fully spent, but you might need to make two dollars to have one left after tax to spend).

Moreover, mortgage refinancing generates more income and jobs than people imagine. For instance, in 1988 there were 8,500 mortgage brokers. By June of this year, there were 44,000 mortgage brokers employing 320,000 people. The 320,000 mortgage broker employees are just supported by a couple of the line items listed below. The other costs support several hundred thousand other employees. Listed in the table are standard charges associated with a refinanced $125,000 mortgage as listed in a recent front page Wall Street Journal article.

A recent article appearing in The New York Times entitled "The Mortgage Closing Nightmare" cites a figure of $50 billion a year spent on mortgage closing costs. However, one person's "costs" are another person's revenue or income. $50 billion in revenues can support paying 1,000,000 people $50,000 a year. If mortgage REFI's have just dropped 70%, it is logical to assume that we are in for a drop in employment in this huge sector of the economy of several hundred thousand workers.

Also, the employment picture should have some major "fade outs" this fall. The FTC "Do Not Call List" has already gotten over 30 million people to sign up so hundreds of thousands of people who basically "smile and dial" for a living will be let go. In the auto industry, the UAW, GM, Ford, and Chrysler have to come to terms with the fact there are still too many US auto factories and workers. The current level of auto incentives can't be sustained with the dollar up 10% - expect plant closings and layoffs. Finally, we have a general economy where it would take economic growth of close to 4% to stop losing jobs to Asia, even without the mortgage side of the service economy collapsing.

Housing prices have risen about 40% and mortgage debt about 60% in the past five years. Shutting off mortgage refinancing will start to "pull the rug" out from under housing prices. Housing prices have been driven by falling interest rates. When the 10-Year Treasury Note Yield hit a 45-year low this spring, interest rates were screaming "Top" for bond and housing prices. US Treasury bond prices have fallen over 10% - keep your eye on housing.

The financial markets and world economy have bet "big time" on a strong US economic recovery again lifting the world. The US consumer is spent out, the tax cuts are fading into history and the Fed is running out of ammunition for interest rate cuts, just as a drop in mortgage refinancing is slamming into the housing market. The Fed has created and nurtured the housing bubble to encourage consumer spending to fill in for the lack of business investment. The Fed also created the "Echo Bubble" to keep investor's "Animal Spirits" up and consumer confidence high.

Given Alan Greenspan's hubris, wouldn't it be a fitting irony if he can get the Echo Bubble and Housing Bubble to pop at the same time? What is reasonably certain is this: If the stock market crashes, it will take housing with it and if housing goes down, it will take the stock market with it. This means if you like to bet, "you've got two ways to lose!"

The world finds Germany, Italy, South Korea, and the Netherlands in official recession and the world stock markets have all bet on the US consumer and US economic growth to save the day. We think it prudent to keep your money safe and to look out for the fall!

By: Richard Benson