DBcooper
08-08-2007, 05:09 AM
This article is pretty good however i think Chan is being somewhat an optimist.
That said notice the 200,000 job loss he sees already.
Investors are nervous. Who can blame them?
BRIAN MILNER
From Saturday's Globe and Mail
<LI class=email>E-mail Brian Milner (bmilner@globeandmail.com) <LI class=bio>| <A title="Read the biography of Brian Milner" href="http://www.theglobeandmail.com/opinions/columnists/Brian+MilnerBio.html"><ABBR title=Biography>Read Bio</ABBR>
| Latest Columns (http://www.theglobeandmail.com/opinions/columnists/Brian+Milner.html)August 4, 2007 at 12:42 AM EDT
The latest troubling U.S. economic signals, spreading housing woes, the worsening credit squeeze and more turmoil in the markets were enough to spur talk of the dreaded “R” word this week.
“We believe that the S&P 500 is now pricing [in] a U.S. recession starting in late 2007 lasting through most of 2008,” UBS's chief equity strategist David Bianco said in a research note on Wednesday.
Using a calculation based on price-earnings multiples and interest rates, Mr. Bianco said the market is expecting the recession to cut S&P 500 earnings per share by about 10 per cent. But he hastened to add that he doesn't consider such an outcome likely, which is understandable. It's not good for business if too many clients cash out of the markets and hunker down to wait out coming economic storms.
But as if on cue, the S&P proceeded yesterday to post its worst single-day percentage decline since the Shanghai surprise that triggered a global stock selloff on Feb. 27.
Most economy watchers remain convinced that the spillover from the U.S. mortgage crisis and the severe slump in the housing sector will stop short of triggering a full-blown downturn, although they are definitely starting to worry as they sift through the tea leaves.
Now, when it comes to forecasting recessions, we'll take the markets over most economists. The latter have an excellent record of predicting downturns – usually only after they have run their course.
But a few weeks of market turbulence after such a long period of calm, sunny weather tells us nothing about whether a recession is lurking around the corner. If we were heading toward a severe downturn in the next few months, punters would be stampeding to the exits instead of walking slowly.
What both the equity and bond markets do tell us, though, is that people are nervous, and with good reason.
To find out why, we went to Anthony Chan, an economist with a track record as a pragmatic prognosticator who has a good handle on Main Street concerns stemming from his time with a bank in the U.S. Midwest. He also once toiled for the Fed. So if he sees trouble ahead, he's one economist worth paying attention to.
“There is quite a bit of slowdown in the pipeline,” said Mr. Chan, chief economist with J.P. Morgan Private Client Services in New York. “The big question is: ‘Is that enough to push the economy into a recession?' At this point, I don't see that.”
What he does see is a difficult road ahead for rest of this year as the subprime mortgage meltdown takes its toll. It claimed another direct victim this week with the failure of American Home Mortgage Investment, a company that until yesterday employed 7,000 people. Today, about 90 per cent of them are looking for other work. The indirect impact of such job losses on the economy is just beginning. And it promises to be painful, as all bursting bubbles tend to be.
“We know that the unwinding of the subprime situation is still ahead of us, rather than behind us,” Mr. Chan said.
Sifting through the latest labour market numbers released yesterday, he noted the slower job growth, but warned “that the other shoe” has yet to drop. Translation: Expect big housing-related job losses to weigh down the economy. And what catches his eye this time is a dip in the average work week of 0.1 hours to 33.8 hours. Why does such a tiny change matter? It translates into a loss of about 200,000 jobs.
As always, the key to keeping the economy moving lies with the resilient American consumer, who has been soldiering on bravely in the face of painful asset declines, tightened credit conditions and growing job concerns.
When housing tanked, people were told not to worry, because equities were so strong and there was still plenty of cheap credit available. Now the markets have given up about half of this year's gains, the job market is looking more precarious and bank loans are getting more costly and harder to get. All of which point to a lot less borrowing and spending.
If the consumer packs it in and the markets keep tumbling, that would leave only one potential white knight to ride to the rescue – Fed chairman Ben Bernanke.
The central bank's track record over the past few decades does not inspire great confidence. It was, after all, the Fed's heavy interest-rate cuts of 2001 that triggered the housing bubble in the first place.
But we're not going to need Mr. Bernanke to save us yet.
Corporate profits for the second quarter were above expectations, though they're slowing. The markets are still up on the year and interest rates remain low. “I still see enough positive developments out there,” Mr. Chan said, “to suggest that we'll be able to avoid a recession.”
That said notice the 200,000 job loss he sees already.
Investors are nervous. Who can blame them?
BRIAN MILNER
From Saturday's Globe and Mail
<LI class=email>E-mail Brian Milner (bmilner@globeandmail.com) <LI class=bio>| <A title="Read the biography of Brian Milner" href="http://www.theglobeandmail.com/opinions/columnists/Brian+MilnerBio.html"><ABBR title=Biography>Read Bio</ABBR>
| Latest Columns (http://www.theglobeandmail.com/opinions/columnists/Brian+Milner.html)August 4, 2007 at 12:42 AM EDT
The latest troubling U.S. economic signals, spreading housing woes, the worsening credit squeeze and more turmoil in the markets were enough to spur talk of the dreaded “R” word this week.
“We believe that the S&P 500 is now pricing [in] a U.S. recession starting in late 2007 lasting through most of 2008,” UBS's chief equity strategist David Bianco said in a research note on Wednesday.
Using a calculation based on price-earnings multiples and interest rates, Mr. Bianco said the market is expecting the recession to cut S&P 500 earnings per share by about 10 per cent. But he hastened to add that he doesn't consider such an outcome likely, which is understandable. It's not good for business if too many clients cash out of the markets and hunker down to wait out coming economic storms.
But as if on cue, the S&P proceeded yesterday to post its worst single-day percentage decline since the Shanghai surprise that triggered a global stock selloff on Feb. 27.
Most economy watchers remain convinced that the spillover from the U.S. mortgage crisis and the severe slump in the housing sector will stop short of triggering a full-blown downturn, although they are definitely starting to worry as they sift through the tea leaves.
Now, when it comes to forecasting recessions, we'll take the markets over most economists. The latter have an excellent record of predicting downturns – usually only after they have run their course.
But a few weeks of market turbulence after such a long period of calm, sunny weather tells us nothing about whether a recession is lurking around the corner. If we were heading toward a severe downturn in the next few months, punters would be stampeding to the exits instead of walking slowly.
What both the equity and bond markets do tell us, though, is that people are nervous, and with good reason.
To find out why, we went to Anthony Chan, an economist with a track record as a pragmatic prognosticator who has a good handle on Main Street concerns stemming from his time with a bank in the U.S. Midwest. He also once toiled for the Fed. So if he sees trouble ahead, he's one economist worth paying attention to.
“There is quite a bit of slowdown in the pipeline,” said Mr. Chan, chief economist with J.P. Morgan Private Client Services in New York. “The big question is: ‘Is that enough to push the economy into a recession?' At this point, I don't see that.”
What he does see is a difficult road ahead for rest of this year as the subprime mortgage meltdown takes its toll. It claimed another direct victim this week with the failure of American Home Mortgage Investment, a company that until yesterday employed 7,000 people. Today, about 90 per cent of them are looking for other work. The indirect impact of such job losses on the economy is just beginning. And it promises to be painful, as all bursting bubbles tend to be.
“We know that the unwinding of the subprime situation is still ahead of us, rather than behind us,” Mr. Chan said.
Sifting through the latest labour market numbers released yesterday, he noted the slower job growth, but warned “that the other shoe” has yet to drop. Translation: Expect big housing-related job losses to weigh down the economy. And what catches his eye this time is a dip in the average work week of 0.1 hours to 33.8 hours. Why does such a tiny change matter? It translates into a loss of about 200,000 jobs.
As always, the key to keeping the economy moving lies with the resilient American consumer, who has been soldiering on bravely in the face of painful asset declines, tightened credit conditions and growing job concerns.
When housing tanked, people were told not to worry, because equities were so strong and there was still plenty of cheap credit available. Now the markets have given up about half of this year's gains, the job market is looking more precarious and bank loans are getting more costly and harder to get. All of which point to a lot less borrowing and spending.
If the consumer packs it in and the markets keep tumbling, that would leave only one potential white knight to ride to the rescue – Fed chairman Ben Bernanke.
The central bank's track record over the past few decades does not inspire great confidence. It was, after all, the Fed's heavy interest-rate cuts of 2001 that triggered the housing bubble in the first place.
But we're not going to need Mr. Bernanke to save us yet.
Corporate profits for the second quarter were above expectations, though they're slowing. The markets are still up on the year and interest rates remain low. “I still see enough positive developments out there,” Mr. Chan said, “to suggest that we'll be able to avoid a recession.”