6 Jan Daylight has come, so has Recession

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Daylight has come, after 2 weeks of darkness prevail when USD was tossed from its height at 1.4311 into the abyss at 1.4830, a 500 pips drop. The people or vampires who did the pushing has disappeared on Friday, sold Euro to those rushing to long Euros after NFP.

However, a greater monster has appeared: Recession. No media, government officials or Fed for that matter can hide the fact that US is now in recession. (the official recognition of a recession is by the department of economics statistics, which would be 1 year later). In fact a deeper analysis of the employment figures, and methods would reveal that the actual figure may be even lower.

The subprime crisis is still far from over. With more revelation of losses emerging, and counter-party risks materialising, banks and financial institutions have more to disclose in coming months.

The housing oversupply is accelerating when those speculators can not longer afford to hold their multiple houses when credits are hard to come by. Schiller is forecasting the loss of real estate value is going to triple in coming years to $3 Trillion or more.
http://business.timesonline.co.uk/tol/business/economics/article3111659.ece

There is a worthwhile article by Professor Brad Delong: Three cures for three crises
http://www.project-syndicate.org/commentary/delong73

First type of crisis: liquidity crisis caused by declining confidence in the financial system,
cured by Central Bank lending
Second type: falling asset prices, cured by monetary easing (current Fed mode)
Third type: bursting buble, cured by nationalising the financial system or inflaiton.

So far the market is only measuredly pricing in the second type of crisis, not the third.

The media and government would continue to talk up the economy, with a pending Bush annoucement of some form of economic stimulus.

In coming week, we may see Fed officials shifting stance to growth concern, laying grounds for Bush stimulus and accelerated cuts. Possibly the Fed target rate would be at 3.25% before summer ends. That is inline with Ben's academic belief in deliverying the maximum impact and not in a measured pace.

We would have a year of world wide inflation, while governments seek measure to offset the effects.

The markets would start to price in a US recession and an accelerated rate cut schedule by the FED in coming weeks.

And the challenge now lies on the Emerging Asia economies. Would they be able to decouple from the US recession ?

Asian economies are essentially export economies, China, Japan, Korea, India, Malaysia, Singapore, etc. The manufacturing bases are in a large part investment of US and European companies. (investment in terms of technologies, capitals, etc). With the biggest consumer US and Europe consumer markets shrinking back, the US and European companies would cut back on their production. Obviously any growth in the Asian consumers cannot offset the cut.

Moroever the Asian economies have to struggle with high oil, and secondary inflation in food, wages, etc. Incidentally there is a rampage in Malaysia this week for cooking oil out of fear of price hikes. We are going to see more and more of inflation scares running in those economies.

The decoupling of the Asian economies from US is just a myth propagated to keep investment in the region alive.

Contrary to main stream thinking, Asian currencies may take a dive sometime this year, with a strengthening USD. And that would bring on another set of problems. We would cross the bridge when we come to it.

When all economies come to a standstill, then we would have a falling oil, commodities prices and with it a return of inflation to normal.

The recovery of the economies would be long drawn.

What I have written is contrarian. Mainstream thinking is a slowing US in the first half and then a recovery in the second half. How often does mainstream gets it right ?