Time To Talk Global / Consumer / Jobs
A: Lets start looking ahead and be forward thinking since I strongly believe Manhattan real estate is directly tied to wall street. If wall street has a rough few years, we will lose some fundamental umph that has helped sustain housing prices while the rest of the country is in the middle of major correction. I'm being asked what to look for as red flags. In my opinion, it's time to focus on oil prices as a sign of global growth, jobs, and the consumer. In addition, today's fed statement in essence is a change in bias towards concerns of future economic growth.
OIL - A CORRECTION MAY SIGNAL SLOWING GLOBAL GROWTH
Energy prices have stayed at high levels (high 60's - mid 70's) for some time now amid strong global growth, supply/demand imbalances, recent hurricane concerns, and geopolitical tensions. While the trickle down effect has been modest and the only real pain felt by consumers is higher gas/heating costs, it could have been much worse. We could have felt more significant inflationary pressures as a result of higher energy and commodity prices, but it seems we haven't. Inflation here at home as been moderating and it seems now the fed has changed their bias towards future economic growth concerns with the accompanying statement of today's discount window rate cut.
Here is what the fed said today that is in essence an intra-meeting change in bias:
Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.Now, you've heard the word 'globalization' a lot in the past few years and the strong global economies have been a key fundamental driver to US equity markets. What should happen if global growth slows? If the US sneezes, will the world economies catch a cold?
Keep an eye on oil prices as a global indicator towards slowing worldwide growth! Should oil prices correct and remain at those correction levels in the near future, chances are this liquidity/credit squeeze is starting to effect global growth and that could hurt US equities and corporate profits that have a big presence globally. Here is a chart to show you the recent drop to around $71/barrel:
JOBS - WILL CORPORATIONS CUT JOBS IN RESTRUCTURING
Given the current credit mess, stock market correction, and today's fed statement disclosing an admitted concern of future economic growth here in the US, how will companies prepare for possible rough times ahead? Economists are putting the risks of a recession at 50/50 right now. Should that occur, expect corporations to announce job cuts and expect the unemployment rate to rise, at a lag.
Something to keep an eye on. Here in Manhattan, if jobs are at risk, so is the health of the prospective buyer pool.
CONSUMER - HOW WILL HOUSING & CREDIT CRISIS HIT CONSUMER
The US economy is 70% reliant on US consumer spending. We are still waiting to see a trickle down effect of the slowing housing market on US spending. As the values of one's home falls, the ability to withdraw equity shrinks and that removes potential spending habits.
In addition, we are still trying to figure out how deep this credit issue goes and how the consumer is ultimately affected by it. Should consumer spending start to slow, that certainly will have an affect on the US economy and therefore stock prices.
But Noah, if the fed cuts the fed funds rate that will bring lower rates to the consumer? Yes, but at a lag. And lets not forget that if the fed starts cutting the fed funds rate (which remained at 5.25% and was not the rate cut today) it is because they are starting to see a sluggish US economy and will cut growth forecasts. The US economy is like a huge ship with one propeller. Once it starts going a certain direction, it takes time to turn it around. A few fed cuts will mean that there are serious risks to the US economy and that the fed is starting to use the strongest ammunition at their disposal to prevent the economy from entering a deep recession. Sound good to you?
Read my previous post titled, "Why Lower Rates May Not Be Good", where I stated:
There is a false perception out there that if the fed starts to cut interest rates that housing will be set up for another boom. I strongly disagree with this train of thought...For the past 12-18 months I have publicly stated that the two biggest threats I see to housing are:If the fed cuts interest rates one or two times towards the end of the year, which is by no means a certainty, it is because they are starting to see signs that the economy is weakening and want to add some stimulation to prevent a recession.
So lets break that down. If the economy is starting to weaken, than stock prices will reflect that early on with a selloff. Since the stock market is a leading indicator of the economy, it will be the first to show signs that trouble might be ahead. Assuming this happens, paper profits and consumer portfolio values will restrict making people feel less confident and less wealthy. As this occurs, there will start to be talk of a fed rate cut as Ben Bernanke and company attempt to put a floor on how bad things might get.
1. Tighter Lending Standards
2. Job Losses
Now that #1 has already occurred and you all are seeing the effects of the credit squeeze and tighter lending standards, I need to update this moving forward. The two biggest threats I now see to housing are:
1. Global Growth Slowdown Amid Credit/Liquidity Crisis
2. Job Losses
Job losses are the side effect of a slowing economy. Stock prices will price in a US economic slowdown or global slowdown first, and job losses will occur as a result.
THIS HAS NOT HAPPENED YET. Right now the equity markets are re-pricing risk and pricing in the effects of a low liquidity / higher risk world. Volatility comes with this re-pricing.
Keep an eye on oil prices, consumer spending, and jobs. Oil will be the signal of global growth trends, consumer spending will be a signal that credit/housing woes are hitting wallets, and weak jobs data will be the final nail in the coffin as corporations restructure and cut costs.
This post is a forward looking discussion based on what I see right now. Things change and savvy investors adapt. If you don't, you'll be eaten. And nobody wants to be eaten!
Did you unwind some of your positions at the open of today's trading? The markets already gave up 2/3 of their gains since the open!
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