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Re: Housing Bubble Correction
What Will Collapse Housing Prices?
By Gary Shilling
This is from John Mauldin's site http://www.investorsinsight.com/thoughts.aspx
It seems to be a thorough discussion on housing collapse and the fallout.
I think it is worth reading.
Schilling, page 7: "So, the Fed won't ease until housing is clearly collapsing and the resulting recession prospects obvious. This point may come early next year, but the Fed's patriotic rate-cutting then will come too late to reverse the downward housing spiral. Given the prospects for a severe U.S. and global recession, however, an eventual return to a 1% federal funds rate is indeed likely."
Deflation and Treasury's
"A major global recession initiated by a collapse in U.S. house prices will probably usher in the chronic deflation we've been forecasting. Crude oil and other commodity prices will nosedive along with all fears of inflation. This deflation of 1% to 2% annual declines in major price indices will be the good deflation of tech-led, productivity-soaked excess supply, much like the late 1800s and the 1920s when concentrations of new technology propelled supply faster than demand increased. Nevertheless, a complete breakdown in housing and stubborn mortgage debt burdens could spawn the bad deflation of deficient demand, as in the 1930s in the U.S. and in Japan more recently, as consumer spending becomes moribund.
Regardless, the next year or so will probably be miserable for most stocks, but great for Treasury bonds as these ultimate safe havens rally as their yields follow inflation rates down. What we luckily identified as "the bond rally of a lifetime" in 1981 when Treasury bond yields peaked at 14.7% will continue toward our ultimate target of 3% yields. If this occurs over two years, so two years of interest are added to capital appreciation, the 30-year Treasury bond will enjoy a total return of about 50% as its yield falls from the current 4.8% to 3.0%. The 30-year zero coupon bond will return even more, around 80%."
What Will Collapse Housing Prices?
By Gary Shilling
This is from John Mauldin's site http://www.investorsinsight.com/thoughts.aspx
It seems to be a thorough discussion on housing collapse and the fallout.
I think it is worth reading.
Schilling, page 7: "So, the Fed won't ease until housing is clearly collapsing and the resulting recession prospects obvious. This point may come early next year, but the Fed's patriotic rate-cutting then will come too late to reverse the downward housing spiral. Given the prospects for a severe U.S. and global recession, however, an eventual return to a 1% federal funds rate is indeed likely."
Deflation and Treasury's
"A major global recession initiated by a collapse in U.S. house prices will probably usher in the chronic deflation we've been forecasting. Crude oil and other commodity prices will nosedive along with all fears of inflation. This deflation of 1% to 2% annual declines in major price indices will be the good deflation of tech-led, productivity-soaked excess supply, much like the late 1800s and the 1920s when concentrations of new technology propelled supply faster than demand increased. Nevertheless, a complete breakdown in housing and stubborn mortgage debt burdens could spawn the bad deflation of deficient demand, as in the 1930s in the U.S. and in Japan more recently, as consumer spending becomes moribund.
Regardless, the next year or so will probably be miserable for most stocks, but great for Treasury bonds as these ultimate safe havens rally as their yields follow inflation rates down. What we luckily identified as "the bond rally of a lifetime" in 1981 when Treasury bond yields peaked at 14.7% will continue toward our ultimate target of 3% yields. If this occurs over two years, so two years of interest are added to capital appreciation, the 30-year Treasury bond will enjoy a total return of about 50% as its yield falls from the current 4.8% to 3.0%. The 30-year zero coupon bond will return even more, around 80%."
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