Not waving, but drowning

I thought I’d quote the introduction of a piece out today by Albert Edwards, Dresdner’s Asset Allocation strategist:

Warren Buffet said "Only when the tide goes out do you discover who’s been swimming naked." As the US housing tide recedes, the skinny-dippers are racing up the beach to find their beach-towels. But this is not a crisis driven by the US sub-prime mortgage debacle. The housing slump guarantees this is a generalised mortgage crisis. Sub-prime has just been exposed first. Buy beach towels.

In other words, the sub-prime stuff matters, but won’t on its own be the reason for a more generalised flight to quality – there’s plenty of other fault lines in the global economy which are looking increasingly dangerous. The same dubious lending practises which are hitting the sub-prime market are widespread through the whole mortgage industry (including in the UK? Northern Rock’s profit warning showed that conditions here are deteriorating too), and higher US rates have made the first year on year fall in US median house prices since the Great Depression almost inevitable (Detroit house prices are down over 9% over the last year already). Whilst employment remains robust, both in the US and the UK, the consumers can just about keep heads above water. Any weakness in the jobs market could well herald a consumer recession.

As an aside Albert Edwards points keen readers to a book that was published by the World Bank in November 1996 – "Thailand’s Economic Miracle: Stable Adjustment and Sustainable Growth". Months later you will remember that the Asian economies and financial systems collapsed. He feels that the US economy is, ten years later, suffering from the same hubris that Asia inspired then, despite the fact that US growth has slowed towards "stall speed" of 2% pa.