Archive for November, 2011
Jim Hamilton shares his insights into a puzzling question: housing sector accounts for less than 5% of the total economy, yet why it, along with auto sector, tends to drive the US business cycle.
Two of the most important sectors in U.S. business cycle fluctuations are autos and housing. For example, in the 2007:Q4-2009:Q2 recession, real GDP fell on average at a 2.7% annual rate, with autos and housing accounting for about half of this decline all by themselves.
… Although autos and housing make a very significant contribution to changes in GDP growth rates over the business cycle, they represent only a small part of the level of total GDP. Over 1947-2011, spending on motor vehicles and parts only amounted to 3.5% of total GDP on average, while housing was less than 4.7%. But the fluctuations in spending on new cars and homes are so volatile, these percentages change quite a bit over the cycle, rising well above average during expansions and falling in contractions. For 2011:Q3, motor vehicles and parts represented 2.4% (or close to 30% drop) of the level of GDP, while residential fixed investment was only 2.2% (more than 50% drop).
The fact that the levels remain so low today relative to their historical averages means that housing construction and automobile manufacturing have fallen well below what’s needed to keep up with growing population. That suggests the potential for a significant positive contribution from these two sectors if the recovery could ever get back on track.
Read the full post here.
Chris Wood shares his insights on what’s likely the endgame of European sovereign debt crisis.
He predicts it will be either a move from monetary union to fiscal union, or a complete breakdown of the Euro. He thinks the first scenario is more likely and Germany will eventually budge.
Then, Jim Rogers comes in with his thoughts:
According to WSJ, less than two weeks after European leaders unveiled an agreement that was designed to bolster confidence in the region, the yield on Italy’s 10-year debt drew close to the 7% mark, a line in the sand of both practical and psychological importance to the market.
Psychologically, 7% has become a beacon due to the fact that Greece, Portugal and Ireland each sought bailouts soon after their debt reached these levels. While analysts said it is too simplistic to say that Italy will be forced to ask for support if its 10-year debt yields 7%, they said the recent selloff is taking the country to the tipping point.
A sharp slide in bond prices pushed yields to their highest levels since the inception of the euro. The two-year yield rose a staggering 0.60 percentage points to 6.04% while the five-year yield climbed 0.37 percentage points to 6.56%.The 10-year yield was up 0.27 percentage points to 6.60%, having hit a new high of 6.62% earlier Monday.
Update 1 (on Nov. 10, 2011)
Italian gov. bond yields continues to soar, now above 7% threshold. See the chart from WSJ below:
It seemed that Europe is gradually approaching its own Lehman moment. What’s different, compared to previously trouble of other smaller PIIGS, is that the latest escalation fed fears that the euro-zone debt crisis is starting down its most perilous path: going from a storm raging among small countries at Europe’s fringe to one that strikes a major economic power.
Also, Italy’s debt load of €1.9 trillion ($2.6 trillion) is the second largest in Europe, behind Germany’s, and the fourth largest in the world. Next year, more than €300 billion of debt comes due, and Italy must continually tap markets to refinance it.