Monday, December 25, 2006

Global economy faces a dangerous year

From: Asia Times online
Read full article at:
"The combination of rising defaults, foreclosures and falling collateral values is beginning to weaken the balance sheets of mortgage lenders, including several of America’s largest banks. Growing weakness in the banking sector is very alarming. Banking sector and economic crises in many countries over the past 25 years can be traced to overly enthusiastic credit growth used to finance either capital investment or real estate speculation, or both. Japan offers a stunning example of what can happen after a real estate bubble bursts."
Given all the possibilities for economic trouble in 2007, many economists overlook the psychology of downward momentum. The perception of the average person that things are sliding south can put the brakes on spending, investing and other lesser monetary activities. This counts, after all, it all comes down to the consumer doesn’t it?

Dow component companies that are experiencing rapid stock price gains will eventually have to substantiate P/E ratios to actual end user sales, not private equity group stock purchasing.

Joe Six-pack has stopped spending.
His wages haven’t risen much over the last decade, his house is starting to drop in value (no more equity loans). He faces higher home payments now due to that second mortgage he took out to extract real cash from his domicile which he used to buy his new Dodge Ram pick-up truck. He might still have some of that money in the bank, but do you think he is going to spend it now?
Chances are greater that he has already set those dollars free and is back to the old 9 to 5 to pay the bills and he’ll be lucky if a cooling economy leaves him with even that next year. The economic environment has become a little hostile toward the average Joe.

That simple fact will have a ripple effect that will touch the whole global economy. 2007 promises a bumpy road.
Vern

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