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Goldilocks Moved to Life Support

Written By Brian Hicks

Posted January 7, 2008



One by one, all of the old arguments are falling away. And with them has gone a certain level of hope that a recession can be avoided.

Sub prime isn’t contained, the consumer isn’t as strong as everybody used to think, and that soft landing has turned out to be nothing more than a fairy tale after all-just like Goldilocks herself.

And while the Fed certainly has a fair share of bullets left in his gun, none of them appear now to be silver.

That’s the take anyway from the American Economic Association’s latest discussion on the matter.

From MarketWatch by Greg Robb entitled: Economists say 2008 will be year to forget

"Many analysts gathered at the American Economic Association’s two-day annual meeting spoke of a recession as almost a given but differed over how severe it will be.

"The recession is likely to be a serious one," said Dean Baker, co-director of the Center for Economic and Policy Research.

He estimated losses in prime mortgages will be two to three times the $160-$200 billion hit seen in the subprime sector. This, he said, will lead to large losses at banks and difficulty for Fannie Mae and Freddie Mac.

University of Chicago professor of finance and former chief economist at the International Monetary Fund, Raghuram Rajan, said questions in the media over whether the U.S. economy will fall into recession are really only about semantics.

"We are going to have very low growth in the first two quarters of the year. Whether it is negative or zero, it is going to feel like the same thing," Rajan said.

But he added that it remains an "open question" whether an even more serious slowdown develops in the second half of the year.

"One of the big issues is the extent to which the credit crunch initiated by the subprime crisis starts spreading and how much does it affect smaller corporations and poorly rated corporations," he said. "Do we have a bank credit crunch which starts impacting on retail credit for small and medium enterprises? There is some uncertainty."

Alistair Milne, a professor at the City University of London’s Cass Business School, told MarketWatch he’s expecting "a really weak year," but added that "it is too early to say how deep the crisis is going to get."

"There has been a substantial credit expansion in many areas — not just subprime — over the past five to 10 years," he said. But now, with credit now under pressure, he sees the risk of a vicious cycle developing where the decline in bank lending pushes down growth, which further reduces bank lending."

Meanwhile there this word just in from legendary U.S. investor Jim Rogers. Rodgers you may recall is the bow-tied investment sage, who helped launch the Quantum Fund with George Soros.

Among other things he has said the Yuan could replace the US dollar as the world’s reserve currency in 15 years, after it becomes fully convertible. He’s been running away from the greenback as fast he can lately.

He has also been talking up the depth of the recession, which he has said for some time now is nothing more than a gimme.

From Bloomberg by Saijei Kishan and Mark Barton entitled: Rogers Says U.S. to have Worst Recession "in a While"

"The U.S. economy is heading for a recession that may be the worst “in a while” and investors should sell the dollar as global currencies weaken, investor Jim Rogers said.

“It’s going to be one of the worst recessions we’ve had in a while because we had so many excesses going into it,” Rogers, chairman of New York-based Rogers Holdings, said in a Bloomberg Television interview today from Singapore. “It’s going to be bad for all of us as currencies come under more and more stress and we have more inflation in the world.”

The U.S. and U.K. governments have been “lying” about inflation, Rogers said, adding that he’s selling their respective currencies.

The dollar dropped for a second straight year in 2007, falling 8.3 percent on a trade-weighted basis as the collapse of the U.S. subprime-mortgage market prompted the Federal Reserve to cut interest rates three times. Rising energy and food prices have pushed up inflation in the U.S. and Europe.

“I hope by the end of this year all of my assets will be out of the U.S. dollar,” Rogers said. “The dollar is a currency that’s terribly flawed and it’s going to be under duress for many years to come.”

So how do you play it all? That answer has to be commodities. Rogers, by the way, loves them-particularly in agriculture.

Here’s a link to an article I wrote last week on the Falling U.S. Dollar. It takes a look at the dollar’s decline and the commodities ETF’s that will likely benefit from the fall.

2008 is shaping up to be one interesting year.