Special overview: Trouble in the U.S. (Part 2)

The house prices started to decline rapidly already before the sub-prime problems, as the U.S. like the whole world had a building boom and thus a real estate prices which where climbing before resettled as demand stopped to increase. However, the sub-prime worries have greatly impacted the prices. As a lot of sub-prime lenders could not service their loans, their homes have been repossessioned; thus, more and more homes are coming onto the market thus increasing the supply in the market. At the moment, there are approximately 4 million unsold homes which has a deteriorating effect on the housing market.

 

Figure 2 Source: BBC News

Certainly, growing unemployment is not entirely an outcome of the sub-prime crisis, but recently it has greatly affected it. On 4th of January, 2008, it was announced that the unemployment rose to 5% in December, 2007, from 4.7% in November, 2007. It is the highest unemployment rate since November 2005. Moreover, only 18 000 new jobs were created in December, which is far below forecasts, as in November the figure was 115 000. One reason why the unemployment is heading higher is that the biggest employing sector in the States, construction and building, is seriously suffering from the declining prices, greatly caused by the sub-prime problems, and is forced to cut the costs. Lots of companies are leaving the business or making massive layoffs up to 50% of the workers, because there is probably the smallest demand for houses in a few years time.

 

Manufacturers are also cutting costs by firing their employees. People have to spend more of their budget for servicing loans and do not have so much money to spend on other goods anymore, plus, if there are fewer households, less household gadgets are sold; thus, the demand for consumer goods is also decreasing. Finally, banks are forced to extremely reduce their costs and do it fast. The only way to do it, is to cut the direct wages cost, it means, firing people. Some banks have already announced prestate plans, the numbers reach to several thousands per biggest banks.

 

Many economists are already fearing and warning that decreasing interest rates and inserting hundreds of billions fresh money into the market will lead to even greater inflation. For the whole world, inflation is high, because of the crude oil prices and increasing food prices. This reminds a situation similar to 1970s, when crude price was soaring and Federal Reserve at the same time inserted additional money into the market to boost economy to create more jobs. The outcome was a deep recession for a decade.

 

President Bush has come up with rescue package, which includes sending cash gifts to households - 1600 dollars per household and freezing the mortgages interest payments, which would help about 1 million people to stay in their homes. Will this action make the matters worse or better, is hard to predict, as this adds to inflationary pressures.

 

The Federal Reserve unexpectedly met one week earlier, on the 22nd of January, and cut interest rates by 0.75%. This is a rather deep cut and in cumulative terms, The Federal Reserve has lowered interest rates by 1.75% in 5 months, from 5.25% to 3.5%. This is a sign that The Federal Reserve is making last efforts to boost the economy and avoid recession. However, the least price for that will most likely be high inflation. Most analysts believe at that point that the surprise move by the Fed will not avoid the panic on the US stock market.

 

To sum up, for companies it is harder to take loans; thus, fewer jobs are created. At the same time, there are more and more people thrown out of their homes and the unemployment is increasing. The food and crude oil prices are driving up inflation together with inserted billions. To be honest, the situation is really poor for the world’s biggest economy and there is no strong argument to be optimistic about it. The only good news in the last month is that, the GDP increased 4.9% in the 3rd quarter and is expected to increase in the 4th as well; mainly due to strong exports as the dollar is so weak.

 

 

Anyone who has followed Baltic markets for a year or more has probably noticed the similarity in the trends of these two markets. The previous year was of no exception. However, besides sub-prime crisis Baltic States have their own macroeconomic problems as well. The biggest problem is the high-and-growing inflation. Moreover, the Baltics are also in general in the state of building boom burst. Finally, most of people have very high loan payment obligations. At the moment, the wages are also high, so people can afford the payments, but the world’s economic growth is slowing down, because of deep troubles in US which can add to overheating markets in the Baltics.

 

 

I really would not recommend investing into Baltic markets at the moment, because even good news are not enough these days for the market, however, the bearish trends should be rewarded. What is more, it is historically known that when investors have problems in their own countries, they try get out of more „unknown” markets, to be on the safe side. Unfortunately, OMX Baltic is not one of „known” markets.