After the FED dropped rates … the illusion continues

John Mauldin writes convincingly that the Fed is trying to preempt the negative consequences of the housing collapse. However, the players in the market are behaving as if a bail out had occurred. In order for the message to be correctly heard, other signals need to be forthcoming. The problem is that asset markets are not responding to the crisis appropriately. Prices should be down, but they are up … the illusion continues.

Are lower rates going to reduce the chance of recession. Not really. The people that will benefit are those least exposed to the sub-prime problem; those higher up the income ladder. And it won’t encourage a change in behaviour of them either. In fact we will continue to do our supermarket shopping …

Hugh Moore of Guerite Advisors writes:

“Consumer spending accounts for two-thirds of the U.S. economy. Total Household Debt is particularly important in supporting the growth of consumer spending. This indicator includes mortgage debt due to the important role that Home Equity Withdrawal (HEW) has played in sustaining the growth in consumption since the beginning of the decade.

“As shown in the graph below, each time the year-over-year increase in Total Household Debt has dropped more than 40% below its recent peak, a recession (or in the case of 1967, a mini-recession) has occurred. The mid-1980’s slowdown touched this level, but did not exceed it. The current -38.9% level is approaching this boundary and, based on recent credit tightening by financial institutions, is likely to drop significantly below the -40% level.

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