Oct All Over Again

Mike asks if the ADP report reduces the probability of a cut.

Well, the word about the blogosphere is that ADP has some issues with its November forecast. I have not looked into to it, but it seems Nov is always an outlier. The question is what number we get on Friday.

Another issue is the market response. I had been thinking of a post on the "Long Bear Case"; the possibility that we could see an inflation adjusted decline in US equity values well into the next decade. The sell off in the market prompted me not to hold off, so as not to be overly alarmist.

However, I think it is equally important to think about whats happening now. The current run up feels like Oct all over again. Then talk was ripe that we had priced in this whole subprime mess and could get on with the business of going upward.

I think this is unlikely. My guess is that things are likely to get worse. Significantly worse. There will be more write downs in the forth quarter and consumer spending will start to sting in early to mid 2008.

The decline in housing prices will steadily weaken the consumer because most of the pain comes through credit constraints. That is households stop spending because the bank stops lending money, not because they simply "feel" poorer.

Indeed, the "smart" household is loading up their HELOC now. Money is only likely to become harder to come buy and who really thinks the prime rate is headed up from here? If you want to buy it, you'd better buy it now. That's what the mortgage brokers are going to be selling and they are correct.

To me this means that consumer weakness is going to become much more pronounced next year than it is this year.