Below are posted some thoughts about  near to medium term economic conditions.     On the one hand, a top Citibank official forecasts declining home prices through 2009 in the U.S and England.  That is an important forecast, if it proves correct. Since declining real estate prices is the single most important driver  of risk to the solvency of financial institutions - banks and brokers - the prospect of another 18 months of lower real estate prices does not bode well for either the economy or stock prices in general.  It is hard to see stocks rising while financial institutions are becoming weaker and riskier.  Falling home prices is also a significant depressant to consumer spending, which re-inforces its potency as a driver of economic weakness.   So I would keep a sharp eye on the direction of real estate prices.  Their bottom could mark the bottom of everything else.

On the other (what else would you expect?) investor/economist John Mauldin points out that there are some reasons to be optimistic.  He reports that Goldman Sachs estimates about 70 million people a year worldwide are entering the “middle class.”  Another optimistic economic trend Maulden pointed out is that manufacturing in the US is starting to make a comeback, with the lower dollar and with management driven to compete globally.

In a similar vein, I noticed a piece of news last week that seemed like a straw in the wind.  A Wisconsin maker of cranes has begun to ramp up production, calling 75 employees back to work.   True, it is only a small company.  But it strikes me as a very good sign.

I would also note, as have others, that a consequence of very high energy prices will be a new tendency to reverse the globalization and just-in-time manufacturing trends that rely on shipping goods long distances and often very rapidly.  That would be very good for the U.S. manufacturing sector.  We may already be seeing signs of it happening. 

In general it seems to me that high oil prices will tend to reduce the advantages of low labor cost Asian economies and emphasize the strenths of the OECD in terms of proximity to consumer markets and ability to produce high technology energy-saving and energy-producing things.  

The ability of the U.S. and more generally the OECD economies to rebound during the next 18 months will be very important if, as I suspect, global oil supplies begin to tighten much further starting around 2010 and become increasingly tight through at least 2015.  That is likely to be the start of a period of substantial pressure on all economies other that oil exporters.  If the U.S. and OECD are still weak in 2010 from the current housing and credit problems, it will be that much more difficult for them to deal with a new oil supply crunch starting in a couple of years.

Here is the Citibank expert:

House prices could fall for two years: Citigroup

Sat Jul 19, 4:11 AM ET

LONDON (Reuters) - Citigroup chairman Win Bischoff has warned that house prices in Britain and the United States are likely to keep falling for another two years.

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The chairman of one of the world’s most powerful banks told the BBC in an interview that he expects it will take two years for the markets to stabilise.

He also said he expected the credit crunch could continue through until 2009.

Bischoff told the BBC that there would be redundancies at the bank, which employs 12,000 people in Britain, and warned that some of them would be compulsory.

No further details were released of the interview which is due to be broadcast later on Saturday on the BBC News Channel

Tags: peak oil energy investments

This entry was posted on Saturday, July 19th, 2008 at 3:32 pm and is filed under Economic Strains of Peak Oil, The Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.