We start the New Year with a continuation of the last days of the old year: stock market rise and bond market sell off. The stock market has apparently priced in all the bad news, the bond market has priced in all of the "flight to safety" and now both are reacting to the fact that we are going to hopefully come off the bottom of this recession and start tackling the problems. Now for the catch 22: If the financial markets start acting like the worst is over, then they might find out it really isn't or may be starting again. Why? Bad times bring low rates; good times see rates go up. To finish the thought, if rates go up, can bad times return, or put another way, will this slow up the return to good times?
Looking at the real estate market (which of course is the industry I participate in all facets), sales and financing of real estate, we need low rates to entice a return to normalcy. When one ponders the stock market you see that you need higher prices to entice a return to the "good old days". In both cases low asset prices, stocks and real estate, cannot for some strange reason present enough reason to lure the general public back into the industry. The stock market always does better at the heights of the averages than it does at the bottoms. People do not get interested until they feel everything is booming and then much to their chagrin, they jump in and end up on the short end. Today we find nobody excited about the stock market or the real estate market. The average person on the street will tell you that real estate is going lower and they are waiting; the stock market is in a bear market and won't return for at least a year. What is wrong with that picture?
It is always better to buy when everyone is selling and sell when everyone is buying. Is it easy? Not a chance! Being a contrarian is the hardest and highest paying "job" in the world. You must look at a horrible situation and see a rainbow to buy; you must look at the sweetest sight you have ever seen and find the rotten apple that tells you to get out now! Unfortunately you might find yourself at the wrong side of the trade for a while and start questioning your reasoning. That is because nobody buys at the bottom and sells at the top. So you will find yourself selling a bit too soon or buying a tad early. The courage of your convictions will save the day in most cases.
Having said all that, we are running a gamble when we look to the future and see the proverbial rainbows. If the economy starts moving - probably with the huge influx of stimulus money from the Obama stimulus package - one of two things can happen which will yield the same results. Either we will have a massive amount of treasury notes, bills and bonds to sell in order to finance this stimulus package (which will then force rates up in order to sell the massive amount of new debt) or we will start the printing presses going and print money (which will inflate the dollar and cause the beginnings of an inflation problem which will force the Federal Reserve to start raising rates). Neither will be good in the short run for real estate which can again short circuit the recovery of the economy. Could there be a silver lining?
Perhaps, now that the government owns the major lenders in this country, Fannie Mae and Freddie Mac, they could suspend the premium of the mortgage backed securities in some manner over the treasuries. They would actually battle the market forces by buying lower rate pools while the market would normally be looking for a higher rate to correspond with the upward pressure of the treasury market. All it takes is money! Does that mean tax money, international money or investor money? Tax cuts are still prevalent, so you can rule that out. The Asians and Europeans have supplied us with money for years but they seem to have problems of their own. Investors, per se, probably do not have the appetite - so who rides to the rescue? You guessed it, the government and the printing presses. Please reference the previous paragraph for the problem with this solution.
The future turnaround of the economy relies on either changing the habits of the American public (and while this is happening throwing in a desire to purchase domestic automobiles), or preparing for living in an inflationary period that might takes us back to the days of Jimmy Carter. Neither seem realistic to me. Why not entice the markets with ideas that aren't potentially as costly, instead of thinking that massive amounts of money is always the answer? Why not expand the idea behind the Roth IRA, where tax free accumulation is offered to all Americans in some form, which could certainly pick up the stock market and simply defer the tax to the government instead of eliminating it? Why not trade lower rates to real estate buyers for more stringent taxing on the sale of their personal residences? Instead of the exclusion of the first $250,000 in profit for individuals and $500,000 for couples who have held their property for at least 2 years, why not offer half of that for a 2 year holding before selling, three-quarters of it if you hold for 5 years and all of it if you hold the property for 7.5 years?
Are the aforementioned the right solutions to stimulate the financial markets? Maybe, maybe not. What I am trying to do is point out solutions that aren't directly tied to huge government monetary infusion. There are better ideas and we do not have the money. I know we can rise to the occasion and save our grandchildren the burden that we seem unwilling or unable to carry. If everyone starts to think about a new solution, I am sure we will have one that makes more "cents" and saves more dollars!
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