By Gene Inger
With demand for money very low, it’s no surprise that Americans have a case of Elvis Presley’s “suspicious minds” when talking of a recovery in the economy. And, most of the buying that is currently going on originates in professional circles and exits quickly if need arises. The simple explanation as to why the market’s rally should advance is the Federal Reserve’s action. But, it should be noted that just the ability to push prices unrealistically higher doesn’t mean that growth automatically follows. For three years we warned to “corral the wagons” and be defensive with respect to excess risk, as the ‘epic debacle’ called for in May of 2007 would be a very long-term process. As we contended that for the last several months, not as an explanation for cynicism about the purported economic improvements, it is at least gratifying to hear the Fed seemingly admitting in plain English that we were right. The “fix” was in and they did do this.
While many Americans are benefiting by improved prices in their mutual fund and all sorts of retirement plans, there is a looming downside to be pondered: a bond bubble will eventually be pricked, and someone will say ‘ouch’. Higher rates will be equated with a realization that economic recovery is taking hold, as will potentially surprise investors, with mostly selling of stocks, almost ironically because the economy is recovering. It’s almost like getting a lap-dance; if a stripper is showing full frontal nudity, there’s not much left to the imagination once you enter the supposedly privileged environment of a private performance. This market has been foreplay in a sense, and once we spike into a “top,” we should see a buying “climax.”
The American dream has become a “rental;” home ownership is like wandering into a dark room where you don’t know what will be lurking around the corner. That’s been a nightmare for those who didn’t listen to our warnings back in the bubble’s froth during 2005- 2006. The housing market is now more attractive, but getting a deal closed isn’t easy, and there is a probability of housing prices generally continuing to decline for at least a year or two, not only because of inventory, but because of what’s in the shadows yet to hit.
A true “deal” is a deal in any economic environment, but that often means paying cash or obtaining seller financing. Furthermore, nobody in their right mind should even consider measuring prices of condos or houses in terms of declines from the peak as that peak bubble was an anomaly likely never to be seen in our lifetimes again. There are few closings in some portions of the market because most sellers are still unrealistic. With the economic collapse and job insecurity and now the “mortgage- gate” crisis, which has by no means peaked, you might need pricing to drop another minimum of 10 to 20 percent.
As we look to 2011, it seems that the emerging American trend of saving, of avoiding tendencies to be attracted to glitz or conspicuous consumption, are newly engrained just as it was in our grandparents’ generation after going through another depression era. This is now the fourth year that I’ve argued to get out of debt, don’t use debt and owe zero to anyone.
This is toughest on youngsters who have student loans set up on salaries they anticipated but won’t exist as they graduate.
The good news from this debacle is that it will be uphill for the youth, who have time on their side. The bad news is that this projected recovery will take so long that the established elderly who thought they were solid may never recover to where they were, while the vast middle-aged crowd of white collar workers laid off will find it very difficult to get rehired again.
Bottom line: we are one headline away from a shot-across-the-bow of this market; so while it’s fatiguing if concerned and risky if you’re not, it is an orchestrated upside move that is “at risk” of reversing from a slight provocationalmost like the hottie you are sure wants to meet you, let’s you buy drinks for hours, then leaves with someone else, which sort of crashes your night.
The Nation went through a transformation into something less than the power that we were. Now we must go through a redirection of that transformation, which is a lengthy process as we warned. It will also restore balance and stability – in time but not on a dime. It’s like meeting your newest love interest; don’t expect too much too fast. And as usual, don’t assume the top’s not out there, or that the bottoms are all behind.
Gene Inger provides expert market opinion via several Internet videos daily, focused on trading and economics. For more information, visit www.ingerletter.com.
