|
After a nice holiday weekend, the world of global finance is still showing severe cracks in the system. We are moving into a very dangerous climate now that the ebullient bulls on Wall Street must deal with reality once more.
The S&P/Case-Shiller home price index fell almost 19% from a year ago. This is getting pretty darn serious. In most areas, sales are being led by foreclosures and short sales. The basic routine of people moving to new homes and trading up is non-existent. Scalpers and speculators are fueling the sales but at a much lower price. Ft Myers, Florida is a good example. The median price has dropped from a high of around $325,000 to around $90,000 today, more than a 65% drop!
When does this end? It will not end until the foreclosures slow and finally stop. And, this cannot happen as long as unemployment continues to rise. The housing market is a pivot point. Prices are starting to return to earth but there are mighty forces working against stabilization. Some experts see another 20% to 35% drop before we hit bottom. Great deals are springing up and if you are in the market for a home, you should be able to get 40% to 50% discounts. If not, be patient.
The Federal Reserve Board and the Treasury Department embarked on a plan to drive down the mortgage rates a few months ago. They made one glaring error: they forgot that they are not the last word. Furthermore, they are not the be-all to end all and quite frankly they are looking less intelligent by the day.
The government, while wandering in the dark woods has wholely lost its way, as Dante would put it. They have only one weapon in its quiver and that is spend, spend, spend. This is music to the ears of any politician but overseas, wary eyes are watching closely. China is not happy. Not only that, the U.S. is losing its status as a safe haven. All this spending is causing fear with our trading partners who are increasingly losing trust in our funny-nomics policies. |
|
Bernanke and Company thought that all they have to do is print more money and sell more bonds to spend our way out of disaster. Never mind the fact that nary an alcoholic has ever drunk his way into sobriety. What is happening is our bonds are losing their cachet. Investors are losing trust. When that happens, the interest rates climb. Now all of a sudden, businesses who have had had a hard time getting loans will be forced to pay higher interest costs. The Government will have to spend more to service the cost of higher interest payments. This bodes very badly for the real estate markets going forward. Actually, high interest rates bode poorly for everyone.
Along with higher interest rates comes a weaker dollar, higher prices and more malaise. California, in the meantime, is getting in more hot water. The voters in the Golden State said no to more taxes and silly spending. While the voters did their duty last Tuesday, the Governator was in Washington D.C. looking for a bail out. He was so sure that his bill would pass that he just thought it smart to seek help just in case. It takes a lot of nerve to ask for help when Congress is wrestling with a mess of epic proportions.
California is in trouble. We are the world's eighth largest economy. We have the lowest bond rating of any state. Our unemployment rate is among the nation's highest. And our housing prices are plummeting. We too are spending and borrowing addicts. The taxpayers have said no to borrowing and taxation. Now what? Good old fashion excising of bad habits is the only realistic solution. This presents a real problem. Politicians don't understand spending cuts. They have favors to return and constituents to enrich. They may have hit a wall. Unless some sucker somewhere is willing to loan us money, we are going to face drastic spending cuts. Some of the 235,000 state employees will need to be axed. Pet programs will need to be dropped. And benefits (oh gosh, don't go there!) will need to be modified drastically.
Around the world, stock markets are riding the coat tails of America's massive public relations campaign to stimulate growth. It shows just how powerful we are as a nation when we speak and others act. They know that we have to resume our spending habits to pull out of this recession. What they don't realize is this time, we just might disappoint.
The only solution is to fire the whole bunch. The California legislature deserves to go. Both state and federal politicians have spent our children's inheritance. Richard Fisher, the head of the Dallas Fed dropped a bombshell a few days ago when he announced that we are almost $100 trillion in debt! This works out to over $300,000 for every man, woman, and child in America. To fix Social Security, Medicare and pay the bills requires enormous work and change. With the cowards we have in office, this is impossible.
|
|
That does it for another week! Thanks for reading the Vance Advance!
Working for your Wealth and Peace of Mind,
The Vance Capital Management Team |
|
