rethinking and thinking...

What will housing do to the economy? That is the question which will determine all the other answers in the next few months.

Let's revisit some recent history. After the stock markets lost $7 trillion, why was the 2001 recession so mild? Because interest rates were lowered to record lows. That lowering of rates dropped the dollar against the Euro by 25%. A weak dollar has fueled China's growth. I am starting to rethink my overall position.

This article caught my eye, and jogged my memory. First of all, it reminded me of a Merrill Lynch presentation where Richard Bernstein said that the government only counts 401(k)'s and IRA's as retirement savings. If Joe Smith buys 100 shares of his company's stock because he likes working there, that counts as spending, not saving. Richard estimated that the real savings rate was 8%, not 0%. This article tells me that there is $6.4 trillion doing nothing. That's a lot of money that won't be going into housing, or commodities if they slide. If rates are lowered, that money won't go back into CD's or bonds. That money will go into the market.

The second thing this article reminded me of was a sentence in the Zeal report a couple of weeks ago. I guess it's been bugging me in the back of my mind. The report said that the technical data from the chart suggested that the fundamentals were strong. I don't know why this article reminded me of this, but in remembering it, I immediately realized that the reasoning is backwards. Technical analysis should be used after a fundamental valuation is taken, in order to determine the timing of the trade, or the price to look for. In other words, fundamental analysis answers the question "what?" and technical analysis answers the question "when, or where?" This realization has made me more skeptical of the Zeal's idea of a continuing commodity run.

Back to our question: "What will housing do to the economy?" Well, housing is directly tied to the consumer, so let's see how much housing will really hurt the consumer. Now, the money on housing is already spent, so to speak, so the most painful thing will be ARM payments going up. Let's have some fun with numbers. $1 trillion in ARM's adjusts next year. The average loan is $150 thousand. That makes for 6.67 million mortgages. Let's guess that the average monthly payment goes up $200/month or $2400/year. That's only $16 billion. That seems a very small number.

What if the housing market slowing will turn the consumer from housing spending to other spending since wages are finally growing?