For some reason beyond me, people seem to ask my opinion of the economy a lot. The only reason I can possibly come up is that I work with sites like DebtSolutions.com and in the past DebtHelp.com.
While building these sites, yes its true that I have had to stick my nose in nearly every aspect of financial news. I also trade currencies on the Forex, so my life has revolved around intentional monetary policy decisions and reports for a couple years now. Between that and living on sites like Bloomberg, Forbes, FT.com, NYTimes business section, and Reddit.com’s economy section… I would say I have kept up on financial matters on an hourly basis for about 2.5 years now.
However, I think its critical before I go on that I give a disclaimer here. Just because I read other people’s opinions on global economics, doesn’t mean I have the slightest clue what I am talking about. I’m not the one writing the stories on Bloomberg, I simply read them. I’m discouraged to see so many “couch” economists spouting their theories on how this economic crisis is going to turn out, when they have no basis, no education, and no frame of reference to do so. So, unlike them I’m going to clearly state right now that you shouldn’t take anything I say seriously and I highly recommend going to sources like Krugman and others who are far more qualified. Think of everything I say as a lie until proven otherwise and certainly fact check anything you read here.
With that disclaimer said, here are my answers to the top 5 questions people ask me:
When do you think the housing marketing will recover?
That’s a very tricky question because “recover” is really in the eye of the beholder. If I’m someone who bought an investment property 3 years ago for $700k and now its worth $400k, my idea of recovering is going to be far different from the person who has owned their home for 15 years and is considering selling for the first time but wants to know when the “bottom” is here.
Also, recovering can mean and increase in prices, it can mean uptick in sales, and it can mean an uptick in new building. It really depends on what you mean by recovering.
With that said, I don’t expect a single hint of recovery in any way in 2009. There is already such a tremendous amount of over building, excessive inventory, new units that have not even come to market yet, availability of cheap foreclosures, and about 600,000 properties currently being held by banks off the market for fear that if they listed them it further depress prices. That all adds up to a small chance that prices will head up any time soon unless banks magically started to give out mortgages like back in 2000-2003 when all you needed was a pulse to get pre-approved. So as far as prices go, I see no recovery or even a bottom for the matter, until middle of 2010. I would also like to clearly state that bottom and recovery in my eyes means home prices increasing 0.5-1% by the end of 2010, but even that may be asking too much. This is not 1999-2004 where you could treat your home as an ever expanding ATM as home prices skyrocketed. Those days of insane home value growth are long long gone.
As for sales, I expect home sales to rise as the year goes on, but only because foreclosures will increase. That’s not good news. Also, that means an increase in existing home sales, but I don’t see much of an increase if any in new home sales. There is such a massive amount of inventory and so many banks sitting on 100,000’s of unlisted properties we could hit a period of time later this year where builders and banks alike start liquidating their inventories since they cannot wait any longer for prices to increase. That means great buys for people who qualify, but not a good sign for prices.
Overall, I expect an abysmal housing marketing through the middle of 2010, possibly even longer. Of course if you are sitting on a ton of investment capital, this housing market is the greatest thing you could possibly imagine. One man’s garbage is another man’s treasure.
How bad do you think unemployment will get?
I think without a doubt the official U-3 unemployment rate will hit 10.5% by the end of the year. Of course the unemployment rate that most media outlets and the administration use is such a terrible gauge of how bad unemployment is. I think the U-6 is a much better way to measure how healthy employment is in this country because it includes people who are working part time and want (need) full time work.
I think its a blatant lie when the government tosses around the U-3 number as the true measure, because if I was a VP at a Fortune 500 company before, but now I’m working at KFC as a clerk, it considers me employed just the same as before, as if the two jobs allowed me to support my family and the US economy identically.
All in all, expect unemployment to go up significantly and expect it to stay there for quite a while (2010 and beyond). I think the hardest hit will sadly be the people who can afford it the least, such as manufacturing jobs. Of course my major disclaimer here is that with the Obama administration’s plans for massive public works project nationwide, unemployment could actually come down. We will just have to wait and see how successful the administration’s plan is at creating new jobs.
When will the economy start to pick up again?
That is such a difficult question to answer. I think about this one all the time and have yet to come up with any solid answer. Once you understand that 70% of our economy depends on consumer spending and the national savings rate is expected eclipse a POSITIVE 10% by next year, those two facts spell out a truly disastrous scenario.
The savings rate had been negative for many years and that combined with rising home prices that fueled home equity loans, credit card pre-approval bonanzas, and a very high consumer confidence, people in the US were spending like crazy. This helped the economy grow at a very brisk pace, but now with credit cards companies dramatically slashing credit lines, home prices collapsing, consumer lending coming to a standstill, the savings rate actually being positive, and consumer confidence low, that means retail operations coast to coast are going to suffer tremendously and they already have.
I’m not saying discretionary spending is over by any means, but it has certainly taken a massive blow. For an economy that relies on this spending to not only grow, but just to survive, this downturn in spending poses a very real risk to the growth of the US economy for years and years to come.
For quite a while I have been contemplating whether or not we could enter a period like Japan’s lost decade. Everything I see right now seems to point to that being a more realistic possibility. While it might not be as severe as Japan’s or last as long, I could see the economy struggling to recover in any noticeable way for the average citizen for 3 to 5 years.
When is the stock marketing going to recover?
To be perfectly honest, I could care less. The stock market is a terrible indicator of the overall health of the economy. The fact that the media reports a 100 point rise in the Dow like its a sign from God that the recession is over, is completely ludicrous.
If you are hoping it recovers because you lost a ton of money, your retirement evaporated, or your 401k isn’t worth the paper the statement is printed on, I’m sorry to say this but its not going to rocket up to 14,000 again anytime soon. If you were close to retirement, I’m really sorry. If you are young (35 or younger) you have all the time in the world. Relax.
I will say that the market tends to start to recover about 6 or more months before the overall economy does. However, that is pretty much worthless knowledge unless you can predict when the bottom is. Get out that magical crystal ball I guess.
What should I invest in?
I have no clue what a GREAT investment would be at this point. I can say that there are certainly some good investments to consider if you have the time, resources, and patience required.
With home prices so low it could be a good time to consider rental properties. Not only can they carry a nice stream of income but the tax benefits are wonderful. However, the strain of being a landlord can drive even the most hardened business person nuts, so keep that in mind. Also, the upfront costs are pretty significant if you are buying fixer-uppers.
If you have the time to do the research, keep your eyes and ears open, and have some liquid funds sitting around, there are a ton of good stock picks right now with prices so low. I’m certainly not going to provide any advice, but I will say that whatever Jim Cramer recommends, do the exact opposite.
Really, I would just try to keep your money safe and consider your investment goal for 2009 and maybe 2010 to just hedge inflation. If you are trying to find the next 15-20% yearly earner right now to replace your investment losses over the past 2 years, you may find yourself in even deeper trouble. Now is not that time to be careless with your money. I would try to find a safe inflation hedge investment and sit on your money.
