03 Jan, 2008 04:34
A New Year, a Bleak View. Sorry, but it is what it is.
US Existing Home Sales came in at 5m units today, slightly higher than expected, but still showing that the Housing sector is in a mess. Inventory levels declined slightly, but still remained over 10 months, and the average sales price fell again.
The way to get the housing sector on its feet can only come from Banks freeing up liquidity and making loans available, and with such a problem on existing Home, Auto and Credit Card loans, that may not be something that most Institutions are willing to do. The constant cycle of Boom and Bust over 5-10 year time-frames may only be broken with a period of pain that allows a natural level between excessive growth and slow-down to be formed. Unfortunately that may be too big a price to pay for most home and business owners. It would mean no more assistance from the Fed whilst the Fair Value of homes, retail inventories, durable goods and commodities, were found and established.
The current slow-down may stem from 2000-2001, when the Fed lowered Rates dramatically, and the Government cut tax rates, both in an effort to stave off recessionary fears back then. It seemed like a decent price to pay in the face of adversity.
It worked for a while, it gave most a warm and fuzzy feeling for four years, but now it is the pay-back time, and this far down the road most have forgotten what it is that they are actually paying for. Consumers and the economy either paid the price then, or deferred it for 5 years until now. Boom or Bust. The same is happening again now, this time it is not a Technology Bubble, nor an attack on the US, it is something that most cannot see or feel. The ‘'Sub-Prime Crisis’' has been wrapped in a shroud of secrecy that those that packaged and sold the debt had to do to protect their self interests. No problem with that, it happens in every Market, every day.
The impact now that those investments have gone wrong are exponential; the fear of loss on something that cannot be seen nor understood by most that are invested in it (anybody that saves, has an IRA, Roth, 401K are wrapped up in this because there are very few Mutal Funds that are not holding Sub-Prime Debt) is hard to comprehend.
Are US investors and Traders going to sit and watch, if the Equity Markets do not start to soon find a base, as their minds race back to 2000 and the Brokers reassuring phone calls that this is a ‘'Healthy Pull-back", or "We’'ll Buy the Dips"? Or are they going to start asking to get moved into Bonds and US Treasury debt, and thereby empower the Dollar as US debt can only be bought in US$''s? If that is the case then there will be huge volatility in the Forex arena as solid looking fundamentals, that not so long ago were the benchmark to value currencies by, get forgotten in the Risk Aversion cycle that all Markets go through from time to time.
Maybe they will, and maybe they won''t, whatever happens very few investors will be as happy to ‘'Ride this one out’' as they may have been in the year 2000. In reality most may not be able to afford to ride it out, US debt levels are one of the highest per capita in the world, and it seems as though the Well may be running dry.The impact may then be that the Dollar gets stronger as foreign currencies are swapped so that Treasuries can be bought. The Equity Market may struggle to justify the risk of waiting 12 months for a little over 4% return on the S&P.
A bigger picture view is required here, but in all honesty not many experienced Market participants can really remember something with the potential of this sitting right in front of their faces, in what is now a brand new Global economic environment. Most previous re-alignments, and pull-back tended to sneak up from behind, and were on us before we saw them coming. This one may be different in that we can see the trouble it may cause, and we do have a chance to deal with it.
We may be breaking new ground and setting new benchmarks for how the Markets deal with these situations in the new era of technology, and the volatility that Automated and Contingent Market Orders bring.
In that time the economy has not been able to grow substantially enough, it would seem, to be able to fund a war, fund an ever-growing Social security bill, reduce substantially the Trade Imbalance (even with a weaker Dollar), nor, it would seem, to reduce the Current Account deficit. If no headway was made on those fronts in times of growth, it may indicate that a reversal in good fortunes may be slightly further away than most would have hoped for.
Forex Traders may need to adjust their sights a little, and ensure that the potential trades that they are looking at have been well researched, and plotted on a Trade Plan. They may have no choice but to stick to proper money management in the % of their account at risk. They may, as an example, start to trade 5 Lots with a 100 Pips Stop, to overcome the volatility, rather than 10 Lots with a 50 pip Stop. An adaptable mind may be required, if this follows through as it looks like it may well do.
No Doom and Gloom, no Negative Vibes; just a reality check that we may be in the middle of something, and not be able to ‘'see the Woods for the Trees’'. We are already planning for it in the Alerts and Broadcasts that we send out, and have adapted our Team''s thought process so that we are as ready as we can be to be able to make 2008 a very good year, whatever the economy does.
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