I recieved a good question from a viewer, and I wanted to pass long my comments for everyone's benefit. I couldn't respond and explain the entire macroeconomic picture because it would take forever to explain. In my journal, I try to be as concise and to the point as possible without boring you with a bunch of economic data. Don't get me wrong, I will try and bore you from time to time too, but I've found that most investors want to know the bottomline.
I realize that everyone has an opinion on just about every subject, and every subject can be debated until the cows come home. The opinions I render try and look beyond the obvious, and I try to predict events before they make headlines. I am guilty of being a contrarian, and I love a bargain.
Here's a comment from a reader:
John, I think your analysis of the housing market concerning valuation is correct, but sadly, housing has replaced manufacturing as the main wealth generator in this country, and like it or not, I think the Fed is targeting it and does not want this bubble popped or the whole thing is coming down, just like Japan. How else can we be "in the eighth inning of tightening" when the Fed funds rate is still negative and nominal long rates are lower than nominal gnp which is inflationary for things than can't be imported, ie, housing and land?
See my answer below:
Thanks for your insights. The Fed will never tell us what they really have up their sleeve. I put more validity in what they do, rather than what they say. An example would be his comments about "irrational exuberance" in the stock market in the 1990's. Had Greenspan known the severity of the impact on investors in the 1990's, he probably would have proceeded more cautiously.
This time around, with the real estate situation, I feel Greenspan is handling the situation more delicately. On the website, I mentioned that the Fed would try to talk down the real estate market first. Frankly, I think he is waiting to see if this strategy works. If real estate speculation does not slow, I am convinced he has a plan 2, and more drastic action with plan 3.
You're right that manufacturing is basically dead or dying in the US. And you're right that Greenspan does not want the current real estate situation to undergo the same fate as the NASDAQ bubble. The impact of a bubble popping in real estate would have a devastating impact on the economy. That being said, we need to remember that the Fed is not very good at engineering a soft landing. Also, people are generally greedy and unfortunately learn only from painful experiences.
We are in the 14th year of the current real estate boom. I do not know when its going to end, but several pieces of data are telling me we are closer to the 9th inning than the 4th inning. In 1980, total mortgage debt was less than 60% of personal income. When you compare this to 75% in the 1990's and 104% today, something's got to give.
John Mugarian
