Wednesday, January 23, 2008


So a global financial meltdown takes place, with foreign stock exchanges losing from 5-15% of their value overnight. Here in the USA the media has the world braced for a collapse of the stock market Tuesday, the day after the Martin Luther King Holiday.

Now there are already a few lessons to be learned. First and most important, no matter how strong the rest of the world, no matter how much strength they have in their currency, they are hopelessly linked to the USA economy if they want to maintain what strength they may have. Like it or not the USA consumer is responsible for 20% of the gross national product of every developed country in the world. We stop spending they collapse.

Another point is that no matter how much foreign investment there is in the USA, it just increases their dependence on the strength of our economy. We don’t make money they don’t make money. And this is just some of the opening points to be made in the so-called worldwide financial meltdown.

So the media creates a hysterical reaction in the world markets with forecasts that we are in a recession, that consumers can’t spend, that the housing market has collapsed and that the financial industry is drowning in red ink. It is enough bad news to drive down our markets and cause an outright panic worldwide. If only someone had bothered to search for the truth. The following chart is the media view of world economics.

The standard newspaper definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters. That has not happened. From a historic perspective every recession since 1950 generated a 25% loss in value in the stock market. That has not happened (so far we have only lost 15%). So why does the media declare we are in a recession when we aren’t?

Of all the potential answers the only one that makes sense is greed, to increase viewership by hyping and distorting the news. Sadly the American consumer got caught up in the hype. So did Wall Street for a week, and the world for a weekend. Thousands of people, maybe even millions, panicked and sold stock and moved it to safer investments if there are such things. Baby boomers saw their impending retirement slipping away as stock prices fell.

But the carnage promised by the media never materialized because the Federal Reserve, doing what the Federal Reserve is supposed to do which is to protect the USA economy, stepped in, slammed down interest rates, and ended the collapse of the American economy. Thank God someone in the government is actually doing their job. Black Tuesday never happened. Foreign markets around the world felt stupid having just had a Black Monday in anticipation of Black Tuesday.

So what really happened in this ecomomic crisis? Well, inflation in the USA was creeping up to around 4% thanks to two factors, spiralling housing costs over the past two years and spiralling oil costs everytime we need oil. Fact is housing in many markets was selling for one and one half times its actual value, a recipe for disaster. And oil hit over $100 a barrel in the past week, up 35% in the past quarter. It was amazing these two items only caused a modest increase in inflation.

Still, for the economy to stabilize the housing prices had to correct by going back down in certain over-priced markets and the oil prices had to go down which can only happen with increased production by oil producers or reduced use by consumers. OPEC held firm on production but the media preoccupation with the weak economy did cause people to change their energy use patterns.

People began dumping their gas guzzlers for more efficient cars, thermostats were turned down, the Good Lord gave us the warmest year in a long time, and people stopped making all the trips. This time people are dead serious about breaking our dependence on foreign oil and being held hostage at the gas pump. Overnight the oil prices dropped 16%. As more and more people join the revolution to break our dependence on oil the prices will continue to fall.

Housing prices have adjusted much closer to their real value. Just in time for the Federal Reserve rate drops to make low cost mortgages affordable and available again. Cheaper mortgages and cheaper housing, sounds like a great environment for growth. Energy efficient cars are now flooding the market and being embraced by consumers. With falling interest rates people can afford them. That also sounds like a great environment for growth.

The financial institutions have now written off billions and billions in bad debt from all the stupid mortgage deals so that loss has been absorbed. A lot of the owners of housing that was acquired with sub-prime mortgages were greedy investors and foreign buyers so they have been put back in their place with the drop in housing prices and foreclosures.

Long term things are looking better all the time. Of course Bush will be leaving after this year, another benefit in the opinion of most people. The Fed will continue lowering interest. The president and Congress, two of the most unpopular organizations in the USA have agreed on a bail out package which will further fuel the economy.

Don’t sell your stock. If you did you will now have to pay two commissions in order to get back in the game, a fee to sell and another fee to buy back what you sold. Stocks will clearly be a better investment than housing. Commodities like gold have already hit record highs for their owners who have cashed out and the commodities can now drop back to normal levels.

The White House, Congress and Federal Reserve will all be trying to outdo each other to strengthen the economy through the rest of the election year. The troops in Iraq have done a wonderful job with the surge and troops will probably be cut in half by election day, lowering the cost of the war by more than half and saving tens of billions of dollars for the economy further improving the economic picture.

In conclusion, don’t trust financial advisors and turn off the television and we will be a lot better off. By turning off the tube not only will you be saved from the hysterical and slightly deranged media but you will not be subject to the brainwashing from ads that urge you to buy all those things you don’t even need.

No comments: