On Tuesday, December 11, the Federal Open Market Committee (FOMC) will meet and their primary concern has to be the continued sub-prime mortgage mess and the credit crisis it has created. We are fairly certain the Fed will cut the Fed Funds rate by ¼%, conventional wisdom thinking this will rescue the US economy. We are not so sure. And, although we hate to use the “R Word” (recession), we are concerned the Fed is basically powerless to avoid the effects of the worst real estate market in many years.
A recession is typically defined as at least two consecutive quarters of negative growth in the economy. There is a growing consensus that the 4th quarter of this year will show negative growth. Consumer spending is slowing for a variety of reasons including:
- Increasing energy prices
- Less home equity from which to borrow
Billions of dollars of sub-prime, adjustable rate mortgages will adjust upward over the next 12 months, most of them in the next 6 months. Some borrowers will likely walk away from their obligation, giving the lender no choice but foreclosure. This will have the effect of increasing the number of properties for sale. And, according to the Wall Street Journal, Bank capital ratios are at their lowest levels since the late 1990’s. One way for banks to deal with this is to slow down loan growth, further restraining the economy.
In the month of October, construction spending dropped 0.8%. Private nonresidential construction spending declined 0.5% and residential construction spending dropped 2%. Is everything bad? Are there not any reasons to be optimistic? No, everything is not bad and there are a few reasons to have optimism. However, the “untested” nature of this debacle and the total size of this crisis ($2.25 trillion in total Subprime and Alt-a mortgages issued) lead us to be very cautious for the next 6 months as these mortgages get adjusted. The worrisome part of this is……no one really knows how big this issue is.
At Boyer & Corporon Wealth Management, we continue to recommend a larger allocation to cash than usual.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.