Before I get to the future let me spend a moment on what has happened over the last four months. I have been in this business now for over 35 years and I have seen some pretty ugly markets. What concerns me more than anything else about this correction in 2008 is the fear and panic spread by the financial press. As the market declined, many programs kept using the words “Depression” or “is this the 1930’s again?" At one point I counted in the span of a one hour show the word Depression used over 20 times. That is once every 3 minutes.
I recently heard one reporter make the statement that the Fed was issuing 10’s of trillions of dollars of new debt and then asking how our children will be able to pay off this debt. I call this irresponsible journalism. Let me point out a fact not reported as far as I have seen; the Government invested $250 billion in the “Nine Brothers” and even more in other financial intuitions. They are earning between 5% to 8% on this money. The government is borrowing money at the most, at the moment under 3%. All of the short-term cost of funds to the government is zero percent. If you can borrow at 3% or less and earn 5 to 8 percent, I don’t think you can loose money. Ask yourself, other than here, have you heard this information reported by anyone else?
My point is I don’t want to down play the problems, we have serious problems. I have been writing about the problem in the housing market for the last 2 years. If the media elevates the level of fear by the way it reports what is happening how is that positive? Clearly the press has the right to report, but they also have the responsibility to be fair, balanced, objective, and not create panic.
With that off my chest let me look ahead to 2009. I expect the housing market to stabilize by the beginning of the third quarter. We may well see the cost of a conforming home mortgage at 3.5%. After the first of the year, I would expect to see bank short-term interest rates on money market accounts and CD’s to fall closer to T-Bill rates, zero percent. The banks have been attracting as much capital as they can through deposits as they could before year end. Deposits are a low cost way to strengthen a balance sheet.
The problem is that the banks are paying 2% or more for money market accounts and CD's and not loaning out the money. If they don't start lending they will quickly begin to loose money and will be forced to lower interest rates and to look for positive yield spread opportunities. If the banks are, as reported, unwilling to lend they will be forced to cut the rate of interest they are willing to pay.
The idea that the banks are not lending is bunk. They may not be leaning as much as they had in the past, but they are lending. As another example of misleading press, “Even though mortgage rates are falling, nobody has any equity left in their homes.” If that were a true statement then why are refi applications skyrocketing? If you have been in your house over 5 years you have equity in your house, perhaps not as much as you had, but you have equity to refi and lower your mortgage payment.
The American consumer wallet has benefited from lower gas prices, I do not see them going below one dollar a gallon as many hope. Lower gas prices will increase spendable income. Demand destruction in mortgage interest rates will also increase spendable income for at least half or more of American households if they choose to refi their mortgages.
Therefore, the consumer will save more in 2009. We may in fact bring to an end the negative savings rate that has plagued our economy for many years, if not decades. America will turn into a nation of savers. Even with increased saving I think Americans will spend more than people think they will in 2009. If I’m right on these two items alone the economy will not fall as much as everybody thinks it will in 2009.
My last two items are interest rates and the markets. For interest rates, the question is will this recovery look more like Japan or the typical American economic recovery? I’m going to disagree with the pack and say our recovery will look more like Japan. Interest rates will be low for more than 5 months. I take the Fed Chairman at his word when he said at the last Open Market Committee meeting that he expected interest rates to stay low for an extended period of time.
We will turn into a nation of super savers. In the last 8 years we have had the Internet bust, the real estate bust and the market bust, I think Americans have lost there appetite for risk. So, I expect the stock markets to trade in a fairly wide range, but no new highs or lows for the markets in 2009. Perhaps the largest single opportunity will be the purchase of corporation bonds and preferred stocks. Locked in high rates of interest vs. low interest rates across the yield curve will present significant total return potential.