The Road Ahead

I don't know about you, but I've been trying to look down the economic road that this country has been on for the last four or five months and see exaclty what lies ahead for us economically and where I need to be standing in order not to get run over.

One of my main concerns is the value of the dollar and whether it will be ruined by hyper inflation as we print this money needed for the stimulus.  Indeed, there are alot of radio talk show hosts with nothing but a high school diploma predicting the inevitable apocalypse from the events that have transpired over the last few months.  But finally I heard one analyst that crystallized all this economic complexity in a way that makes sense to me: Walter Zimmermann from ICAP, Vice President of ICAP

A couple of quotes:

Trying to pick a bottom. People are going to want to wait and see, well, how far down is this going to go. And what deflation is really, it's a buyer's strike, say I'm not going to buy; I'm going to save. And the problem is that's what you need to get the basis for a recovery. Prices need to get cheap enough, again, to be affordable. And you don't get there by trying to prop up failing mortgages taken out by people who couldn't afford them in the first place. You need prices to become more affordable. However painful that is, that's going to happen whether the government tries to get in the way of it or not because that's the basis of a sustained recovery: Low prices and people have rebuilt their savings. 

What I think is irresponsible is not being hopeful but encouraging people to spend when they really need to save, when the only way out of this is to get people to replenish their savings, rebuild their cash position. What brings an economy out of depression is not increasing spending and debt but lowering debt. Raising cash and letting prices fall back to levels that are affordable. That's the only real basis for a springboard up out of a severe economic contraction like is currently unfolding.

Essentially, he predicts continued deflation until 2012 until prices reflect a buying opportunity for those that have cash. This reset of the economy will then spur a recovery.  He is not concerned about inflation, and if you do see it, it will be a sign that the recession is over and cash is starting to flood the market.  But hyper inflation as seen in Germany before the war is very unlikely.  He is saying "cash is king".  Rebuild your cash position. Don't dump your 401K, but tell your 401K manager to roll it over within your 401K into a money market account (cash) and then roll it back into the market when it hits bottom (according to him).  Though, I think I will continue to just dollar cost average.  I think the market is probably close to its bottom at the moment, IMO.

Of course there will be pain as deflation continues, alot of it for people that are upside down in their homes, have alot of credit card debt and are out of work or under employed.  This type of person represents the profile of millions and millions of people that are spurring deflation.  The thing is, even people that should be spending are not letting go of their cash.  If you have a good secure job, have at least a years worth of savings, have no credit card debt, you should be spending as has always been the case even before this economic event.

I'll never forget what Warren Buffet said, and I try to remember it as an unsophisticated investor.  If everyone is running away from the market, he runs to it.  If everyone is buying real estate, it's a signal to him to get out of it.  If you follow the herd, you lose every time and miss out on opportunities.

Anyway, this kind of cleared alot of things up for me. Hope this has helped anyone that was as confused as I am about the economy.


3 comments

  • Tim

    Tim

    Fortunately I didn't have any money in the market before this whole crash happened, so I really think I'm coming at this situation from a position of strength. ;)

    Fortunately I didn't have any money in the market before this whole crash happened, so I really think I'm coming at this situation from a position of strength. wink

  • Dale Ulan

    Dale Ulan

    Haven't checked your site for a while, but your little summary makes a lot of sense. Really, what needs to happen is the debt incurred by those in upside-down mortgages and swimming in credit card bills needs to be unwound. Paid off. We've been trying to keep up with the Jones' that live a dentist's lifestyle, while we're making a janitor's wage. A healthy rate of growth is closer to a straight line. Check out the web site trendlines.ca and look at real estate prices as a proxy for the real economy (ie people buying and selling 'stuff'). You can see that straight line. Basically the real estate market has already unwound itself back to the afforability index 'straight line' - deflation. But you can also see the bubble and consumer prices have to either fall or stay stagnant until 2015 if deflation does not happen. What that straight line also indicates, and this is implied and not stated, is that the majority of people will not (and cannot) get rich without hard work and making a real living - creating something. Trying to cheat the straight line average will be temporary and is only a redistribution of wealth, not a creation of it. Those with an apocalyptic view of anything have always been wrong. They will probably be wrong again, almost certainly. I don't appreciate how so many people are predicting 'the end is coming'. Sensible advice is what we need, not fear-mongering.

    Haven't checked your site for a while, but your little summary makes a lot of sense. Really, what needs to happen is the debt incurred by those in upside-down mortgages and swimming in credit card bills needs to be unwound. Paid off. We've been trying to keep up with the Jones' that live a dentist's lifestyle, while we're making a janitor's wage. A healthy rate of growth is closer to a straight line. Check out the web site trendlines.ca and look at real estate prices as a proxy for the real economy (ie people buying and selling 'stuff'). You can see that straight line. Basically the real estate market has already unwound itself back to the afforability index 'straight line' - deflation. But you can also see the bubble and consumer prices have to either fall or stay stagnant until 2015 if deflation does not happen. What that straight line also indicates, and this is implied and not stated, is that the majority of people will not (and cannot) get rich without hard work and making a real living - creating something. Trying to cheat the straight line average will be temporary and is only a redistribution of wealth, not a creation of it.

    Those with an apocalyptic view of anything have always been wrong. They will probably be wrong again, almost certainly. I don't appreciate how so many people are predicting 'the end is coming'. Sensible advice is what we need, not fear-mongering.

  • Karyn

    Karyn

    Thanks for stopping by, Dale. There are voices on AM radio talking about how this country is going down the toilet and it makes me ill to even listen to it. They will say and do anything to talk the economy down. I'm all for free speech, but this seems like it's only destructive. The market is certainly psychologically driven to some extent, and this can't help.

    Thanks for stopping by, Dale. There are voices on AM radio talking about how this country is going down the toilet and it makes me ill to even listen to it. They will say and do anything to talk the economy down. I'm all for free speech, but this seems like it's only destructive. The market is certainly psychologically driven to some extent, and this can't help.

Add comment