The U.S. and most other G-7 economies have become very comfortable with the belief that asset price appreciation created wealth as opposed to producing goods and services. So here we are witnessing this belief in action that if asset prices do not go up, then the economy will not do well. Leverage and securitization were both ways to continue the asset price appreciation. The problem is that as stocks or house values went up, the consumer would borrow against the capital gain or sell and spend it.
Florida was one of the worst states where this happened. The Miami Herald recently reported that the number of homes and condos that are expected to come on the market in just South Florida alone is nearly 5 times larger than all the residential properties that are currently listed. I believe that South Florida is just a snapshot of things to come. Have you been to Michigan or Ohio lately? How about Hawaii? The state of Hawaii just moved their school days to 4 days a week. It was packaged as Furlough Friday.
Governments on the state and local level are cutting back on programs. They are seeing their tax revenues dry up. Mortgages that are in foreclosure can only stay on the books of the banks for so long. Those that are saying the mortgage crisis is over are wrong. Despite that, stocks have moved up sharply.
Beware, you need to watch the dollar in the coming weeks. As the dollar moves up, everything priced in dollars will move down. There is more to this market than the belief that price appreciation creates wealth. We still have a long way to go before we work out of this danger zone.
That is what I think...
