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Re: timing markets
Old 12-17-2005, 08:39 AM   #21
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Re: timing markets


Trying to look only at economic factors over the next few years, the primary issue I see is the same one you see—home price reversion difficulties and the debt underlying it. At some point mortgagees are going to start going underwater on this debt, and then some sort of panic may result where retail buying starts to slow down. And because 70% of our economy is now consumption-based, lay-offs are likely to start, especially in the service industry—our only really growing sector over the past ten-twenty years.

I think the housing sector is our current bubble-de-jour. When it starts to pop or decrease in size, the gov’t will do what they always do: lower interest rates and stimulate. And here I differ from some because I THINK that near that point the gov’t will become more obvious in their bubble blowing if things don’t quickly improve. It is likely that they will finally attempt to stimulate the demand side. This means shooting a full barrel of inflation into the economy: They’ll probably raise minimum wage across the board. (Wal-Mart recently brought the subject up.) I see it coming, especially if wages don’t rise by themselves. This currently isn’t happening due to the Asian and global wage push-down effect.

If it works, fine. But then we’ll have to face the consequences of rolling wage hikes throughout the country. If minimum wages go up 25%-50%, then everyone else will want a little additional wage increase too. Consumer prices will rise in order to support the new costs. Retirees may have their savings corroded. It’s been twenty-five years since we’ve experienced serious inflation. I see wage inflation as a looming bubble, but it’s currently just a little froth.

I’m worried about our bonds too. At some point the Chinese and Japanese who hold more than a trillion dollars worth of them, won’t want to buy more, especially if we slow down our purchases of their goods. Or if we throw up trade barriers. Or if they just want out because of the deteriorating US$. Even if they dumped $5 billion/mo., it might create havoc in our economy. (Brewer, could you speculate on this possibility?) Plus Japan and China have their own demographic problems, and at some point they may need their money back to support their aging population. At some point we could/probably will be blind-sided by dropping bond prices. This type of event could also affect bond and bond-like paper world wide.

These two ideas are only small possible factors in a larger tangled mess. I do think they will play prominent roles though. I think aggregate housing prices will tip within the next year or so--if they haven’t already.

Timing: I think it's important to remember that timing markets bears a similarity to having a car accident in that everything seems to slow down for the observer during critical moments, while waiting for the event to happen. So some mild diversification helps balance perceptions. In other words, don't make huge bets. especially with index funds .


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