Economic Silver Linings

My pastor thought it would be helpful to talk about economic & financial matters between services in November. I spoke about macro-economic issues--one of my favorite topics. A friend talked about the stock market. He is an investment manager for a $700 million portfolio. Another church member works at Wells Fargo, and he covered home mortgages.

The presentation was so well received that we were asked back in December.

My talk was rather frank in November, so I decided to talk about "silver linings" that may be emerging in the economy.

Leading up to that second presentation I wasn't so sure I was going to have much hope to offer. I was one of a few Americans who tuned to CSPAN II at 10 pm December 11 when the Senate was voting to deny the Big Three automakers a bridge loan. I went to bed thinking we'd see the Dow drop by 900 points the next day. That didn't happen. Indeed, the stock market posted a modest gain on Friday.

Are there some silver linings? Is there any ray of sunshine that might indicate an economic recovery? Might we actually see positive returns again in the stock market?

My friend, Kraut, thinks so! He is very busy processing mortgages these days. He sometimes goes to work at 5 am to keep up with the business. I am one of his customers--having recently refinanced my home at a near all-time low rate. Due to actions taken by Fed Chairman Ben Bernanke a few weeks ago, we have witnessed a plummeting of home mortgage interest rates.



Likewise homes are becoming more affordable for Americans. The National Association of Realtors provides monthly data on the Housing Affordability Index (HAI). As the chart shows, the October HAI is at an all time high of 141.8. This means that a family earning the median family income (ie, $60,840) had 141.8% of the income necessary to qualify for a conventional loan (ie, 6.23% 30-year fixed rate in October) covering 80% of a median-priced single-family home (ie, $181,800).

This should play an important role in the recovery process for the slumping real estate market. It's the best buyer's market for real estate since at least 2002.



Inflation is disappearing. While in the long run, de-flation is a very, very dangerous matter--at least for the moment we can enjoy falling prices. This, too, helps stimulate the US economy. The main reason we are experiencing a recession is due to a techical matter called the velocity of money. Beginning in September, Americans became fearful and greatly slowed their pace of spending. That's coming around gradually--and attractive prices will get consumers back to the stores.



Nothing is more appealing than driving to the pump and finding cheap gas prices. The oil market has collapsed in the past several months--and we are now filling up for far, far less. Just consider the windfall we are now enjoying relative to the $4 per gallon gas this past summer. At the moment, that's providing about a $400 billion annualized stimulus to the US economy.



Of course, this is not all without a lot of pain & suffering. It's been said that it's a recession when your neighbor loses his job. It's a depression when you lose yours!

Let's now take a picture stroll though the lines of time. First, here are the unemployment lines of the Great Depression.



Next, you will all remember the gas shortages in the 1970s. Times seemed pretty harsh back them. Waits for gas were long. Inflation was through the roof. We thought it would never end. Remember those days?



You are probably wondering what lines can be seen today. Well, just think about it. There are some pretty long lines that have been forming since September. They all lead right up to one of the most important buildings in the United States.