Posted by Leonard Steinberg on August 8, 2011
To-days dramatic market plunge following the S + P downgrade raises the question: is this a correction or a crash? Market corrections are not unusual events. From the market lows of July 2010 to the highs of April 2011, the S&P 500 was up over 26% without experiencing a correction. To put that 26% run-up in perspective, the best 20-year time period for the stock market was 1948-1968, and the market only returned an average of 8.4% annually during that period. This illustrates that we were overdue for a correction. During recovery periods, stocks are prone to sudden declines in value. Unexpected drops in the market can be painful, but they are part of the healing process. And I would be certain many shorted the market to compensate for last week’s losses. Gold is at an all time high, trading over $ 1,700/ounce to-day…..and talk of inflation is growing. These may be good times for real estate, provided interest rates don’t spike.
Fear is still dominating investor sentiment. Fear and uncertainty are not good for the luxury real estate market. What are people afraid of? While there are several factors that could be cited, debt problems domestically and abroad would be the most obvious answer. Our nations medium to long term debt needs to be addressed urgently. And revenues need to be raised, even if its just for a few years till everyone is working again, producing more tax dollars and not draining the Federal money bandage.
Yes, European countries have spent themselves into a corner: correcting this mistake will be good for long term growth, not bad. While some financial institutions may face losses in the process, the minimal level of European exposure U.S. banks have, makes them well equipped to face this challenge. The odds of significant damage to the U.S. economic system resulting from European debt failures are very low.
Although S&P downgraded the nation’s bond rating from AAA to AA+, Moody’s reaffirmed the United State’s AAA rating. The U.S. now has a split rating from the two largest ratings agencies. The third-largest ratings agency, FitchRatings, also agreed with Moody’s AAA rating. In confirming the AAA rating, Moody’s recognized that the budget compromise is a first step toward achieving long-term fiscal improvement. The legislation passed on August 2nd calls for $917 billion in specific spending cuts over the next decade and established a congressional committee charged with making recommendations for achieving a further $1.5 trillion in deficit reduction over the same time period.
Strategic investing is a long term project undertaken with risk and uncertainty. Equity markets do not move in a straight line, and neither do economic recoveries. Neither do real estate values. Right now we are hearing lots of NOISE, but we will only be able to assess the true facts in a few weeks, possibly months. Long term objectives should not be drowned out by short term panic or radical moves.
So lets think solutions: These will be the trends I would hope to see in the future:
1) Cut long term spending, without raising poverty levels. Raised poverty levels will cost lots more. Raise retirement ages and benefits ages. One or two years can even make a big difference. Attack waste and corruption with a vengeance. Do not ever enter into an un-funded war….EVER again. If you want to go to war, have the money to pay for it.
2) Raise revenues by eliminating loopholes for those that really don’t need them. When GE does not pay taxes, we all have to pay for it. Introduce a tax system that doesn’t just reward a select few….lets play fair. Should billionaires pay less taxes than millionaires? And if so, explain it to all of us and SHOW us how it helps the planet.
3) A re-newed awakening of our need to make and produce things. ‘Buy America’ seems smart right now.
4) A flight to quality: In real estate and in everything. Maybe its time to focus on less volume, more quality rather than too much of a bad thing. When you buy 5 cheap Chinese made toys when you could buy one well made American made toy that obviously costs more because we ended slave labor many years ago, think about the cost to all.
5) Medical costs are much, much too high for what they deliver. The profits of the medical system are the primary killer of our economic recovery. Who is profiting from this? Not the American taxpayer for sure. And without Obamacare, who will pay for the un-insured? We will.
6) Hire local: this is a double edged sword. Jobs left America not only because they were much, much cheaper elsewhere, but also because Unions were becoming extremist in their demands. Paying workers a wage that is impossible to live on is also unwise. A fair, balanced approach is needed. Ross Perot predicted our unemployment rate to-day many years ago….we chose not to listen.
7) Wall Street needs to revise its thinking. This Quarterly-think mentality has to end. It drives companies to make decisions that may be of benefit to its balance sheet and the stock price in the short term, but it is bad for the economy in general. When thousands are fired, who pays for their unemployment benefits?