Gut instinct for me as well. I could be wrong – but i’m betting on it. Everything moves in cycles and at some point all cycles correct themselves. When fundamentals are skewed all the people who profit from them explain how ‘the new fundamentals are the new paradigm’.
Some examples – I had a web consulting company during the crazy years. 25 year old ‘executives’ of web firms were telling me how the new way of business is market share – profits don’t matter – no suits – p/e’s don’t matter (no profits so no ratio!, etc. They got destroyed and guess what – business got back to usual.
This ties in to Realtors explaining how prices are still going to go up despite only 5% of buyers being able to afford. (Will it go to only 1 of 25 affording? 1 of 30 affording!). They keep pounding the lie to the public then sheepishly admit they were wrong after the market plummets (it really hasn’t plummeted yet – it will keep correcting to the base line of affordability – it always eventually does.
I think that cycles correct because most buying decisions were outsourced to mob mentality. Everyone lives in the world where prices always go up. Now the smart money isn’t buying – they are actually giving incentives to buy houses (both new and resale) – this puts further pressure on prices – more buyers get scared as trend lines are established (we were only at the top about a year ago – or a little more) – the vast public hears about price declinations but havent seen the aftermath.
Debt. It is now at an overwhelming level both personally for people as well as our government paying for a war it can’t afford. Debt always needs some self correcting. This is happening now. The pressure from credit cards being given like candy and now the bush administration passes bankruptcy reform to protect the same people who gave anyone with a pulse a loan (same with mortgages).
Interest rates! (The big one) Prices have to rise and fall with interest rate costs. The bank of England has promised 2 more rate hikes. Our stock market got hit because the street got news that they cannot expect falling rates. Our debt actually has to increase rates because with falling dollar value – the interest rates have to go up to compensate or other currencies will be more attractive. This is the big killer.
What does this add up to? The consumer spending machine getting wacked. Along with a slump in housing construction the economy gets tanked for the next 5-10 years. So it goes…
Just a gut feeling.
By the way – there are more rich people now then ever especially along the coast in OC, in San Diego, La Jolla, ect. Of course their exposure is greater to – their money is made from the economy – and while executives protect their earnings on the backs of working people – as the economy gets weaker people lose good paying jobs and everyone suffers. So is La Jolla ready to tumble? (as an example). It will follow the rest of the market and the economy.
Anyway – I think that risk management is key. So many people I know are on the sidelines with their cash. Who has all the money in the market? Institutions, 401Ks (not well managed – mine is in as well I just ignore it), and Hedge funds. They would rather risk the investments for good returns than worry about a crash. They get paid on getting good returns, crashes affect everyone. They can’t afford to be ultra-conservative so when the crash comes – boom.
Just my 2+ cents. I am only going with these gut feelings. I think the tide has turned on interest rates and they will only go up from here. But I’m a computer dude and look at broad views – hope i’m right and hope i’m not right!
