Terry Savage
Think rising rates won’t affect you? Think again
July 17, 2006
BY TERRY SAVAGE SUN-TIMES COLUMNIST
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The Fed has spoken, and will speak again, as it walks the narrow line between fear of strong inflation-producing growth and economic weakness brought on by the higher rates it imposes. In fact, the economy has hugged that center line for so long, we seem to have forgotten just how frightening those extremes can be.
Memories of recessions, job loss and rampant home foreclosures are in the shady, distant past. Inflation, with soaring prices and interest rates, is thought of in historical terms. The word “stagflation,” a combination of inflation and high rates, coupled with a slowing economy, seems to have left our vocabulary.
But as was said long ago by the philosopher Santayana: “Those who do not remember the past are condemned to repeat it.”
So maybe it’s time to take a look at history, and where we stand today. Market historian James Stack, publisher of the InvesTech Research Market Analyst, has done just that in his most recent issue. (You can get a sample at http://www.Investech.com.)
Excellent track record
If Stack’s excellent track record and his historic economic statistics don’t cause you to rebalance your investments because you take a longer-term view, they certainly should cause some rethinking of your personal financial balance sheet.
For example, Stack points out that:
*The Fed has now tightened on 17 consecutive meetings. Of the past 10 tightening cycles by the Fed, only 2 resulted in a soft landing (without recession).
*The flat yield curve shows an 88 percent probability of a recession beginning between now and the end of next year.
*The yield on the 10-year Treasury bond hit new 4-year highs last week.
*Stack’s “negative leadership composite” — a proprietary index — is now deeper in the bearish territory than at any time since the 2000-2002 bear market. He points out that on each of the 100-point rally days since the market peak, there have been more than 100 stocks hitting new 12-month lows.
*More than $2 trillion in Adjustable Rate Mortgages, or about 25 percent of all mortgage loans, come up for interest rate “resets” in 2006-07 — at much higher interest rates.
Those facts and more have Jim Stack deeply worried about a bear market. But here’s my prediction: While a potential bear market will get all the headlines when and if it comes, far more damage will be done to the personal finances of American families by the impact of rising rates on their ability to stay in their family home.
The obituary of the debt-ridden American home-owner has been written and re-written over the past five years. But the “resilient” consumer economy has managed to survive all the dire predictions.
Maybe these articles compiled by Stack in his newsletter will open some eyes.
From the Associated Press: “The number of homes still on the market at the end of May climbed to an all time high — 3.6 million units . . . At the May sales pace it would take 6.5 months to exhaust that inventory, the highest level since May 1997.”
From Alan Abelson in Barrons: “The U.S. banking system is more exposed to the real-estate sector than at any time since the end of World War II [with] $3 trillion in direct mortgage loans sitting on their books — a record 43 percent of bank assets.”
And Stack collects reports from papers around the country: In metropolitan Phoenix, sales of existing homes were down 34 percent in May vs. a year ago. In Las Vegas, a record 20,515 unsold homes and condos are on the market, up from 10,555 a year ago, and 4,553 in 2004. During the same period San Diego homes took their “largest ever” plunge, down $15,000 since April.
Not your house, though
Of course, these statistics don’t mean that your house will drop in value. And it shouldn’t be important to you, unless you need to sell your home.
But it does mean that as all those adjustable rate mortgage holders start facing higher monthly payments, some of your neighbors might become desperate to sell. And once that cascade of selling by people who can’t afford to wait out the decline makes headlines, it will be too late to reorganize your personal finances. That’s The Savage Truth.
Terry Savage is a registered investment adviser and the author of the newly published The Savage Number: How Much Money Do You Need To Retire? (256 pages, Wiley, $24.95).
Kind of hard not to see the facts for what they are here. He (Savage) clearly points them out, to believe otherwise is just “whistling in the graveyard”
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