The Economy — Real Estate — The Election — The Fed — The Coming Year

Almost said it’s getting to be that time of year, but since tomorrow is Thanksgiving, I guess that time is here. The holidays — end of the year — much reviewing and looking forward going on.

Like everyone else, I’m wanting to know what’s up next? The economy, the election, the Fed, Wall Street, real estate in general, and whether the Padres will be able to extend Jake Peavy’s contract.

The Economy

Here’s where I go off on the media. I are a normal folk. Like most normal folks, I have to live my life in context. Reality says we all do. Here’s what you’ll read and hear for the next day or two.

Gross Domestic Product growth rate will slow. It’ll still be growing. Unemployment will increase — which will make the media almost gleeful. The facts? Historically, (and now for that matter) 5% and under for unemployment is reason to party hardy. The rise in unemployment? Up to about 4.75% — relax.

Context — what a concept.

Fed Chairman Dr. Bernanke has made the extraordinary move of opening up the Fed’s process to us. It’s refreshing. It’s also brilliant, as the various markets will now have a much better idea of what might be coming, cuz much of the guess work will have disappeared. We’ll have to wait and see, but it makes sense this new openness and increased updating of the Fed’s thinking will smooth the markets out a bit — not to mention lessening the anxiety.

In late August I wrote my thoughts on where the Fed would land by the end of the year. I thought back then it would be 4.5%, maybe lower. We’re at that level today with one more chance for a cut, in December. I’m not holding my breath for Bernanke to cut again so soon. However, if he gets a little spooked by housing and job numbers, he’ll do what he thinks necessary. The real cutting I suspect, might happen in the first 3-5 months of 2008.

In fact, is it too optimistic to say by April Fool’s we’ll be at 4% — or lower?

It’ll help to understand Bernanke’s mindset. He’s been writing books, treatises, and anything anyone will read, telling about his belief in the cause of the 1929 crash — which led to the Great Depression.

It goes like this. The real estate collapse of 1927 was the first domino to fall, which ultimately led, just two years later, to the crash and subsequent depression. He believes in his DNA the crash/depression needn’t have happened. The Fed, only about 14 years old then, didn’t understand the power they wielded. Instead of slashing rates and flooding the market with cash, they contracted the money supply and raised the freakin’ rates! In retrospect, they created the original recipe for depression.

If in September and October Bernanke had raised rates, and continually contracted the money supply, we would be in serious trouble today — many would say a deep recession. And that’s exactly what happened back then. The real estate collapse, combined with the catastrophic moves by the Fed, moved the economy into the depression. What else could’ve happened, given those facts?

I review all this to illustrate why Bernanke will not let real estate implode — not on his watch, if he can help it. He doesn’t care a wit about Wall Street and their problems. They’ve figured that out by now.

The Election

This isn’t a political blog, and I’ll not be making editorial comments. That said, a few observations — generic in nature.

Presidential election years tend to be up years for the economy. There’s no science whatsoever to that, just history. With two exceptions in the last 40 years, ’80 & ’92, this has been the case. Again, no science, just what’s happened. Be nice, it gives me comfort. Everything doesn’t have to be rational.

If this election turns out to be a repeat of 1980, the status quo will continue, more or less. If you remember, most of the talking heads back then predicted a Carter victory. It didn’t turn out that way.

If it turns out as a repeat of 1992, we’ll find ourselves in a whole new ball game. Generally speaking, more likely than not, taxes will rise. The status quo will go through major changes, most of which we can’t possibly predict. One prediction will be safe to make — we won’t be in Kansas any longer.

Though some investors wouldn’t welcome a repeat of ’92, I harken back to ’76. We’d just finished a nearly two year recession. Carter beat Ford by an eyelash. During the election year and for three more years, real estate took off like a rocket. I recall this for you, not as a comparison to today, as there is none. It’s merely to point out, real estate will go up or down, regardless of who is in office — most of the time.

Nixon/Ford — real estate flat to up — 74/75 recession — real estate up in ’76. (election year)

Carter — real estate up — then crash and burn.

Reagan — massive tax cuts and economic recovery — real estate up once inflation tamed and interest rates finally reached ‘doable’.

Bush I — real estate up — then S & L crisis — then crash and burn.

Clinton — took office in the middle of S & L crisis so real estate still down — second term, real estate very mildly up.

Bush II — real estate way up — then crash and burn. Final year yet to be written, but almost surely not up.

As you can see, it doesn’t matter either way who is living on Pennsylvania Avenue when it comes to real estate. It goes up, it goes down, it stays flat awhile. Both parties have presided over real estate party times, and like now, crash and burn scenarios.

Carter was in office during 16.5% FHA rates. Bush I was in office with S & L crisis. Clinton inherited S & L, then saw flat to mildly rising real estate. Bush II saw huge real estate rise, then crash and burn.

In my opinion, Bernanke is the central figure for real estate investors — not whether a liberal or conservative will be our next oval office tenant. He controls how banks look at lending, and the money supply. In other words, he who controls the gold, rules.

The Fed

Chairman Bernanke’s choices over the next 12-15 months will tell the story. It’s also, in my opinion, likely he’s pretty happy with the fall of the dollar. As I’ve suggested here before, once the dollar gets too low for the rest of the world to compete with quality of our goods, they’ll start singing another tune. It’s already starting with Europe. The shoe is now beginning to squeeze them, and they’re crying foul. Once the world is forced to compete with American manufactured quality, we win almost by default.

It’s certainly worth watching.

Wall Street

The Bears have a vested interest in prices falling. They’ve already faced total defeat once, and barely escaped. We’re at what may be the final showdown in the next 3-4 weeks. If the Bulls don’t blink, this could be it for the Bears for a long while. If that happens, we could see the DOW go back on steroids.
In any case, the blinking should be over in a few weeks.

I’m bettin’ on the Bulls.

Jake Peavy

Outside of Josh Beckett, no pitcher in baseball is clearly superior to Jake. He’s just 26 and is no doubt a couple years from is prime. Scary thought. He just won the ’07 NL Cy Young Award — unanimously. Unless Jake wants to be the next Tony Gwynn, i.e. staying in San Diego his entire career, while taking millions a year less than market value, he’ll be playing elsewhere by 2010. He’ll be a 29 year old free agent, who will demand and likely receive about $20 Mil a year for 5-7 years. Jake says he wants to stay here forever, and I hope it works out for him. There’s only so much ‘San Diego’ discount one super star can swallow though. He’s a quality guy both on and off the field — exactly what endears him to San Diegans.

Being a sports fan in San Diego is like being a football fan at Duke. Big shiny rings and parades just aren’t in your future. If your team does happen to luck into a World Series or Super Bowl? They’re humiliated within an inch of their lives. We still love ‘em though, cuz they’re ours.

Related posts:

1. Real Estate History — The Media’s Version — Preview of Coming Attractions
2. Real Investors Are Looking Beyond Next Year
3. Ending 30 Year Ban — Never Say Never — The Lani & Benn Show — Ditchin’ Weight
4. Happy New Year!
5. It’s Been A Year — Happy Birthday!