January 8, 2011

Stock Market Surge - Housing Purge!

For some time I have been trying to understand why the stock market has recovered significantly since the crash of 2008/2009 while the housing market is still falling.Well, I finally arrived at a premise that makes some sense. It is supply and demand. One of the bad guys, Wall Street, seems to be the winner from this disaster. Not only were they bailed out by the tax payer, but now the product that they are selling is in demand and competition has been eliminated.

When the housing market collapsed it took Wall Street with it. (Perhaps I should say, as a result of Wall Street's shenanigans, the housing market collapsed and that in turn brought down the perpetrator - Wall Street.) Wall Street was then bailed out. Hundreds of billions of dollars of the net worth of American's disappeared as housing prices fell and the stock market tumbled. Housing is not a liquid asset and the American citizen is no longer looking at housing as an investment, but rather a means of providing shelter. The investment reason for buying a home is no longer valid.

Housing was further crippled by the bankruptcy of Fannie Mae & Freddie Mac, the two financial engines that provided 30-year financing for home-buyers. Further, the securities market for sub-prime loans ,and home loans in general disappeared. These securities, created by Fannie, Freddie and Wall Street were being aggressively purchased by not only individual investors, but also by pension funds, hedge funds, insurance companies and other long-term investors across the globe. These funds still need to invest the funds that they manage.

At the same time, we still have 90% employment in this great country. Our corporations have made adjustments to the new economy and trimmed their overhead. They also have done the right thing in this uncertain market and ave hoarding cash like they never have before. In other words, corporate America is not booming, however it has survived and positioned itself well for the future.

So at this stage in our economy, what better place to put your money than the stock market. Housing related investments are out of favor and are shrinking, Treasury and Corporate bonds are providing some of the lowest yields in history and sooner or later their prices will fall as interest rates rise.

The best investment standing is good quality, well managed stocks of publicly traded companies who are plush with cash.

It is time to enforce anti-trust laws against Wall Street. I wonder if the new Chief-of-Staff to the President will recommend that.

1 comment:

  1. Robert C. Lieberman's recent comprehensive article in Foreign Affairs Magazine (www.foreignaffairs.com) “Why the Rich are Getting Richer,” is worth a read.
    It explains why you are not rich (The rich already know).
    Here are some excerpts that support the stick-up.
    In some cases, these policy changes originated on Capitol Hill: the Ronald Reagan and George W. Bush tax cuts, for example, and the 1999 repeal of the Glass-Steagall Act, a repeal that dismantled the firewall between banks and investment companies and allowed the creation of powerful and reckless financial behemoths such as Citigroup, were approved by Congress, generally with bipartisan support.
    In the 1990s, the Financial Accounting Standards Board, which regulates accounting practices, noticed this practice, correctly predicted the damage it would do to the economy, and then sought to curtail it. But Congress, spurred on by the lobbying efforts of major corporations, stopped the FASB in its tracks. As a result, Americans spent the 1990s and the first decade of this century living under 1970s accounting rules, which allowed top executives to more or less help themselves and, through the mutual back-scratching habits of corporate boards, help one another.
    Similarly, labor law has failed to keep up with the times. Policymakers have repeatedly failed to enact reforms that would have accommodated new union-organizing techniques and empowered unions to counter the growing power of business to resist labor's demands. In this realm, the United States is running a twenty-first-century economy under 1940s rules.

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