For the last month or two the world has been on pause. The Greek crisis is still there, Portugal is closing in on BK, and there is a solution being worked out. Deadlines come and go and still no real solution.
FHA, which is about to join Fannie and Freddie in bankruptcy, is still offering great home deals; a friend of ours is buying a 555K home with a 3 ½ percent down payment out here in California. A coworker yesterday showed me a 343K REO home that he was bidding on. It was offered by the bank and since there are 5 other bidders, he’s bidding 383K on it. If it was me, I would have bid 300K and if I didn’t get it, I’d bid on the next one. The only trouble is, very few Realtors want that sort of a client. You’ll be considered a waste of time.
The housing market in California is in the dumpster and everyone is oblivious to it. Prices have dropped enough that buyers think they are getting the deal of a lifetime. There is no panic, just a lot of unexplained burnt lawns and lock boxes hanging on front doors. Interest rates are at an all-time low. All the consumer is interested in is; can I afford the monthly payment? No fear yet, we have yet to hit the lows where panic selling begins.
The real thing to look at is the cost of money. When interest rates are low, the banks are flush with cash and no one to loan it to (or the buyer can’t qualify for a loan). When this happens, commodities take off like a rocket. Futures in gold, oil, wheat and etc. are determined by interest rates. The price of a commodity on the spot market determines the price in the futures market. So if gold is at $1600 an ounce spot, a 100 oz. future 1 year out would be spot plus interest on the value of the spot price for one year on 100ozs. So if the interest rate was 5%, 100 oz. for a year, the premium would be at least $8,000 for the contract. So with very low interest rates, it becomes very profitable to dabble in commodities that are in an upward trend.
Banks are paying zip for interest right now. And the odd thing, there is a very small spread between AAA and DDD bonds. In normal times you could see a spread of 12%. Well with the Federal Reserve guaranteeing everything, there is no risk so Triple D only raises eyebrows when it’s a bra size. The silver foxes are trying to maximize their retirement interest income with high risk investments that have very poor returns for the risk taken. We have speculators playing the commodities and stock markets. All because of very low interest rates.
With the calm before the storm, there are only two real games in town, the stock market and the futures market. As long as we have very low interest rates, look for the markets to go up. Many investors will realize that dollars in the bank are returning nothing and this will be the new sand box to play in. In the end, it plays out like the river boat in India where two star crossed lovers decided to commit suicide rather than be separated. Everyone rushed to one side of the boat to view the event and the boat capsized killing hundreds.
The mess we are facing has a high user confidence level, “I can avoid catastrophe, I know what I am doing.” It’s a little like being the driver facing a head on collision with another driver. You’re confident you can avoid the crash. You both try to turn out of the other cars path. The funny thing is, you both turn in the same direction— away from danger, to where the other car isn't, but will soon be.