Next Bull & Real Estate

Harshal sent: “You wrote positively about the stock market in November, and now it’s up. Do you think this is the start of the next bull market?”

No way. If I thought that, we would have held oil earlier in the week on anticipation of higher demand around the corner.

Signs of trouble are everywhere: Wal-Mart’s report yesterday, Alcoa’s earlier in the week, retail sales reports for last month, major cutbacks at Japanese automakers in addition to American, comments from bankers that their troubles are far from over, and so on.

Nouriel Roubini is one of the economists who correctly called the onset of this financial crisis, and he continues to expect the worst. In an interview with Bloomberg last week, he said:

Unfortunately, the worst is ahead of us. The entire global economy will contract in a severe and protracted U-shaped global recession that started a year ago. The U.S. will certainly experience its worst recession in decades, a deep and protracted contraction lasting at least through the end of 2009. Even in 2010 the economic recovery may be so weak — 1% growth or so — that it will feel terrible even if the recession is technically over.

There also will be recessions in the euro zone, the U.K., continental Europe, Canada, Japan and the other advanced economies.

A hard landing for emerging-market economies may also be at hand. Among the so-called BRICs, Russia will be in an outright recession in 2009. Growth in China will slow to 5% or less, representing a hard landing for a country that needs expansion of close to 10% to move 10 million to 15 million poor rural farmers into the urban industrial sector every year. Brazil will barely grow in 2009. Even India will experience a sharp slowdown.

Most other emerging market economies will suffer a similar hard landing. This severe global recession will morph into a stag-deflation, a deadly combination of economic stagnation/recession and deflation. In the advanced economies, with aggregate demand falling below growing aggregate supply, slack in goods markets will lead to deflationary pressures as companies’ pricing power is restrained.

Likewise, rising unemployment will constrain labor costs and wage growth. These factors, combined with sharply falling commodity prices, will cause inflation in advanced economies to ease toward negative territory, raising concerns about deflation.

Other than that, things are swell.

Sibelle sent: “I enjoyed your comments on the real estate market last autumn. Are you by chance still keeping an eye on it?”

Both eyes! My home finance contacts say rates below 5% are guaranteed, and that we might even see rates under 4% before this crisis is over. As I write, 15-year mortgages are already at 4.8%. Dirt cheap money like that combined with low market prices is a combination that no investor can pass up.

I’m watching Southern California closely. I already own property in L.A. and feel that the area will never lose its appeal. Over the long run, Southern California will be a profitable place to own property. In the short run, though, it looks headed lower. For potential buyers, that’s great. Money sees the L.A. market declining another 25% in 2009.

If that happens, and rates fall below 4%, I’ll be buying whole neighborhoods!

Yamile sent: “I would like to see what your other readers think about many of your posts. Why don’t you enable comments on your site?”

I’ve tried comments in the past but found the signal-to-noise ratio to be too low. For every meaningful comment, there were five worthless ones. I’ve heard that monitoring tools and spam prevention add-ons are better now, but haven’t looked into them.

I like selecting from comments that come via email, grouping them into a zeitgeist, and then presenting them to readers along with my answers in a clean format such as this very post. For instance, the top question today was from Harshal, but he wasn’t the only person who asked me about whether this is the start of the next bull market. Many people did, so the topic bubbled to the top to deserve a public reply. If I’d handled that via comments, you would have had to read the same question 20 times before getting to my answer.

That’s one reason I’m not dying to bring comments back. The other is that I want to help my readers reblock themselves the Polly Frost way.

Enjoy the weekend. Subscribers, see you Sunday bright and early!

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