The significance of last week's dramatic reduction in interest rates in the United States from 1.75 percent to 1.25 percent was highlighted only by its ineffectiveness. The day after the announcement, the Dow Jones industrial average dropped by 184 points, leaving investors wondering if the US central bank had used its last silver bullet.
Until quite recently it seemed that falling share markets were not having a negative impact on consumer spending in the US, while the bull market in property prices supported consumer confidence.
But the latest economic data indicates that this is no longer the case. Consumer and investor confidence continue to worsen. There are clear signs that property prices are no longer appreciating, and have probably already started to decline. Property prices are the most important prop to consumer confidence.
There are more property owners than investors in the markets, and people have made a great deal more money on property than they have lost in stock exchanges. But this also highlights the risks that a declining property market holds for the world economy. We all know the effect the Japanese property bubble had on
that country. Interest rates are at a 41-year low in the US, and this has everything to do with the strength of property prices. There is no imminent prospect that rates will rise, but is this enough to support prices?
The balance of supply and demand could swing if consumer confidence continues to worsen and homeowners feel the market has peaked. In those circumstances, low interest rates won't insulate investors. It now seems probable that the US will again experience a period of recession, and possibly even a deflationary depression. The more optimistic view is that the world economy is entering a period of low nominal gross domestic product with low inflation.
In deflationary times such as these, cash flow is the most important consideration, because income yields tend toward zero. Fancy accounting and non-cash flow earnings are meaningless. Portfolios need to be inoculated by adding dependable income streams, whether they are dividends, interest or rentals.
In a strange sense, it is easier to invest now that quality and reliability are the watchwords. Bottom-up stock pickers who research companies thoroughly are going to do very well in this market, particularly if they are wise in their choice of geographical location.
With the Nasdaq still down 80 percent since its 5 042-point high on March 10, 2000, the investment community is feeling pretty miserable. Warren Buffett, the chief executive officer of Berkshire Hathaway, is not convinced we have seen the worst: 'I could make a case that the stock market has now fallen to fair value, but I don't believe it has. Considering the corruption in US accounting and the normal risk premium investors would expect, I don't think the market is yet fairly valued.'
Against this backdrop, highly leveraged homeowners are going to find themselves in a very uncomfortable position as property prices start to decline while average household incomes fall rapidly.
Respected economist Stephen Roach, of Morgan Stanley, sums it up brilliantly: 'The basic message is that post-bubble shake-outs don't end quickly. To me, it is like peeling away the layers of an onion. Nasdaq was the first layer to go, followed by IT and then telecoms. But there are still more layers to come off this onion. They include the dollar bubble, the property bubble and the biggest bubble of all - the American consumer.'
Publisher: Personal Finance
Source: Personal Finance
Ailing US property market indicates that consumer bubble is about to burst.
Posted On Monday, 18 November 2002 10:01 Published by eProperty News
The significance of last week's dramatic reduction in interest rates in the United States from 1.75 percent to 1.
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