Market Jitters

Yesterday, Alan Greenspan said, "When you get this far away from a recession, invariably, forces build up for the next recession and indeed we are beginning to see that sign." The former chairman of the Federal Reserve also commented on housing, saying, "We are now well into the contraction period and so far we have not had any major, significant spillover effects on the American economy from the contraction in housing."

I attribute that first quote to the DOW's 400 point correction today, but here's my take on the totality of his remarks. The economy, after four years of growth and the DOW increasing some 4,000 points, is tightening its belt with companies focusing on efficiency. This contraction leads to increased incentives and wages for retained employees and the dissolution of unprofitable contracts. This is completely natural in a mature economic stage of the cycle. As long as profit margins remain viable, widespread layoffs will be avoided. Inflation, in particular energy prices, has stabilized for the most part, but there are several international situations which threaten to increase energy costs.

As far as housing is concerned, I was working in south Jersey during the summer of 2004 on the mainland across from Long Beach Island while witnessing the construction boom. Hundreds of quarter-million dollar houses were sprouting up in this relatively rural area of New Jersey and clearly wasn't sustainable (south Jersey is no Shangri-la).

I said it then, and I'll say it again; the housing market can't keep up this pace. They're over-building and the late-comers are going to take a bath. As a whole, the market will recede, but not much and certainly not collapse.

When I got to San Diego, my prediction was clearly illustrated. Johnny-come-lately's tried for their piece of the pie, over-built (specifically condos) and then ate their losses. Housing in the early 21st century was akin to dot-coms in the late 90's, but with one major difference; even the busts retained some value. As aught-7 progresses, housing should stabilize (a relief for young families who were getting priced out of neighborhoods, especially in established metro-areas).

Concerns for the future include quarter-trillion dollar budget deficits, energy prices, unbridled welfare expansion, increasing health care costs, unrevised social security outlays, and an international loss of confidence in the dollar.