Macro Economic Trends and Risks
What Will They Do Now?

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By sonnypage
September 21, 2007

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My wife and I are Realtors, also associate brokers, who live and practice real estate north of Atlanta. We are north of the Chattahoochee River up in Roswell and Alpharetta. This past week our final listing expired and was not renewed. This means that for the first time since we have been in business, fourteen years, we have no listings.

Five months ago my wife's friend Barbara called to refer us to her friends Donna and Nigel, who needed to sell their home. My wife, after a first visit, emailed them that she was doing a market analysis and would be able to recommend a listing price shortly. Nigel emailed back that she could do all the cost analysis she wanted "as long as it's not below $500,000". That was our first hint. My wife emailed back that $500,000 was probably "the high end of fair value in a soft market". Nigel insisted on starting at $525,000. We agreed and took the listing. Six weeks after we took the listing, we began to recommend that it was time to reduce the listing price if they wanted to attract a buyer in a soft market. We recommended $500,000, the price we had initially suggested. We were getting very little showing activity and felt that a significant reduction was needed. Nigel's response was to reduce to $522, 500 but no more. My online "tax search" on Fulton County's system showed that even though they had paid $400,000 four years ago as they had told us, they now owed $490,000. So how did that happen? It seemed that Donna and Nigel, along with many other Americans, had installed an ATM in their home which they had used frequently. Now, in a soft market, with declining prices, they are probably underwater on their mortgages. I do not believe that they can sell their home for what they owe. Last month we learned that Donna had taken the kids and moved into her friend Barbara's basement. I read somewhere once that financial issues are the main reason for divorces in America. The next week Donna's attorney insisted that she needed to move back into their home. She moved back but now lives in their basement bedroom. It was then that they learned that they have a significant problem in the basement with mold that they must address before they can possibly sell their home. So there you have it. The money they took out of their home was spent and not used to maintain their home. They are now upside down on their mortgage. What do they, and other Americans like them, do now?

On Monday Alan Greenspan's new book hits the bookstores and yours truly will snap up a copy. Early quotes that are out have Greenspan blaming congress for runaway spending. He also blames the current resident in the White House for failing to veto that spending. Americans demand that their government provide them with lots of goodies and our elected politicians of both parties are more than eager to comply. Surely you are not surprised? Even the Roman emperors had to provide bread and circuses or risk being literally torn apart by their citizens. I remember very clearly Greenspan recommending a couple of years ago that Americans take advantage of adjustable rate mortgages. Liquidity provided by our central bank made money available but no one forced Johnny America to buy that SUV; no one dragged Connie Consumer down to the mall and forced her to shop till she dropped. There is ample blame to go around, no one needs to push and shove for their share.

Tuesday is show time for the Fed. They must do or not do, but either way, it's a decision. All of the chatter is that the markets will sell off on the news whatever it is and that may well be. Keep in mind also that the following week real estate sales figures for August will be out. Take my word on this one; those figures will be breathtakingly awful. Because of this, any way you slice and dice it, the Fed will have cut 100 bps before you say "boo" on Halloween. Can we wash away our problems with more liquidity? I do not know but I am certain that we will try. Never forget that next year is an election year. A deflationary recession is absolutely not in the cards, or at least not next year. My take on all of this is that the globalization story is alive and well. Whether or not our economy slows or not globalization continues and the emerging markets continue at their emerging. Our dollar may well fall as the price to keep globalization on track but so be it. I will stay invested accordingly. In my retirement accounts, where I have most of my assets, I am fully invested mostly in two hard commodity mutual funds...materials, energies, and precious metals. These funds are PSPFX & FSENX. I also have smaller but significant positions in three emerging market mutual funds; FEMKX, FPRNC & USCOX. In my so called "main account", my taxable account, I am aggressively long five hard commodity equities; BHP, SSRI, AEM, FCX, SLB.

We are in for a very interesting week.