Wednesday, March 29, 2006

Waving the Yellow Warning Flag

The Inner Game of understanding the Business Paradox: the better you think you are doing, the greater should be your cause for concern.
Mark McCormack, sports agent, promoter, and lawyer

I am not known as an optimist, so I won’t throw any one off by stating that I think many people will be major financial trouble in the coming months.

We have the new bankruptcy laws that no one is paying too much attention to at this point, but with interest rates up a quarter of a point to 4.75 percent, which means a number of home loans will rise for those who financed their new homes with adjustable rates and for those who have adjustable equitable loans (seconds taken out on their homes).

The government tells us that inflation is under two percent, not counting food or energy costs (somebody needs to tell me why those are not counted, especially since a large percentage of my cash goes to those two items). The New York Times article in today’s paper points out that this interest increase is the last rise before it leaves neutral territory. This means “after 15 consecutive rate increases, the cycle of monetary tightening is reaching its peak as interest rates approach what is seen as a "neutral" rate that is not so high that it slows economic growth but not so low that it allows inflationary fears to come back to life.”

But, what brings this piece home, so to speak, is that an article in yesterday’s Los Angeles Times about swindlers preying on those who cannot afford their homes states that there was one foreclosure for every 1,223 households in Los Angeles. Now, throw in a terrorist attack or a natural disaster such as an earthquake and people are going to be in big trouble. We know what a help FEMA is! People will not be able to walk away from their homes as they used to. The new bankruptcy law states that one has to pay back loans and debts unless one is penniless with no income.

Trouble is brewing.


Jack Steiner said...

I think that you are quite right. It is going to be very ugly for some people.

alice, uptown said...

Food is inextricably linked to energy in places like Wonderland, where we have econo-boxes for supermarkets, and streets too small for an 18-wheeler to make deliveries.

As for what is in the consumer price index, apparently housing and health care costs are covered. Oddly enough, each of those went up 15% for me in January.

If you can reconcile that with an inflation rate allegedly below 3%, you're a better financial planner than I. And that, I should be embarrassed to say, is my job.

The future's so dim (except for some of my debt-free clients), you'd better get a miner's helmet.

The Misanthrope said...

Alice, thank you for further confirming my beliefs about where the economy is going. There is going to be a rude awakening for this country. My prediction is somewhere in the next 2-7 years. I hope to hell I am wrong.