Sunday, November 30, 2008

The Root of the Problem

The Root of the Problem

Bert Whitehead, M.B.A., J.D.
© 2008

Five ‘up-days on the Dow’ gives us a chance to catch our breath and ponder: What is the root of the problem? Three considerations come to mind.

1) Mortgages made too easy to provide affordable housing has resulted in too many families having to go back to renting. The root problem in real estate is too many houses: population shifts and housing speculation has resulted in having more houses than we have people to live in them. The housing glut means that real estate will be depressed for at least a couple more years.

From an endogenous standpoint, that means if you have a vacant house, cut the price until you can sell it. The root of the continuing housing problem is that too many people don’t price their vacant houses realistically. The price has to go down to the point that it makes financial sense for investors to buy them and rent them out.

2) The root problem with the stock market is that investors have reacted with sheer panic to the liquidity problem (caused by too many non-performing mortgages). The primary valuation indicators show that the worldwide stock market is underpriced. Governments are acting in concert to add liquidity, which is a very complex undertaking. Mistakes have been made with the bailouts, but eventually they will get it right. FDR didn’t get it right to start with when he battled the Depression, but he did engender confidence in people that the problem was being addressed. Confidence in our leadership will suffocate rampant panic.

Expect the stock market to rebound before real estate. It’s not a given that the market increases over the past 5 trading days signal the end of the bear market. The market will turnaround before the economy starts to recover, and when the market does turn around it is likely to increase very rapidly. That’s why we don’t want you to panic and sell off your portfolio, especially now.

3) Being ‘rich’ means having enough money to buy and do whatever you want. Being ‘wealthy’ means being rich enough to take time to enjoy life. It doesn’t take a lot of money to be rich, and it is too easy to focus too much on ‘rich’ rather than ‘wealth.’ The current problems in our economy remind us how transient our stacks of money are, whereas wealth is within our control. The root problem of feeling poor is our own mindset.

Thanksgiving is a wonderful time in our culture to reflect we are indeed wealthy, even if we are not as rich as we could be.