Avoiding the Portfolio of Doom

Last time I compared the current investing environment to an Indiana Jones movie.  So what can the average investor do to prevent his holdings from becoming the “Portfolio of Doom”? 

You must cross the high, rickety, bridge to the acceptable rate of return on the other side, without plunging into the crocodile pit below.  Here is some advice on how to do this. I am not a financial professional, however I do manage the GeoDon Fund, a portfolio of stocks and bonds that was originally put together by my grandfather George over 50 years ago.  The GeoDon is up 11.1% YTD vs. 15.4% for the S&P 500.  Not too shabby for a conservative rated fund.

Diversify and Then Diversify Even More

Diversification is needed by the average investor to prevent you from making big mistakes and to spread out your risk.  Because the current environment is so risky, you should diversify even more than normal.  For stock and bond people, this means putting $5000 into two stocks or bonds instead of $10,000 into one.   I know that this increases your investment costs, but paying extra commission reduces your risk is and this makes it worth it right now.

For mutual fund investors, if you are in three mutual funds in your 401-K (the minimum I recommend), consider now spreading your money into two or three more.  Just make sure the additional funds are solid ones.  Look at the five-year history and be aware of how they performed in the worst year because things could get nasty again.

Gold and Silver

Gold should be considered strictly a defensive action and this can be a valid strategy for some people.  Do not consider it a value generating investment.  If you lose money, you received a benefit from hedging against disaster.  If you make money, consider it insurance that paid a dividend.  To rely on it as an investment is the same as an NFL team expecting their defense to score enough points to win the game.   Also, it has been reported that Russia is hoarding gold.  This is driving up the current price, but if Russia decides to unload its holdings in the future, the small investor could get stuck.

Silver is like a gorgeous woman that flirts with you, deceives you, seduces you and causes you to fall deeply in love with her.  It is a sultry, steamy, romance until she crushes your spirit and leaves you poor and brokenhearted.  All the good things the commercials say about silver is true, but don’t be sucked in.  The silver market has a history of suddenly imploding for no reason at all.  A careful investor should avoid the “Silver Mines” when climbing through this wilderness.  And copper presents some danger also.  China has been stockpiling copper, so it could be overpriced and the risk of a future sell-off exists.

Opportunities

People always say “I wish I would have got in at the bottom of that one”.  Well there are two sectors that are very close to the bottom that offer a potential big upside:

Water

Demand for clean water is expected to greatly increase in the future.  Companies that purify, transport and provide this water are still very cheap compared to their potential growth.   You can do the research to determine which are best.  I am planning to add a water company (or ETF) to my portfolio in the near future.

Uranium

Uranium prices are still very low.  China, India and Turkey are expected to build many nuclear power plants in the near future.  In addition, even Japan is expected to replace its old, damaged, nuclear power plants with new plants featuring the latest in safety technology.  Next year, demand is expected to rise while supply, due to some unusual circumstances, is expected to temporarily fall.  This creates a potential for a big price spike.
 

Of course investing in uranium companies is very risky.  But the downside is limited because uranium prices are already depressed and should not go much lower.  I do have some money invested in two uranium companies.  Please do your own research to determine what you may want to do here.

Looking Under the Rocks

This tricky investment environment makes it necessary to look for opportunities in unusual places.  The quest to find good investment takes some creativity.  I have used my new “hyper-diversification” strategy to make small investments in two riskier companies, but there are logical reasons for both.

Can he be trusted with your money?

I invested a small amount of money in the Bank of Scotland.  The bank suffered during the European financial crush, but has made an impressive comeback.  I figure that the Scots are so tight with their money (I am allowed to say this because I am part Scottish) that after almost losing it once, they won’t risk letting it happen again.

I also invested a little cash in a Spanish electric utility.  Again this may look very risky, but it really isn’t.  If things totally collapse in Spain, the very last thing to shut down before all the lights go out would be, well, the electric company.  Until then, the stock is up 47% in two months and I can still sleep well at night.  Invest wisely my friends.

The Sound of Silence

It’s quiet, real quiet, too quiet.  The stock market is quiet, the economy quiet. It’s so quiet, it’s downright eerie.  And just like an Indiana Jones movie, you know when it gets this quiet that something very terrible or very good is just about to happen.  And while this makes for a great movie, it makes things very nervous for investors right now.

Investor “Wall Street” Jones is searching for high returns with low risk, which is now as difficult to find as the lost ark.  Jones survived being crushed by the giant rolling debt crisis in 2008, but now is trying to navigate a financial jungle filled with junk bonds, commodities and Chinese, Greek and Spanish obstacles. He must walk across a very unstable bridge that is built with Euros.  A few years ago the bridge was rock solid, but now the bridge is so rickety that it could suddenly collapse and send Jones plummeting to financial ruin.  He is trying to avoid building the “Portfolio of Doom”.

Jones is very concerning about the lack of activity as he navigates through this jungle.  He then reaches a clearing and realizes why things are so quiet.  All the creatures in the jungle are assembled watching two knights engaged in a brutal jousting match.  The winner will be deemed worthy to fight the nasty, fire-breathing, dragon that goes by the name of “Bad Economy”.

"Bad Economy"

One knight, Sir Barack, has been fighting the dragon for over three years.  The dragon has been winning this battle and in fact Sir Barack’s pants are currently on fire.  But Sir Barack believes he can slay the dragon if he is just given more time.  The other knight, Sir Mitt, believes the dragon should have been slain by now and thinks Sir Barack’s lance is flaccid and incapable of defeating the dragon.  Sir Mitt believes he is rather good with a lance since he has experience slaying smaller monsters.  The jungle is expected to be rather still until one knight is victorious and the battle with “Bad Economy” resumes. 

Quiet Until November?

This election is so pivotal and the difference in choices (and economic direction) is so great, that it seems like the stock market and maybe even the economy (lack of activity due to uncertainty) have ground to a halt.

In a normal presidential reelection year, the incumbent takes significant actions to stimulate the economy and thus improve his election chances.  Congress usually supports these actions because most of them are up for reelection also.  These actions usually work but can be harmful for the economy in the long-term.  However, an incumbent president doesn’t really care.  If he wins, he just thinks “Hey I’m in for four more years, suckers!”  If he loses, he just says to the winner “Good luck dealing with that mess sucker!”

But this year has been very different.  There have been no big economic stimulants and economic growth has been anemic.  Possible reasons for this are:

A.   The economic is so weak that it can’t be stimulated much

B.   The administration has already fired all the stimulus bullets in its economic pistol and so it has nothing left to try 

C.   The administration is so inept that it has no idea what to do (the Republican favorite) 

D.   The administration has all these great ideas (that for some reason were not tried before) but the stupid Republicans in the House of Representative are obstructionists and won’t agree to anything (the Democratic favorite) 

I’m hoping the answer is B, but I fear it could be A or C. (you can vote by commenting after this post)

 

Do Not Believe the Election Year Models

You may read articles about what the stock market does in certain months of an election year and for that matter what will happen after the election.  As I have said several times this year: the traditional economic models and indicators are broken.  This is a strange and unique situation so do not invest based on these historic-based models. 

Something Big is Going to Happen Soon

But things are too quiet.  Something big has to happen before the end of the year, unfortunately in this crazy situation it could be a spike up or a crash down.  If I had to bet, I would bet for a drop.  In May, I forecasted an S&P 500 Index low of 1245 this year before a recovery.  I expected the drop to have started already so I am much less confident of that forecast now.  But it remains quiet, much too quiet.  So put on your Indiana Jones hat, keep your head low, and beware of the snakes that can poison your portfolio.

Beware of the Tax Zombies

I have a Miniature German Schnauzer named “Midnight”. One characteristic of this breed is its ravenous appetite.  Midnight wolfs down every meal and constantly begs for more.  If you gave him all the food that he wanted, he would literally eat himself to death in a short time. He has an almost insatiable appetite for food.


Midnight

And like Midnight, there are people in this country that have an insatiable hunger for tax money.  They want more taxes continuously.  They spend time thinking of new ways to get it.  They make emotional pleas for it.  At times, like Midnight, they even beg for it. 

They are “Tax Zombies” who seek to bite open your wallets and eat up all the cash.  They exist both inside and outside of government. A commentary in last week’s New York Times argued that higher taxes are the solution to all our problems.

But how much taxes would be enough for the Tax Zombies?  Just like Midnight and food, I don’t think there are enough taxes to satisfy them. They would just develop more and more programs and more and more ways to spend the money and then ask for more.  It’s like a spendaholic with a credit card.  No credit limit is high enough because they will always spend all the available funds and then want more.

If allowed, the Tax Zombies would take every dollar you earn and then give some it back in food stamps, housing allowance, and other credits.  Therefore the power to tax is the power to control.  The more you are taxed, the less freedom you have.  An increase in taxes results in a decrease in freedom.  Some taxes are necessary, but nations that figure out how to provide “Public Goods” with the lowest tax rates are rewarded with stronger economies.  Remember that every dollar removed from the private sector in taxes is one less dollar available to fuel economic expansion.  Higher taxes will not solve all our problems – it is the problem.

The Affordable Care Act (aka Obamacare) includes 21 new taxes or increases (7 hitting the “non-rich”).  This is expected in order to be able to cover people who are currently uninsured.  But the problem is how government will manage your tax “contribution”.  Fraud is so rampant in Medicare that it can’t even be accurately estimated.  A sample audit found fraud at over 30% in one location.  There will be much fraud with the government managing the ACA and this is not factored into the cost estimates.  This means the ACA, even if the costs estimates are accurate (and you know they are too low), the program will cost 25-30% more due to fraud.  After you make promises to people and you come up short on funds, how are you ever going to pay for it?  Here come the Tax Zombies again!

Both Illinois and California have huge deficits because they spent way more money than they collected in taxes.  The solution? Even though they already have very high tax rates, both states plan to raise taxes even higher.  The Tax Zombies strike again! My friend Mike just ran (moved) across the border to Indiana to avoid the monsters.

Our enormous tax code is composed of thousands of ways for the Tax Zombies to get your money and thousands of ways you try to keep ahold of it.  We are in dire need for tax reform because running and hiding from the Tax Zombies results in too much cost and inefficient use of resources. 

Economic theory says that collective money (taxes) is necessary to pay for public goods (roads, bridges, security forces, education, etc.)  But the government didn’t create these, it merely manages the process. (Think about it, the government didn’t build the bridge, a private construction company did)  And when you factor in the fraud and inefficiencies of government processes, it manages your tax money very poorly. 

The government cannot generate any revenue on its own, it is dependent on taxes and fees) collected from people who earned income in jobs that were created by entrepreneurs who took personal risks.  These business owners also paid corporate and personal taxes along the way.  So what about those “ungrateful” business owners?  Because of their successful efforts they created jobs that provided the tax money for the “Public Goods” to be produced. Yes they did build their businesses and they helped build those roads and bridges too.    

A Very Different Type of Economic Recovery

This recovery has been inconsistent, sporadic, and unpredictable.  At times it looks like the economy is getting stronger and starting to zoom.  At other times it has looked so feeble that you question if we are making much progress at all.

This recovery is certainly very different from past recoveries.  To get a ground-level perspective on how things are progressing, let’s go back and look at that distressed business district near my home in Stark County, Ohio.

This is the place I have written about before, where things were so bad that the self-serve car wash was encouraging people to bring their buckets with them to wash their cars.   During the depths of the Great Recession about half of the business along this nearly two-mile stretch closed up shop. 

It is interesting to note that the first business to close up was the dancer bar / strip joint.  This happened before the recession actually started.  I believe strippers are a good economic indicator.   This industry is based on disposable, discretionary, male, entertainment, spending.   This type of spending is the first to be cut during bad economic times and should be the last to return in a full recovery.  I think an economics student needs to do a doctorate thesis to prove this.  There is a connection here and of course the research would not be boring.

The owner of the strip club tore down the existing old building and put the property up for sale.  I doubt that he has heard from any interested buyers in years.  And the car wash will still let you “bucket wash”, but business is still slow.

There are signs of recovery in the distressed district.  About half of the vacant buildings have new businesses.  But the types of new businesses that moved in give an indication about the nature and quality of the recovery.  Let’s look at a few of the more interesting ones:

 

Internet Café

This is the ultimate in misnomers because it does not offer Internet service nor is it a coffee shop.   You buy time on terminals that allow you to win money if you are able to click on targets at just the right moment.  They say they are games of skill, but of course it is really just gambling.  Actually it is worse than gambling because it is unregulated which means that payouts are just high enough to keep the pathetic customer hooked.  So far law enforcement has not shut them down and there are many of these “cafes” opening all over Ohio.

Dog and Cat Shampoo 

Kitty right before the shampoo

I am guessing the owner started this business at home and after building up a customer base, moved out into a building.  This is a tough business to grow in a slow economy because people can wash their own pets if necessary.   But this can be a tough job.  Many breeds of dogs will not resist bathing, but cats are another story.  Shampooing a cat can be dangerous for all involved, so the proprietor must be good at what she does.  Many she can video the cat shampooing sessions and then sell DVDs for entertainment.

Arabian Food Market

This business moved into a building where there has been much turnover.  However, I think this business is going to do well.  There is a growing Arab population in the area and there is no competition of any sort for miles.  The location is also close to the interstate which means it can draw customers from a wide area. 

The Gift Boutique

According to an article in the local newspaper, this business opened based on a permit to sell retail purses, women’s wallets, scarves and knick-knacks.  They must believe that it is very stressful for men to shop for these gifts because in the back of the store they offer full-body massages performed by unlicensed masseuses.  Unlicensed masseuses often rub their customers the “wrong way”.  I don’t know whether the opening of the boutique has resulting in greater employment, but it can be assumed that it has resulted in an increase in the number of “jobs”.  A police spokesperson said they are “accessing” the situation, but the business still appears to be open.

The Church 

A local factory closed and put its large warehouse and surrounding property up for sale. This facility was a prime business property because it was situated right off the interstate and just over 10 miles away from an intersecting interstate.  It would have been a great property for a new factory or distribution facility.  

But who bought it?  It was an expanding church.  I have no problem with a church buying the facility.  They renovated the place and it is much better than having the building sit idle.  However something is wrong with your local economy when the organization that is able to gain the most value (by paying the highest price) from this property is a church and not an expanding business.

The Conclusion

Regarding this business district, this is an economic recovery built on saints, sinners, hungry Arabs and smelly cats.  No wonder it is inconsistent and unpredictable.

Paybacks Are Indeed a (well you know …)

Young Billy Economy had just graduated from high school.  He had earned decent grades, but had not received any scholarships.  He did not have any money saved up for college, but he did have a long-range plan.   He would borrow money for college, study arduously, get a degree, get a great job with a high salary, work very hard and then someday, have a big-ol’-pile of money.     

So he applied for a student loan and was approved.  However, in this fable, he received his entire four-year loan in one lump sum up front.  Billy sat and looked at the newly acquired funds.  And then Billy had an epiphany.  “If my goal was to acquire a big pile of money” thought Billy, “then I have achieved my goal very fast without having to do all that work!”

Then Billy took the money, ran off and partied like a rock star.  He frolicked with the chicks from “Bankers Gone Wild”.  He engaged in multiple encounters with that promiscuous “dame” Becky Housing.  He injected derivatives.  He engaged in back-door financing and sub-prime deals.

He was having a great time with his wild, lascivious, lifestyle until one morning when he awoke and called the bank to get more money.  To his utter surprise he was told his account was dry.  He rolled over and found a fat, ugly, Greek, woman in bed next to him. (Bloggers note:  I think Greek women are very beautiful and know several attractive Greek ladies, however for purposes of the story, this woman was lacking important assets).

“Shall we do it again, dahling?” she purred.

“I’m out of money! exclaimed Billy.

“Get out of my bed now, you worthless piece of crap”, she demanded.

So now young Billy found himself broke and forlorn.

Now you might think this is a modern, economic-based, version of the story of the Prodigal Son, but it isn’t.  There is no wealthy father to bail Billy out and Billy is not at all repentant.  He is sorry that the money ran out, but he is not sorry for his behavior.

You might think that Billy is back to “square one”, but in effect he is much worse off than when he started.  He now owes the bank for the large student loan and he can’t get another loan because he wasted the first one.  He still needs to get a degree and now he is behind schedule.  He will have to work his way through college, which means it will take him much longer to graduate.  And unfortunately his first job is a night shift telemarketing job soliciting contributions for a political campaign. “No ma’am, he’s not inept, he just needs a few more years to really fix things.  Now can I put that on your Visa card?”

The Lesson

We basically partied like economic rock stars starting in the mid-90’s.  We feasted on cheap foreign-made goods.  We created a big Internet bubble. We pumped up the money supply and threw cash around at random.  This fueled an enormous housing bubble that did not pop, but exploded.  Our government watchdogs and regulators showed the same discipline as Secret Service agents with Columbian call girls.

And we all benefitted.  We didn’t object to these actions because people don’t care about the sins of others if it benefits them.  The problem is that after the crash, we did not all suffer equally.  Some of the worst offenders kept their illicit profits, while many innocent people lost their jobs and/or their homes.  A free-market, capitalist, system is not fair, just like life.  I think the aughts (00’s) should be labeled the “Enron Decade” because the total books “were cooked”.  Our stocks weren’t as valuable as we thought they were.  Our houses weren’t as valuable as we thought they were.  And our economic growth was based on lies.

Because we were irresponsible for so long, the Great Recession didn’t take us back to “ground zero”.  It put us in a big hole, just like Billy Economy.  That is why we can’t “snap back” from this recession as we have from previous ones.  This is why growth has been so anemic.   This is why unemployment remains so high.  Yes, bad choices made by the current administration have contributed to our lack of progress, but if the economy had been managed “perfectly”, things would be better, but certainly not yet good.  

It is going to take several more years of tough work to dig us out of this mess (just like Billy again).  Some people have said we are going to experience a “lost decade” (economic stagnation) similar to Japan.  I prefer to label it a “Payback Decade”, a payback for our years of “reckless” economic behavior.  And in this case, payback is indeed a bitch.

Feelings, Really Bad, Feelings

Feelings, nothing more than feelings,
trying to forget my feelings of love

Last October I detailed the giant “economic smack down” between Warren Buffet and the Economic Cycle Research Institute (ECRI).  ECRI was forecasting a recession and Buffet said emphatically there would be no recession.

Here are the GDP results since then:

Q3 = 1.8%

Q4 = 3.0%
Q1 = 1.9%
Q2 = 1.8% (expert panel estimate).
 

So the winner is Buffet in a rout.  In the same post I tried to split the difference between the two behemoths and forecasted a very mild recession with GDP near 0% during the time period.  And I was wrong.  I based this forecast on the belief that the best economic cycle model (ECRI) could be that wrong.

And neither could ECRI.  The Chief Operating Officer of ECRI will not admit they made a wrong call.  He instead claims that the forecast is still correct and that the recession just hasn’t happened yet.  I think a better explanation is that the economy is moving so slowly that it can’t even get to a recession.

The reason that ECRI has not backed off its recession prediction is that even though the economy continues to grow, the ECRI model never has stopped “flashing red” and it is flashing even brighter than it was nine months ago.  Say you have a warehouse of flammable material.  You install the best, state-of-the-art, smoke alarm system you can buy.  One day the smoke alarm sounds.  Firefighters rush to the warehouse, inspect the entire facility, but find nothing unusual.   So you have the system thoroughly inspected and tested and determine that it is functioning fine.  You then reactivate it and immediately the alarm sounds again.

Something is definitely wrong.  Last year there were logical reasons the economy sputtered after a hopeful start.  This year the economy is slowing for no apparent reason. (Unless you count Obamacare) I would be tempted to label this the “Molasses” recovery because it is moving so slowly.  But I won’t because molasses is sweet and this economy is anything but sweet to the millions of unemployed.   The latest employment report was sickening.  Forget 8.2%, the Wall Street Journal calculates the “real” jobless rate at 14.9%. 

Patti Domm (CNBC) has labeled this the “Zombie Economy”.  I said early this year the economy was wearing ankle weights, now it seems more like a ball and chain.  Last year I said it was the “Grocery Cart” recovery.  The wheels of this cart are now locking up.

So where are we?  We are slowing down from around an estimated 1.8% growth rate in Q2.  I think that number is high because the recent statistics for Q2 are weaker than Q1, so I’ll go with 1.5%.  Unfortunately, the question must be asked again: Are we now headed for recession?

Recessions are extremely difficult to predict, and very few economists are forecasting one now, even after the horrible jobs report.  Recessions are like diseases, they begin long before you realize something is wrong. The best model we have, the ECRI, was unreliable last year. The ECRI still says recession.  Buffet said in early June that the possibility of recession was low (not as positive as last October).

In December of 2007 I called my colleague Economist Pat because I thought the economy was getting worse.  I told him that it “feels” like we are entering a recession and he agreed.  I remember this conversation because the last recession ended up starting that month.

And I have a similar feeling now.   It feels like the economy started to recede in late June or early July.  I say feel, not think or even believe.  For the record, Economist Pat does not think a recession is imminent this time.

I do think this recession be extremely mild.  It could be a six-month period of just under 0% growth.  This is basically the same forecast I gave last October which was in fact “wrong”.  This recession will not be that traumatic because the economic was not growing that fast.  There won’t be massive layoffs because companies cut drastically during the previous recession and have been very careful in adding workers.  So expect very weak hiring, sort of like the June jobs report (get it?).  The stock market will retreat, but not that much.  So stay on guard and please let me know what you think.

And now we can say goodbye to the hopes of a strong economic recovery in 2012:

Teardrops falling down on my facew we can say goodbye to trying to forget my feelings of hope (love)

Feelings wo-o-o, feelings ....

Follow Up: I posted this on July 9.  On July 10, Lakshman Achuthan, ECRI COO, said in an interview on Bloomberg Televison he believes the economy is already in recession.

A Brick By Brick Housing Recovery

The dust has finally settled down
The sun is shining on these pieces that are scattered all around
This house was everything we knew …

Brick by brick, we can build it from the floor
If we hold onto each other, we'll be better than before.
And brick by brick,
we will get back to yesterday …. (Train)

Last December I described the housing market as being “constipated” and said the market would continue to “skid” on the bottom before finally starting to recover around March 2012.

This forecast was very accurate.  Usually a correct prediction made just four months out is not impressive, but few people were forecasting this.  Back then, people were panicking because the market hadn’t “bottomed out”.  Now people are panicking because the market isn’t recovering fast enough.

The problem is that people are using charts, graphs, and models based on historic data to compare and forecast the current economic and housing recovery.  You can’t do this because many traditional indicators are still malfunctioning.

This was a very damaging recession.  There is no quick bounce back.  There is only a slow, sometimes excruciating painful, and climb out.   Imagine a long distance runner who falls down the side of a hill. He gets up, brushes himself off, climbs back up the hill and rejoins the race.  He bounces back and is able to finish the race, albeit at a much slower time than if he had not fallen.  Contrast this to a runner who falls and breaks his arm.  There is no bounce back.  And he won’t be finishing this race or any race until his arm is healed.

When will the housing market start to race again?  We may not have the old models to help forecast, but we have a new one.  Many industries crashed during the recession and have since started recoveries.  Housing was the last to hit bottom because it had the furthest to fall.  If you look at what happened in the capital equipment, transportation equipment, and recreational vehicle markets, there is a sequence to the recovery process:

1.     Crash – the industry suffers a severe, unprecedented, drop in sales.

2.     Skid – the industry hits the bottom, but does not begin a recovery.  It slides on the bottom for almost a year.

3.     Walk – the industry begins to show increased sales, but at a very modest rate.

4.     Run – the industry gains momentum and sales return to healthy (but not peak levels)

The housing market stopped skidding around March and started walking in April.  We will be walking for a while before we run (forecast at end of post).

The Current Housing Market

Housing Starts, New Home Sales, and Existing Home Sales are all up 15-30% over last year, but this sounds better than it actually is.  Remember 15% over a very low number is still a weak number.  And there has not been consistent growth from month to month in some of the statistics.  This causes “panic” from some people, but it is characteristic of the “walking stage” of this recovery.   

Another hopeful sign is that housing prices actually increased on average in the March-April time frame for the first time in many months.  This was not expected to happen until later this year. 

But there are factors holding back the market.  Listings are very low, down around 20% from a year ago. People cannot sell their homes easily if their mortgage is underwater. Unemployment is still high so people are not getting jobs and buying a house.  People are not changing jobs so they are not moving to new locations.  Prices are still much lower than peak so many people are waiting for a stronger market before putting their house up for sale.  And banks are still holding back on some repossessions because prices are too low.

Sales are also being slowed by tight credit.  Mortgage rates are low but it is one giant teaser rate.  It looks very appealing, like a swimsuit model, but you are not getting any of that unless you have a “super fine” credit score.

There are some positive factors.  There is less slack in the market than was previously thought.  The shadow inventory (repossessions or future repossessions) is smaller than expected.  This is because it is not in the banks’ interest to repossess too many houses and people are not “walking away” from underwater mortgages as much as feared because they still need a place to live.  Bankers and customers continue to work together to prevent foreclosures.  This is an example of the free market at work.

Basic economics is the key to housing recovery.  Low inventories (supply) lead to higher prices.  Higher prices lead to less people being “underwater”.  Higher prices also lead to higher inventories and this will ultimately lead to a strong housing recovery.  But this process takes time.

The Forecast

The “walk” phase will last through 2012, but each quarter should be stronger than the preceding one.  Based on what has happened in other industries, look for the housing market to start “running” around March of next year.