This is my first time blogging so I am not certain how this all works or who will actually read it but I don't know how else to get my opinions to the masses. My wife and I currently own 2 businesses in the Central Florida area. One is World Mortgage with one office in Ormond Beach, Florida and another in Gainesville, Florida. The other is an at&t retail company with 7 locations in Volusia County. Obviously the mortgage business is having some difficulty with business being down close to 70% across the board. Even though we never really got into a lot of the sub-prime business and did not build the business model on that premise, it has still affected us tremendously.
As I always do, I have been trying to connect the dots between the current economic conditions and our businesses to try and come up with some different ways to stimulate our market. In thinking about what to do I have come up with what I believe are some interesting concepts that could help everyone in the industry do more business as well as help the overall economy.
Now stay with me here in the first part and I will tie it all together in the end.
Back in 1998-1999 the U.S. stock market was in the midst of what is now referred to as the "tech bubble". We all know about it now but couldn't really see it while it was going on. Tech stocks were going up at an alarming pace and start up companies with no real business model were able to amass market caps in the billions with nothing more than an idea. Some of the ideas were good but a majority of them were pretty stupid. The one that sticks out in my mind was cereal.com. Did they really think that people were going to order their Captain Crunch over the internet and wait 5 days for delivery when they could simply pick it up at the grocery store while they were there?
Towards the end there became a mass hysteria to get into these stocks because people just knew they were going to get rich. But economic fundamentals always stay the same and when the stocks became overpriced it was time to sell. It was like trying to catch a falling knife though and there were a lot of people that got hurt financially in the aftermath. Be rest assured, it was not the professional traders that work for the large financial institutions that took the bloodbath. They were the ones selling the stocks to the poor schmucks who didn't know any better. These were the grand days of the day traders when people were quitting their jobs because they thought all of a sudden they were great stock pickers. It didn't last very long though and within 2 years the free for all was over. However, during this time there was an enormous amount of wealth created within the financial firms who bought low and sold high.
After the "tech bubble" burst there was no real place for those firms to invest the money they had made in order to produce the same types of returns that the shareholders and their bosses had become used to. So creativity took over again and some very bright people on Wall Street came up with some new investment vehicles like SIV's (structured investment vehicles) and mortgage backed security bonds to try to secure high returns.
It was during that time that the "housing bubble" was created as a direct result of low interest rates from the Federal Reserve and a need to invest the money that had been made in tech stocks. With these new investment opportunities it became easy again for the same poor schmucks that lost the money in the tech bubble to think they were going to get rich in the housing market. Because let's face it, none of us was really alive and working the last time real estate had a long period of devaluation. As a matter of fact almost every one you talked to at the time thought that real estate was just a safe as government bonds or cd's. There was easy money to be had and nearly everyone wanted in on the action.
But look at the parallels between the tech bubble and the housing bubble. The only difference between the 2 is that in the tech bubble it was the individual investors who got hurt and the housing bubble has been indiscriminate as to who it has hurt. It has claimed large financial institutions who played the game all the way down to the guy who never bought a home but has watched the value of his stock holdings drop along with the value of his home simply because of horrible lending practices of others and greed on Wall Street and around the world.
As a matter of fact when you really connect the dots (which i will finish in a minute) it has affected everyone worldwide because of the commodity costs and inflation that has now become a severe issue.
Lo and behold though the "housing bubble" took about 2 years to completely inflate to the point of bursting. When it did burst though we all know what the consequences were.
Now here is where I connect the last dot. As we all all painfully aware we are now in the midst of a severe credit crisis in addition to an energy crisis that was created, I believe, by the tech bubble of 8-9 years ago. The money made from tech stocks went into housing which burst and now the money has no place to go but into commodities.
Where are the major institutional investors going to put the billions of dollars to work other than commodities which are the only thing working. They can't invest in stocks because they are down over 20% from their highs in October in just the U.S. and down a lot more than that worldwide so they can't invest in stocks. They can't invest in real estate or mortgages because no one knows where the bottom is on those or when it will come. So that leaves the only place left to put the money is into commodities.
I read the other day that 6 years ago there was a total of $13 billion invested in the commodities market and today that number is upwards of $280 billion. That means that there is too much money chasing too few commodities in the world which is therefore driving up the price. Again, it is pure economic fundamentals at play.
The fact is that the only way to get commodities down, and therefore give everyone more disposable income to spend, is to fix the housing market. if we find the bottom in the housing market it will signal the end of the write downs for the financial institutions. When we end the write downs it will signal the all clear for the investors to start investing in equities again since they are severely under priced right now. Once the money starts to flow out of commodities and back into equities it will automatically drive down the price of the things that we all need to survive and prosper.
I have some thoughts as to how to solve at least a portion of the housing problem but I will save that for a future blog.
i would be interested in someone who disagrees with my position and can tell me where my thinking is askew.
