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Reading Market Intentions after the Credit Crunch

“People are living longer than ever before, a phenomenon undoubtedly made necessary by the 30 year mortgage.”(1)

30 mortgage

Want to know how quickly financial facts change? Consider that since I intended to write this newsletter the government has instituted a 360 degree change in the way banks will now be able to lend money. Previously the sky was the limit with 40 year mortgages being touted as the answer to buying that dream home. Down payments were considered unnecessary.

Now a homebuyer must have a minimum 5% down payment and an amortization period of no more than 35 years effective October 15, 2008. At least that’s what they’re doing in Canada.

What was the reason most potential homeowners went for a long amortization and no down payment? It is because the banks know human nature well enough to exploit this one tendency:

Good Intentions Rarely Translate into Action

Many people take the low monthly payment afforded by no money down and longer term FULLY intending to make extra payments but seldom do. Thus the banks come out most profitably. But as we can see from our neighbor to the south that it doesn’t pay to overdo the goose that lays the golden egg!

The Canadian government has wisely understood that financial surgery is extremely painful and has opted for prevention rather than cure.

“Stock markets are caught in a crossfire between bearish and bullish forces with the bears continuing to grab the headlines.” (2)

Now you are probably thinking, “Shouldn’t that quote have been the headliner of this newsletter?” But it was exactly the excesses of the investment banks and their handling of their mortgage books that led the economy to where it is today.

What investors need to remember are the undiscussed facts BEHIND the featured news.

Featured news: There has been much debate about whether the US is in recession and what impact this is having on Canada and the rest of the world.

Undiscussed fact:
US manufacturing and exports have become more competitive because of lower cost of production.

Undiscussed fact:
US manufacturing and exports have become more competitive because of lower cost of production.

Undiscussed fact: For the first time in many years the US savings rate is in positive territory.

Featured news: China’s exports to North America have become more expensive due to increased costs of transportation.

Undiscussed fact: China is increasing both its domestic consumption and exports to other developing countries.

Featured news: Financial companies such as banks are being severely penalized by investors. Most financial companies’ stock prices are down.

Undiscussed fact:
There is a difference between retail and investment banks but both types stock prices are being punished indiscriminately. For instance Anglo Irish Bank in Ireland had earnings increase by 15% in the first half of 2008. Yet their stock price went down 60%. There are also many other types of financial companies that have not been involved with the subprime mess, that are still profitable.

There are more examples of undiscussed facts please contact me if you would like to know more.

Slowdowns or recessions are a normal and necessary part of market cycles. They are always a temporary interruption of a permanent uptrend in stock markets.

Remember we have been through these periods before. Yet economies keep progressing because almost all people like and want the same things in the world. Maybe you like white bread and I like brown rice. Maybe you like blue jeans and I like khakis.

For the economy to reach the crisis proportions that is featured in the mainstream media the following would have to happen:

Every citizen in the developed world would have quit their jobs, rip up their mortgage papers, get rid of their cars, cash in their investments and move to the country.

We would have to build our own houses, grow our own food and sew our own clothes or wear hand me downs. We would never go to a store to buy anything.

If we had any money we would stuff it under our mattresses and never spend it or invest it.

Is that going to happen on a large scale? Of course not! We will all get up tomorrow, go to work, pay our bills and buy our groceries.

That demand has not changed and will probably grow because of developing markets’ increase in their middle class populations, who aspire to the same standard of living that we now enjoy.

Because the cost of living is rising here are a few questions you could use to help you spend wisely:

For an expensive want:

– How much do I owe on my line of credit or credit card this month?
– If I had to pay cash would I buy this item?
– Would I come back tomorrow to buy this item?
– How many hours or days would I have to work to purchase this?
– Should I afford it?

For items or services that you buy regularly but are low cost:

– Example eating out for lunch or buying a coffee every day.
– Multiply the little expense by 5 or 7 days then by 4 weeks then by 12 months. You will be surprised how big a little expense becomes over time!

help card economics

1) D. Larson 2) Synergy Asset Mgmt. CI Investments

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