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The
first seven months of 2008 have
certainly presented challenges of many
stripes. Fannie Mae and Freddie Mac have
scared the Feds into issuing them a blank
check from the American taxpayer in order
to keep the American housing market from
crashing. (Fannie Mae just slashed its
dividend 85% as its quarterly loss rose to
$2.3 Billion.) Then we have the political
front, the credit front, oil prices and Iran’s
continuing to build potential nuclear
weapons. Even Warren Buffet is down
around 20% so far this year.
Where will it end? It won’t.
As
of today every major market is
down for the year-to-date. In percentages:
Dow Jones -12.13; S&P 500 -12.20;
Nasdaq -12.31; Germany’s DAX -18.66;
France’s CAC -20.39; Italy’s MIB -22.99;
Netherland’s AEX -21.04; Portugal’s PSI -
36.47; Spain’s IBEX -22.21; Switzerland’s
SMI -15.04; and, UK’s FTSE -15.15.
In
Asia: Hong Kong’s Hang Seng -
20.60; India’s BSE Sensex -25.08; and,
Japan’s Nikkei 225 -14.26.
Of
note is the fact that every major
world market is down more than the U.S.
markets --- although the Dow was down
16.4% several days ago before a one-day
330 point recovery.
The dollar which had been very
weak, especially against the euro when it
was 1.60 to the euro, is now slightly above
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1.54 to the euro. We
see this more as the
euro’s becoming weaker rather than the
dollar’s becoming stronger although many
are calling for a continuing dollar rally. It
is, of course, possible although we do not
see how the economic plans proposed by
either presidential candidate lend
themselves to strengthening the U. S.
dollar. We believe the opposite will be the
outcome of the proposed massive spending
programs put forth by each.
Good
news is that oil prices have
come off a high of $147 per barrel to $120
today. As that has happened and as other
commodity prices which skyrocketed in the
last several months have dropped sharply -
-- we think in large part due to hedge fund
selling --- there has been at least a
temporary feeling of relief. We, however,
are convinced that the “oil problem” will
not go away and that neither political party
has a solution that will materially help
Americans, especially in the near term.
Economics 101: As long as there is demand
for a product that exceeds the amount of
that product that can be produced or
otherwise supplied, prices will trend
higher.
The
financial markets continue to
be most challenging. The Credit Crisis has
not begun to go away, and real estate has
not begun to stabilize let alone recover on a
large scale. Meanwhile, the Consumer
reigns, as usual, and consumer behavior
will be of paramount importance as it affects every nook and cranny
of the economy, meaning your pocketbook.
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With that in mind, I would like to
quote several comments from our friend
Jim Grant’s June 27, 2008 issue of
GRANT’S INTEREST RATE OBSERVER
titled “This time --- really --- it’s different.”
“The elder J.P. Morgan famously
warned his son the banker not to sell
America short. Advice for the ages, it
would seem, especially as it bore on the
American consumer. Never before have so
many spent so much for so long with so
little reference to current income.
“But nothing lasts forever, and Mr.
and Mrs. America, we predict, will shortly
disappoint their hundreds of millions of
fans and economic dependents. They will
spend less, borrow less and save more.
There would be nothing so strange about
that --- certainly, nothing to shock ---
except for the track record. On form, the
American consumer is no more prone to
save than the American Marine is to
retreat.”
“However, with joblessness rising,
house prices falling, gasoline prices
orbiting and credit contracting, even
America’s iron wallets must adapt….
“Not much is certain in this life, but
it’s a pretty good bet that the American
consumer won’t go meekly into the night of
prudence.”
Today houses can no longer be used
as ATMs, and as Jim Grant continues
“Twenty years ago, the ratio of mortgage
debt to GDP was in the neighborhood of
30%. By 2007, it had topped 76%, at which
time homeowners collectively owned only
47.5% of the equity in their dwellings; for
the first time, lenders held claim to more
than half.” The percent of the home-equity
owned by the homeowner is continuing to
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decline with the continuance of falling
home prices. How will the validity of Mr.
Grant’s observations about the American
consumer affect the financial markets?
For the answer, like the weather, all
we need to do is to wait.
John W. Hamilton
August 7th, 2008
John W. Hamilton
jwh@hamiltonadvisors.com
Deborah J. Hamilton
djh@hamiltonadvisors.com
J. Brock Hamilton
jbh@hamiltonadvisors.com
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PRIVATE WEALTH MANAGEMENT SINCE 1980 |
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No part of this publication may be
reproduced in any form, or referred to in any other publication, without
express written permission. This article contains the current opinions
of Hamilton Advisors and does not represent a recommendation of any
particular security, strategy or investment product. Such opinions are
subject to change without notice. Information contained herein has been
obtained from sources believed to be reliable, but is not guaranteed.
This article is distributed for educational purposes and should not be
considered as investment advice or an offer of any security for sale. ©
2007 Hamilton Advisors, Inc. All rights reserved. Tel: 203 629 1112.
Fax: 203 629 1469
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