Monday, December 15, 2008

Markets are quickly returning to normal.

A lot of scary stuff is being said about the economy. Even optimistic economists tend to suggest that the economy will be weak until at least the third quarter of 2009. Of course, certain market sectors are already starting to price in the coming powerful recovery.

As always, it makes sense to compare what people are saying with their money to what is being spoken. One of the key market moves of the past few days has been the shape interest rate decline in the 5-year inflation adjusted notes. The deflation scare is over, at least for now. There is hardly a basis point difference in the TIP rate and the nominal rate. The markets are now forecasting no inflation and no deflation! How about that!

The huge spread between high yield bonds and AAA bonds was maintained last week only because the rate on the AAA bonds declined as rapidly as did the rate on the high yield bonds. Forecasters are expressing great concern about the expectation of very bad earnings numbers, but their concern is pretty much old discounted news. The coming major move in the market will be a major expansion of PE ratios, not an expansion of earnings. The rise in earnings will come much later.

Our family can finance the purchase of a 20% share in a beach condo. You can enjoy owning and using a beach condo without incurring the normal hassles of owning real estate. Over the next 15 years, you will see your equity rise while enjoying other benefits of ownership. We had much rather share 20% with an owner rather than to rent the units out to a steady stream of strangers.