As the year 2014 comes to an end, RERC sees that the U.S. economy has finally turned the corner on the credit crisis. With growth of more than 3 percent during the past two quarters, the Federal Reserve has ended its monthly purchases of securities as planned and is considering changing its communication about how long short-term interest rates will remain near zero. In addition, job growth is increasing, average gasoline prices have dipped to levels not seen for five or more years, and consumer confidence has increased to its highest level in eight years.
There are still many risks facing the economy and financial markets, however. We have not addressed a federal debt of more than $18 trillion, and we have just seen the biggest drop in a week’s time in the DJIA Index since September 2011 (mostly because of the drop in oil prices). Further, 10-year U.S. Treasury rates dipped to 2.10 percent at the end of the week, while the 10-year government bond rates dropped to 0.64 percent in Germany and 1.85 percent in the UK. If this weren’t enough to plant seeds of doubt about the risk dominating the investment environment, Fannie Mae and Freddie Mac just announced an option for expanding the LTV ratio for “qualified homebuyers” to 97 percent with a down payment of only 3 percent. Stay tuned: there is still a final leg of adjustment for the financial markets down the road likely in late 2016.
Investors insist that this time, things are different. We are
smarter, and we think that there is more transparency into investment opportunities. We have learned from the past, and we won’t make the same mistakes again. But investor psychology shows that memories are short and investor behavior does indeed repeat itself. As shown in the graph below, when prices are up, our greed or pleasure in buying investments increases. However, as we approach the peak of the investment cycle,
a period of denial and ignoring problems inevitably follows, and the fear and pain of loss will start again.
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By Ken Riggs, President & CEO, RERC, a Situs Co. / December 17, 2014
Lessons Old, Lessons New