Wednesday, June 18, 2008

Something's Got To Give

Health Care Costs
Credit Crisis
...interest rates?

It seems the world is spinning out of control, it isn't, but it sure feels that way. The good news is that it is now affordable to buy a house in a lot of places, the bad news is it is tough to get a loan, there aren't many jobs in those area's thus you must commute to buy that house........which will completely defeat the purpose as it costs $4.50 for a gallon of gasoline. Assuming you travel 50 miles to work and can get 25 miles to the gallon, you are spending about $400 per month on gasoline, if both family members commute (married couple) you are close to $800 per month. When gas was $1.50 per gallon - this was doable, it isn't for most people now. These area's need good jobs. Many people are now trying to live closer to where they work, this will in the short term cut down on oil consumption.

While housing is decreases, which doesn't benefit most people who already own, everything else is increasing. I'm going to spend nearly $14,000 this year on health care for a family of four (and that's with half my family in an HMO). This is ridiculous. When I fill up at the pump I get stopped out at $75 (many stations limit the amount you can pump with one slide of the card), this doesn't fill up my car (ok, its a truck)! This is ridiculous. Every time I look at how the dollar is doing, it is dropping against the Euro, this is ridiculous in a country that has publicly stated for years that we have a strong dollar policy. If you thought the Europeans were upset with us because of Iraq, they weren't nearly as upset as they are now that we've in essence slapped a 50% tariff on their goods and services........of course it is making it cheap to buy U.S. goods - which helps exports (keep in mind that you can't export your way into a good economy).

Food prices are soaring for a number of reasons: the falling dollar, the use of our food for oil, and because of the price of oil.

This is all leading to the dreaded word - Inflation. Year over Year inflation was 4.2%, I read that wholesale inflation hit 7.2%. This is not surprising considering the price of oil. The Federal Reserve apparently is not all that interested in stopping inflation - instead they are still focusing on the credit crunch and keeping rates low. If the fed continues this policy we will see continued weakness in the dollar (which may leader to even higher oil prices) and inflation spiraling out of control.

I hate to say it, but something has to give and I believe that something has to be interest rates. If you're earning 4% on a treasury bond (which you'll only earn if you buy a 10 year one) and inflation is at 4.2% - after taxes you are guaranteed to lose money. You should earn enough in bonds to at a minimum cover inflation, and in reality you need to be compensated over and above inflation - this is not happening. Just like in the early 80's, the fed is going to have to raise interest rates. At a minimum the market is going to have to start repricing bonds to yield a higher rate.

While it seems the world is spinning out of control and for the first time in a long time Americans are really feeling it in their pocketbooks, there is some good news.

First, America always fixes it problems and it will this time as well. Employment, though weakening is still strong. Exports are booming. For borrowers who can borrow - interest rates are good. People are changing their oil consumption habits, this will at some point have an effect. Congress is actually seriously considering drilling for oil in America (while that may not sound good to many people, it can be done in an environmentally friendly way - just ask the people from Holland). American's are still at the forefront of innovation. We are about to embark upon a period of technological and biological breakthroughs that none of us could have ever imagined.

Things aren't great - we need long term fixes to our energy problems, we need long term fixes for health care, we need a healthy mortgage market (which means congress needs to stop trading favors with them), and we need to get inflation under control as it wipes out the incomes of retired folks. There are fixes for all these problems.

I want to encourage all of you who feel the Gloom and Doom out there to remember that things aren't as bad as they seem, we've been through this before and we'll get through it. In the meantime, jumping out of the stock market in an attempt to possibly miss out on losses is a mistake. Holding on during the tough times will pay off when things correct themselves (as they inevitably do).

Scott Dauenhauer, CFP, MSFP, AIF