As our government spends itself into oblivion in order to pump up the equity markets David Rosenberg chimes in with some deep thoughts:
It is next to impossible to really gauge the health of the U.S. and the global economy in view of the massive doses of medication that have been administered by governments everywhere. In the U.S., the situation has been particularly acute because it is so apparent that domestic demand falls off a cliff once the freebies from the unknown taxpayer expire. We saw this with the end to cash-for-clunkers, and wouldn’t you know it, but the 2.7% slide in the S&P homebuilders index yesterday was pinned on a Deutsche Bank report concluding that the U.S. government is not going to extend the first-time homebuyer tax credit, which is due to expire at the end of November.
As we sifted through this story on Bloomberg News we found some quotes from market pundits that truly expose today’s mentality — the desire for ongoing government intervention.
“I can’t believe the Congress will be so stupid in allowing those programs to expire. If the government suddenly eliminates the stimulus program in the housing market that will begin to call into risk the sustainability of the recovery at some point during 2010. I think that program will be not only extended, but expanded.”
“I can’t believe the Congress will be so stupid in allowing those programs to expire. If the government suddenly eliminates the stimulus program in the housing market that will begin to call into risk the sustainability of the recovery at some point during 2010. I think that program will be not only extended, but expanded.”
The fragility of the U.S. housing market — never before has $8,000 separated a boom from a bust
That is a remarkable statement — the risk is that the government “suddenly eliminates” the stimulus. Never before has $8,000 separated a boom from a bust. Never mind that housing receives more preferential treatment than anything else in the economy even though it is not exactly a productive asset — capital gains exemption, mortgage interest deductibility, and what about FHA financing?
We then came across this stroke of brilliance:
“The experience of the last few years argues that government acts on housing only when the situation is plainly deteriorating … if, as we expect, housing conditions deteriorate again, that might propel a renewal of the purchase tax credit.”
Our head is spinning over that one. Is the conclusion that when housing conditions improve, investors should be shorting the homebuilders because the government is going to withdraw its support? And, are we supposed to go long the group when the fundamentals deteriorate because Uncle Sam will come to the rescue?
We are confused. If state capitalism works, shouldn’t we be investing heavily in Venezuela?
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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