Double Dip?

The markets and financial media didn't know what to make of today's Existing Home Sales data. One news story from the Wall Street Journal bemoaned the fact that existing home sales fell yet again. However, later in the day (as the equity market was rallying) the Journal published an article stating that market participants were optimistic because existing home sales declined at a slower pace than last month and than what was forecast. I understand that deceleration is acceleration in the opposite direction, but considering the amount of stimulus the federal government is pumping into housing, the recovery in housing is anemic. There is fear in the market that once the stimulus is removed the anemic recovery in housing will simply evaporate. There could even be a double dip in housing prices.

Some like CNBC's Larry Kudlow believe that the way to spur home prices is to remove stimulus and permit prices to fall to levels at which buyers who can get credit come in off the sidelines. This is something I suggested two years ago this month. However, doing so would be to acknowledge that models used to evaluate bank assets were flawed. It would also result in realized losses for institutions holding existing troubled mortgages, many of have never been marked down.

If there is a double dip recession housing would be the likely cause. I don't think that happens as the Federal Government will keep Freddie, Fannie and their possible successor buying mortgages when no one else will. This has treasury secretary Geithner concerned. He said today that although The GSEs cannot exist in their past or current forms, they are necessary in providing mortgage capital.

Healthcare and financial reform legislation could also weigh heavy on the economy. Not too long ago I opined that we could be looking at a 1950s-type recovery. Now the economy could be shaping up to be 1970s-like. I don't believe that we will experience 1970s inflation, but 1970s stagnation is a possibility, unless consumers become flush with cash from either credit or wages, but neither seems to be likely at this time.


Strategy: Large dividend paying stocks and laddered fixed income portfolios. Boring, but effective.