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By Michel Filion

President Barack Obama proposed the fiscal year budget for the next few years. One significant point in the proposal is that the mortgage interest deduction will be limited to 28 bracket. Governor Arnold Schwarzenegger raised income tax, sales tax, and property tax for fiscal year 2009-2010.  Both will have BIG effect on the housing price of silicon valley. 

I forecast that the price of condominiums and low priced single family homes will continue drop for the next few months, but the price will reach bottom before the end of the year. (Hopefully the economy will rebound as well). 

However, the high priced homes will find it tough to regain ground. Their prices will lag, mostly due to the limitation of mortgage interest deduction (if the proposal passes), and tThe tax increase in both federal and state level. The affluent will suffer financially during the Obama term and the housing market will be down for quite some time. 

As for 4-plex, 8-plex, and apartment complexes, it becomes tough to find renters with decent rent.  One is that the huge lay-offs now make a large population moving out of California. The rising income tax and sales tax does the same. Basically, fewer people will be in California. The relatively cheap housing price will draw a portion of people with steady jobs buying houses instead of renting. 

I will see how correct/wrong I am….

It’s mid-year time, and I’d like to have a mid-year review of the direction of the stock market. I made some predictions at the end of January. It seems I’m quite lucky that they are more or less in-line with what really happened.

The stocks reached new lows in the middle of July, which was close to the far end of my prediction. I didn’t expect the rebound so strong after the March dip, however. In January, the market was not sure how serious the sub-prime mortgage issue was, stock dropped. In March, the market was shaken by the collapse of Bear Stearns, thus, retreated. The continuous write-downs of the financial institutions dampened their future prospect, which resulted the July retreat. I totally oversaw the impact of credit tightening, however.

Starting June to middle of July, the stocks decline steadily. It may be due to several factors: 1) Public has lost confidence of financial institutions (as I mentioned above). 2) The security tightening strategy has spread outside the realm of mortgage and banks. and 3) Higher oil and food price drive up inflation. We’ve only seen a small portion of it, however.

My prediction for the future economy direction is as follows:

Even though we still see new records of foreclosures, the sub-prime mortgage crisis is largely over.  We’ve also seen the worst of bank write-downs. The financial industry has bottomed (or almost) in July. However, the economy is at a critical point now. The crisis is at the verge of spreading outside the financial industry. It really depends whether it can be contained. The key indicators are consumer confidence index and jobless rate.

The consumer confidence index slide to the lowest point in 16 years in June, and held steady in July. To me, it is a good sign that the economy has bottomed. It is mainly because consumer is the end of the “economic” chain. The index usually reacts to crisis several quarters after the real cause. When consumers feel the pressure, the market has already digested the crisis and absorbed most of the pain. Thus, it’s a good time to get into the market.

The jobless rate, however, is not very optimistic. In today’s news (08/01/08), the jobless rate climbed to a four-year high. Not a good sign. It may mean the consumer confidence index staying at the low end for some time. The economy is not due for a rebound anytime soon.

Looking at the market, however, I don’t see any real reason people should worry about further retreat. In my opinion, market panic on the mortgage and credit is over reacted. The panic keeps the stock from
rebounding, but it won’t hold for long. The real enemy, is still the inflation. In January, I predicted that we would see the impact of inflation around this time. I was mistaken. The bulk impact has not arrived yet (It takes longer time for inflation to accumulate strength). On the good side, however, the inflation may not be as serious as I originally thought. The recent retreat of oil price is a good sign. I don’t see any support for such high oil prices. However, Bernanke is in a tough job fighting inflation. He cannot simply raise overnight interest rate because of its adverse impact on financial industry. What other weapon can he utilize?

In my opinion, the stocks will walk sideways till the end of the year. 2009 will be a good year for stocks and I’m looking forward to that.

Well, I will see how wrong I am in half a year.

The stock market is so volatile these days… and I have my own thoughts on its direction… although I know the market is unpredictable… any prediction is meant to be wrong… (and especially for an armature like me…) I just want to find a way to laugh at myself…

so here is how I’m going to laugh at myself… and maybe the day is tomorrow…

the stock last Tuesday is at the low side for the next couple of months… the reduction of the overnight interest rate will temporarily boost the market… however, the underline problem is not solved… the inflation may become more of an issue in the middle of the year… sub-prime mortgage will still be a risk… more defaults may be seen around May…. the stock may reach new lows around May to July period. The economy in the second half of the year depends on the spread of the recession. A recession is likely to occur… If the possible recession is limited to US, which means China, India and most part of Europe will still have mild growth, the US economy will go out of this dip close year end, or beginning of 2009. Bush’s 150B dollar tax rebate may see some effect in consumer spending around year end. If the recession is more wide spread… assuming the other countries will have a delay of a quarter to half a year… the economy won’t make turn until the second half of next year… overall, this recession may be just a light one… it’s impact to semiconductor industry may be mild to moderate… however, even after the recession, the US economy may not enjoy the same growth as the past few years… as the internal issues of the economy cannot be overshadowed and thus post a greater threat…

I understand that a planed inflation can stimulate economy. The current monetary policy tries to keep the inflation low but avoids deflation. Since early 70s, paper money is not directly linked to gold or silver. What keep its value? Will paper money always worth less and less in the future, and it’s beneficial? Is it unavoidable that $100 bill in 100 years will only have the same purchase power as $50 today? That’s the destiny of market? Maybe we will see $1000, or even $5000 bills soon 😉

Don’t know why, don’t know how… I’m suddenly interested in economics… actually that was a year ago… still, now, I’m a novice. But I’m reading economics history, which I loaned from a friend. And more importantly, I’m going to read more… Interesting enough, I’m now reading wikipedia on the internet… just type in a key word and read the description… I’m quite surprised on the amount of information it provides… it’s one secret to kill time in work 😉

So.. as you can expect, this my notebook to scratch everything about economics… and I do expect some experts would answer my questions…

later…