Friday, May 26, 2006

Doom?

Well, despite the bunch of half-finished posts that I should wrap up, I'm going to discuss something new. The coming recession...maybe. A couple of days ago the news reported that the yield curve on interest rates inverted. You don't have to know what that means, but you should know that it's a bad thing. Do you remember watching Star Trek as a kid and Scotty would tell Kirk that the anti-matter containment fields were failing? Even if you didn't have a clue what antimatter was (and let's face it, I still don't) you knew that it was bad if it wasn't contained. Well, yield curves are the same thing...sorta.

Before I explain what they are, I'll explain why they are important. Every recession ever, in the history of the universe (slight exaggeration) has come after we had an inverted yield curve. Now, sometimes you get an inverted yield curve without a recession, but you never have a recession without an inverted yield curve. Think of the inverted yield curve as the bread in your recessionary pizza. You can have bread that isn't made into a pizza, but you can't have pizza without bread. And if you are the kind of person who tops your pizza with pineapples, stop reading this post right now because you are obviously deranged and I can't talk sense to you.

So you might be reading this and thinking "that analogy is making me hungry, even though I can't eat pizza because of my lactose intolerance, can you explain some more?" Okay, here is what the yield curve should look like: A 3 month CD at your bank is supposed to pay a lower interest rate than a 10 year CD, right? Well, when the yield curve inverts, the short term stuff pays more than the long-term stuff. If that doesn't seem like it makes sense, you're right, it doesn't. It happens when somebody (Hi Dubya!) completely screws up the economy like a teenager learing to drive with a clutch, or a republican with his first Tranny hooker (Hi Porter Goss!).

Because this is such a grave development (which could lead me to win that bet I made a year ago with Johnny Vegas), I decided that in a future post, I'll give recession related financial advice on investing in the stock market. You can play along or invest beside me.

In the short term, if you are thinking of buying a house, this might not be a bad time because the markets are predicting a future rate cut. I'd be careful about buying a condo in a bubble market like Vegas, but investing in a house to live in should be a safe bet. Also, in general, I think Home Builder stocks might be underpriced right now. Even if bad things happen to housing market, these stocks have been getting killed in the market and the big boys (Toll Brothers, Pulte, D.R. Horton etc.) are trading at 6x earnings (most of the rest of the S&P is at like 15x earnings).

Oh, for next week I'll try to wrap up the florida trip, have a ninja news segment (maybe) and finish up telling you about the underpinning stuff.

8 comments:

John said...

If we ever mortgage the Devil Queen (Nov. 7th hopefully) and exit our financial death spiral, my wife and I are thinking about buying a small rent house. The town is about 10 minutes away, the houses cost $3000-$5000, and they rent for about $350-$450 per month. Even if you sink in $2500 to fix them up, they pay for themselves in a little over a year (baring a deadbeat renter).

I'm very interested in your recession investing post, bring it on.

HomeImprovementNinja said...

John, that sounds like a good investment. Before prices for houses got all crazy, they used to say that as a rule of thumb, a rental property works out profitably if you can get 1% of the purchase price in rent. In other words, if the place rents for $1000 a month, then $100k is a good price.

That's why I sold my condo when the prices more than doubled, but rents only went up about 10 or 20% over those 3 years.

Gui said...

Good post, only read it today.

It is scary to see that inverted yield curve close to being a reality.

Gosh, I hate our "leader". Damn you, Dubya.

HomeImprovementNinja said...

gui, thanks. And it's already inverted. It has been flat for a while, but now it's inverted.

Stef said...

Even in your somewhat frightening economic posts, you still make me laugh. For the record, pineapple is the absolute best pizza topping in history. period.

:-)

Siryn said...

God help us.

The carnage is going to be so bad... especially for people who have lots of high interest debt.

Cash is king these days. Oh, and real estate, but it is most definitely good to be debt-free.

Allison said...

Holy crap, $5000 for a house. I grew up in Arkansas, so I guess I shouldn't be surprised, but wow. It's hard to believe that there are places where buying a house is less than half the price of buying a really cheap new car.

Interesting stuff about the inverted yield curve. There are a lot of people that are going to be royally screwed by there recent home purchases, I'm afraid. I have to admit, I felt really guilty selling my house to the guy that bought it. He was in his 50's, with a 4 year old. He bought the house as an "investment" rental property - and financed $417K on a $429K property that I can't imagine being rented for more than $2200, at a 7.8% interest rate. So many people with interest only and negative amortization loans (which I just found out about and still can't believe exist) are fu!ked.

I may not be a libartarian, but it appears we both agree that GW Bush is an incompetent moron destroying the country....

Kristin said...

I didn't know about that inverted curve stuff, but that is terrifying. Dubya sucks.