An Epiphany--Maybe

On last Saturday, October 18, Joe Nocera's article called "Shouldn't We Rescue Housing?" appeared in The New York Times. After reading it, I had what may have been an epiphany--which Webster's Dictionary defines as "an intuitive grasp of reality through something usually simple and striking." I say "may have been" because, in order to have been an epiphany, the future reality has to be confirming.

As the title indicates, Nocera argues that the next rescue effort should be concentrated on stabilizing home prices. I strongly agree. After all, the bursting of the home price bubble is the central cause of the credit crisis and recession. And if the slide in home prices and the buildup of unsold home inventories continue unchecked, the result will be a further vicious cycle of lower home prices, more delinquent mortgages, and more foreclosures leading to lower home prices.... This would prolong and deepen the recession.

It doesn't take a "phi beta kappa" to figure this out. So why hasn't this already been done? First of all, the more immediate problem facing our economy as recently as October 10 (it seems like ages ago) was a freezing up of the credit flows necessary for commerce to flourish in this country. Unless action were taken quickly, our economy and the remainder of the world to boot would probably have lapsed into a depression. I wrote about this in my October 12 posting "Scared Straight." Now, after the rescue efforts by Treasury, the Federal Reserve and Congress, the flow of credit seems to be at least partially restored as evidenced by the decline in the three month Libor rate.

The second reason why we haven't heard a lot about rescuing housing is the upcoming election. In dealings with my local government, I learned long ago that there can be a vast difference between "reality" and "political reality." "Reality" is something should be done to rescue housing. "Political reality," all about votes, is how will any housing rescue plan affect the imminent election?

Nocera writes "there are lots of Americans who were not greedy or foolish during the housing bubble, and many resent the idea that their neighbors might get a bailout they don't deserve." From a political point of view, that potential for resentment weighs heavily in the decision whether to act now or after the election. After all, the number of homeowners without mortgages and the 96% of mortgagees who are current on their payments dwarf the number of people delinquent on their mortgages. The ratio is more than 24 to one. So why risk the wrath and votes of at least 24 homeowners to win the vote of one?

I believe that, immediately after the election, the president-elect will propose a major, effective housing rescue plan. By the end of the year, that plan should become law.

How does this affect my view of the equities market? It increases the probability that the S&P 500 Index's intra-day low of 840 on October 10 will mark the low of this bear market. At the very least, any serious test of that low should be later rather than sooner. With this in mind, yesterday I added more to my equity position by purchasing shares in the T. Rowe Price New Asia Fund. This fund has roughly 40% of its capital in China, 30% in India and the remainder in other Asian emerging economies. Its price range has been a low of $3.92 in 1998 and a high of $22.06 in
2007. From the 1998 low to yesterday's closing price of $8.70, the fund has appreciated at a compound 8.3% annual rate, less than the weighted-average real growth of the portfolio's underlying economies. Last year, there was a huge influx of foreign money into this fund due to the much higher real growth rate in Asia and the theory that there is a decoupling between the U.S. economy and the Asian economies. The decoupling theory has been discredited, and U.S. investors, due to the greater decline in the Asian markets than here, have been redeeming shares. It seems like a good entry point. There is the risk that China's booming economy is overseen by a Communist government. I regard this fund as a high growth, high risk investment. When I am fully invested in equities, 75% will be in an S&P 500 Index fund and 25% in this Asian fund.