1) One part of the story that does not get much play is the demographic story on real estate.  (Note graph on the left.)  Baby boomers will try to cash out of homes to fund their retirement.  Now, that effect will vary by region, because oldsters will want to live in warmer or drier climates.  Perhaps apartments in Florida, the South and the West will benefit, as homes in the Midwest and Northeast languish.  Then again, at least in the Midwest, it would be cheap to live there, as well as less popular areas in the South.  Perhaps we should turn New Orleans into a haven for retirees.

2) Housing prices down by another 25-30%? Sounds too severe to me, but markets do overshoot, particularly illiquid markets.

3) Even when recourse is available, lenders often find it not worth their while to pursue those who “mail in the keys.” There are many who are giving up on their homes, and rationally so, because they know that the home is beyond their means.  They may have known it from the time they took out the loan, realizing that they got a lot more house than they ever dreamed of.  Well, we wake up from dreams and face reality.  Given the slipshod nature of the lending, many banks will not pursue for recourse.  You can’t squeeze blood from a stone.

PS — I should have a post tomorrow on the portfolio reshaping.

For my readers, particularly my Canadian readers, you can read an article that I wrote on risk control in portfolio management for MoneySense magazine.  In the process of writing the piece for MoneySense, I got to read a number of back issues, and found it to be a good quality publication, of most use to Canadians.  Having passed the Life Actuarial exams, I know enough about Canadian tax law and financial services to be a danger to myself, and those who listen to me.  Fortunately, the piece I wrote was generic, and can benefit investors anywhere.

Notes on Stocks and the Fed

On a side note, why didn’t the stock market fall more today? For me, it boils down to two things: the FOMC surprise move, which ratcheted up total rate cut expectations for January, and seller exhaustion.  It’s hard for the market to fall hard when you have already had a high level of down volume net of up volume, and huge amounts of 52-week lows net of 52-week highs.  This wasn’t just true of the US, but of most global equity markets.

So, if we are going down further, the market will have to rest a while.  That said, valuations are more compelling than they were, especially compared to Treasuries.  Compared to BBB corporate yields, they are still attractive.  I think I would need to see 10-year BBB corporates at yields of 7% or so before I would begin edging in there.

One other note, the forward TIPS curve is showing some life again; perhaps that will be another fake-out, as in August, but there is certainly more oomph in the inflationary effort now than when the stimulus effort was grudging and fitful as it was back then.