2007Aug US Grows Rich

2007Aug US Grows Rich

The housing bust continues and sub-prime lending melts down. It seems that these are the only topics that were deemed newsworthy in late July. At the core of this issue is simple human greed. People with poor credit and/or insufficient income bought houses they could not afford. It was made possible by those who accepted non-documented loan applications.

If your income did not normally qualify for the home you wanted to buy, just “restate” your income. Use a “buy-in” loan with a temporarily low interest rate. Deny your exposure to real estate taxes and future increases in interest rates or payment obligations.

Lenders were paid for making the loan and buyers wanted homes they could not afford. “Mutual greed society pacts” made the deals work. That sub-prime loans default should not be the surprise, rather that it took this long,

Not coincidentally, the last few trading days of the month were volatile as investors tried to digest the new developments on these fronts. Will sagging home prices and a lending crisis drag our economy into recession? Will consumers get defensive and stay at home? What will happen with corporate profits as a result?

It’s easy to get preoccupied with these kinds of questions, particularly when the Dow loses more than 700 points in the course of a week. Still, it’s important to realize that short periods of volatility like this are normal in a bull market, and that bull markets rarely if ever occur under “ideal” circumstances. There is always a new, higher “wall of worry” at every stage that stocks manage to climb. This is not to minimize the seriousness of the housing bust or of the crisis in the sub-prime lending market. These issues do matter. But consider these facts about current wealth creation from the Wall Street Journal article quoted above:

    * The population of high-net-worth individuals – those with financial assets of more than $1 million – rose 9.4% in 2006 to 2.92 million.
    * 9.5 million people globally held more than $1 million in financial assets in 2006, an increase of 8.3% over 2005.
    * The number of ultra-high-net-worth individuals – those with financial assets of more than $30 million – increased by 11.3% in 2006 to 94,970.
    * The United States still ranked number one in both the number of high-net-worth individuals and the size of their accumulated assets, but…
    * Singapore, India, Indonesia and Russia witnessed the highest growth in the high-net-worth population.

Despite the calamities that have rocked our economy in recent years, a massive amount of new wealth has been created, in both the developed markets of the U.S. and Europe as well as in developing economies like the ones listed above. This is truly a global bubble boom with the affects being felt far and wide.

HOWEVER, our current economic prosperity will soon change. The drivers for corporate profits and, therefore, stock market pricing will soon make radical shifts in industries and countries. Investors need to re-examine their planning for income or retirement to protect them from the next market melt-down.