A Little Bit Of Knowledge Can Be Dangerous!

[Michael Shuster]

So many people are scared of what is going on in our economy because of what they are told by others. Yet, they really don’t understand what is making our economy tick. I recently received an ‘economic update’ from my financial advisor and it raised some very interesting information (Source: CIBC World Markets). I completely understand that some people are knowledge junkies, and others only care about the end result. I also understand that people have different learning styles, and grasp information to different extents and levels of clarity. I’ve taken much of the information that I just received from my advisor and tried to clarify/simplify why the fears and panic of many people today are unfounded. Furthermore, there is much hope coming our way very soon.

Many people compare our current economic condition to the Great Depression. However the early 1930’s was very different (in many ways). Almost 10,000 U.S. banks went bankrupt and the unemployment rate surpassed 25%. The supply of money decreased by 30% and so the entire economy actually decreased in it’s total size.

Our current situation is different in many ways. The unemployment rate is only 6.5%, the entire economy only declined by less than 0.5% in 2008, the supply of money is still increasing, and there are many new insurance programs to protect depositors’ funds.

Now, there have also been comparisons between our current economic situation to those of Japan. Japan is now fighting their 5th recession in 15 years. Many have said that our economic situation is not unlike Japan at the moment. The current economic crisis is similar in some ways to what Japan experienced in the early 1990’s, however the (government) policy response is very different.

After the 1989 Japanese equity market crash, the Bank of Japan continued to raise rates. It actually took over 5 years for the government there to cut rates to 1%. The U.S. Federal Reserve board cut rates immediately (here) when it realized that the markets were in trouble.

It took Japan over 6 years to launch their economic bailout, while ours is already being implemented, along with many other policy tools that were not available to the bank of Japan.

Conclusion 1: Nobody can deny that we are amid a difficult economic slowdown, but it certainly is not another great depression. Thanks to the many policies and initiatives launched by our government, we are not heading for the same troubles seen in Japan. The global economic recession is already 12 months old. It appears to the experts that we will remain in tough times for the first 6 months of 2009. However, current and future stimulus activity will provide for an economic recovery, which is likely to show signs of turnaround in the second half of 2009, with solid economic performance in 2010.

Conclusion 2: Many people live in fear because of what they hear in the media, while others chase ‘get-rich-quick’ schemes, or do what everybody else appears to be doing (eg. stop spending and hold on to every penny they have). In the great gold rush, the majority rushed out with shovels to dig for their own gold, hoping (either out of panic for recovery and/or sheer greed) to strike it rich with their own found gold. The people who made fortunes during that time (without having specialized knowledge, skills, or panic) were not the people who were lucky enough to dig in the right place and strike gold (which by the way were few and far between). They were the people selling the millions of shovels.

Summary: Last year many investors asked me about investing in real estate in regions like south Florida. When I told them they could acquire properties at $0.40 cents on the dollar, they hesitated. They were always worried that if they waited longer, they could still get a better deal, and knowing that they could have got a better deal would bother them.

Now, with all indications that the market is close to the bottom (in many areas), people still seem afraid to invest their money until the majority of other people (and the media) say that the troubles are all over and it’s okay to part with your money. Fact is, by the time that happens, the prices are already going up. That (the price increases) is obviously one of the justifications that the media would have for releasing such a statement.

Where are the people now who fear that if they wait to long to start investing, they might pay more for a property, than if they bought sooner, while the prices were at an all-time low? That time is now folks! There is a very popular saying that all of the professional real estate investors say: “You make money in real estate when you BUY … not when you SELLâ€. When you buy, you negotiate the best price, and that determines how much room you have for capital appreciation.

Buying investment properties now is like stocking up on your shovels. When the country starts buying real estate and renting places to live, you want to have the inventory and meet their demand. Don’t forget – demand is what drives up prices (profits)!