Okay class, let’s pick up where we left off in part 1. So what are some of the facts that we do know? To the extent that we have had any degree of housing recovery to date, it would be attributed to financing provided by the Federal Reserve in the mortgage market by buying more than $1 trillion in mortgage backed securities. That support is scheduled to end in March of this year. Certainly that could be a negative. A positive point would be that the stimulus pool of dollars authorized last year in the amount of $750 billion will essentially begin to be spent this year. The hope certainly is that this will create momentum for job creation.
While our collective hope is for the investment markets to go up again in 2010, there are other areas of the economic and political landscape that will probably see increases and will have some consequence on that happening. They are taxes, government debt levels, and interest rates. With much of the 2001 Tax Act already in transition or ready to sunset on January 1, 2011 there will be tax revisions made by the administration this year. That is a matter to be watched as it will effect such issues as estate planning, ordinary income tax rates, and capital gain rates. Government debt levels will continue to rise to provide the funding for such things as the stimulus package. There is much concern within the economic community already as to our rapidly increasing debt level.
Then there is the matter of interest rates. There is only one direction that they can go since we are essentially at zero, so that is up. The big question on the agenda is when will the Federal Reserve begin to raise interest rates? They are certainly playing a great poker game at this time by not tipping their hand. The consequence of that, however, is that when the central bank remains quiet it creates much speculation in the investment markets about their plans and hence increases volatility. Admittedly, I recognize that they have a delicate balancing act on their hands with significant risks. If they begin tightening rates too soon it could derail a budding recovery. On the other hand, waiting too long to raise rates could kindle an inflationary firestorm. Clearly the decision on interest rate management will be of utmost consequence to economic recovery.
It will be an interesting year and, by the way, let’s not forget watching the healthcare issue play out in Washington. So at this point I will adjourn our class for the time being and remind you to watch those letters of the alphabet as the year progresses.
