Effect of QE 2 and technology stocks IPO bubble on real estate

 

 

     The effect of QE 2 was to stimulate the stock market and commodity market making wealthy investors feel richer. It has worked for the upper class. Now they may take some of their stock market assets and invest in a house to live in. However the risk is that QE 2 created a false boom or as the Austrian economists describe it a “crack-boom”. QE 2 is ending in a few weeks. The Congressional budget showdown over the debt ceiling may lead to government budget cuts. So a reduction in stimulus is coming.

     When QE 2 ends then stocks and commodities will go down. Wealthy people who used a stock margin loan to buy a house without a mortgage may find themselves in a cash flow squeeze. If they were preparing to buy a home then they will have to suddenly cancel the purchase.

    I fear that the new Social Media is simply a fad that will end badly as did the tech bubble of 2000 where people thought that if a website can get “eyeballs” then the company can sell ads to its viewers. That turned out to be false.

tech stock crash coming?Tech stock crash coming?

   Warren Buffet said in 100 years of aviation the industry’s stocks have merely broken even when all losses and gains are netted. This means investors overpaid to buy into the glamour of owning an airline. It happened with tech stocks in 2000. It probably will happen now. The resulting crash will be deflationary or disinflationary and will make bond prices go up.

     Eventually after many years of deficit spending the government many finally succeed in creating substantial inflation, plus “crowding out” of the bond market, resulting in a massive crash in bonds. Since stocks are not a very good pass-through for inflation then investors will need to learn more sophisticated strategies to protect themselves from inflation.

 

    I have written “Real estate deflation continues” and “Housing not comparable to the past“.

      The Emerging market economies are more fiscally sound than the U.S., so they may be a place to invest for the purpose of reducing the risk of dollar devaluation, or the risk of developed country government insolvency. Important: Get more information in my free Special Report about emerging market currency investing.

         Investors should seek independent financial advice.