Economic Update: October 23, 2008

Let me bring you up-to-date on our economy and provide some commentary.   
One aspect of my purpose is to help people simplify and clarify financial issues in life. Let me begin this update with some important information about money markets.

#1 Misconception about Money Markets:
All funds in money market accounts are now insured by the federal government.
Until recent weeks, most people realized that money markets were not insured.  However, when investors began withdrawing billions from money markets (moving to safer investments) during the week of September 15th we almost had a financial meltdown and a run on money market accounts.  The government immediately stepped in and offered investment firms who had money market accounts “government insurance” for their money market accounts.   The insurance was optional to the investment firm and most accepted the offer to purchase the insurance.  This news stopped the run on money market accounts.

FINANCIAL ALERT!
Most Americans now believe that any money in a money market account (where the investment firm purchased the insurance) is insured by the federal government.  Not true!

Here is what you need to know!   I quote directly from the U.S. Treasury Department web site:
“The program provides a guarantee based on the number of shares held in a specific fund at the close of business on September 19, 2008.”  [http://www.treas.gov/press/releases/hp1163.htm]  Read the article for full details -- there are too many details to cover in my update.

What does this mean?  If you had money invested in a money market account at the close of business on September 19, 2008, that is the only amount insured (if the investment firm purchased insurance).  Let me give you three examples of what is/is not insured.

Money Market Insurance
Example #1
Date	$ Balance in MM Account	Amount Insured Today
9/19/08	$50,000.00	$50,000
Example #2
Date	$ Balance in MM Account	Amount Insured Today
9/19/08	$10,000.00
10/5/08	$30,000.00	Only $10,000 is insured because you added $20,000 after the 9/19/08 date.
Example #3
Date	$ Balance in MM Account	Amount Insured Today
9/19/09	$0
10/15/08	$100,000	$0 is insured because you added $100,000 after the 9/19/08 deadline

Remember that these numbers each year are only being reported for January through August.   We will continue to see record foreclosure numbers for the rest of 2008.  It is my opinion that the number of foreclosures will peak in 2009 and will only begin to decline in 2010.   Continued foreclosures will result in continued housing surpluses and lower home values.  Before the housing market can recover we must clear the system of bad mortgages and foreclosures.  It looks like it will take all of 2009 to clear out the bad mortgages. 

Auto Industry
Here are some interesting facts about the auto industry that you might not know.  There are approximately 20,000 new car dealers in the United States.  Almost 600 have already closed during the first 9 months of this year.  Auto industry experts are projecting that an additional 2,000 dealerships will close within the next 18 months and one expert is projecting that number to reach 3,800.  This will continue to create problems in the economy because the auto industry supports one in ten U.S. jobs.  Car sales are down anywhere from 20-30% compared to last year.

Credit has tightened in the home and auto industry.  General Motors is now requiring a credit score of 700 or higher to obtain a car loan.  FICO credit scores range between 300 and 850 so this tells you that only those with high credit scores are able to obtain new car loans.  In 2006 the typical car loan was for 101% of the value of the car.  (The same thing was taking place in home mortgages – buy a house with nothing down!) Buyers were being allowed to wrap taxes and other fees into their new car loan.  And obviously, cars were being sold with nothing down!  So as soon as the customer drove off the new car lot, they were up side-down with the loan,  meaning they owed more than the car was worth.  The typical car loan in August 2008 was for 88% of the value of the car.  (This is a good trend.) 

Close to 25 billion dollars in auto loans are at risk of default.  That represents about 3% of the $800 billion in current car loans in the market.  The supply of new and used cars is at a surplus and will continue to increase.  

Some are asking is this a good time to buy a car?  Here are my questions.  Can you afford to buy a car?  Do you need to buy a car?  If the answer is yes to both questions, here is my answer.  I believe that you will be able to find great deals anytime during 2009.  But as we enter into 2010 with fewer dealers prices will become less competitive.  Think about it this way.  When are prices more competitive?  If you have 5 dealers competing in one city for your business or 1 dealer with a monopoly?

New Stimulus Package
Does our nation need another government stimulus package?  The last stimulus package passed in February 2008 cost $168 billion.  The data is debatable, but about 80% of the last stimulus checks mailed out were used to cover the increase in the  price of fuel, to pay off debt, or the money was saved.   That means that only about 20% was actually used in the area of retail sales (TVs, clothes, appliances, food).  If those numbers are even close to accurate, the stimulus checks did not accomplish their intended purpose – people using them to make purchases!

Experts are tossing around figures like $150 billion to $300 billion for the new stimulus package. Another stimulus package would only add to our federal deficit.   Which brings me to my next topic.

Record Federal Deficit
The federal budget deficit set a new record for the year that ended on September 30, 2008.  The deficit amount was $438 billion!  The previous record was $413 billion in 2004.  Now for the bad news.  Depending upon how the government handles/accounts for the $700 billion bailout, the deficit for 2009 could reach over $1 trillion.  A $1 trillion deficit!  Unthinkable until now.  

The Stock Market
In the months to come you can expect high volatility of up and down days of 1,000 points.  There is too much uncertainty in the world for the stock market to stabilize.   More on the stock market in future updates.

October 1st Update
For those of you who did not read my October 1, 2008  Economic Update let me encourage you to go to my website and read the article:  www.foundationsforliving.org.  It will provide background information concerning our economic crisis.

Final Thoughts
Let me know what “you” are thinking.   There is a proverb that says, “Iron sharpens iron.”  Let’s keep each other sharp in our thinking.  

Ethan Pope 

Ethan Pope is the president of Foundations For Living and lives in Dallas, TX.  He is the author of six financial books and has been a guest on over 200 national radio programs.

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© Ethan Pope 2008

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