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How to Behave in the Recession and Two Sidebars on Gold Prices and Mortgage Rates

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Alex Carrick

Positions:
Alex Carrick is Chief Economist for CanaData, Reed Construction Data’s Canadian economic forecasting and statistical service.

Economists

As an economist, I know that what is best for this current recessionary economy is that everybody who can afford to keep on spending continues to do so. However, the reality is that a different hunker-down mindset is taking over. Two-income families have to consider the possibility that they may soon become one-income and so on. The trend to more conservative courses of action is occurring against the backdrop of job losses, rising bankruptcies and creditors demanding payment. But not all is bleak. Those who are still employed are getting a break in several ways. Let’s take a look.

As an economist, I know that what is best for this current recessionary economy is that everybody who can afford to keep on spending continues to do so. However, the reality is that a different hunker-down mindset is taking over. Two-income families have to consider the possibility that they may soon become one-income and so on.

The trend to more conservative courses of action is occurring against the backdrop of job losses, rising bankruptcies and creditors demanding payment. But not all is bleak. Those who are still employed are getting a break in several ways. Let/'s take a look.

With the decline in gasoline prices, there is more discretionary income to spend in other areas or, as is more likely in present circumstances, save. In the latest national account figures, quarter-to-quarter taxes declined and discretionary incomes rose. Previously negotiated or arranged wage and salary increases contributed to the latter effect. At the same time, the saving rate rose to more than 4%, the highest it has been in several years.

A recession is an excellent excuse to make some lifestyle changes that may be more to your liking than you might expect. For example, the need to “keep up with the Joneses” has gone out the window. And there are all kinds of other ways to cut back without necessarily giving up on personal pleasures. Here are some suggestions. Ski operators won/'t like me for saying this, but maybe cut back on a ski weekend or two and try ice skating instead. This also nicely transforms into roller blading in the summer.

Still eat out once in a while, but try downscale every so often as opposed to upscale. Also, rein in your tastes to cheaper wines as opposed to more expensive varieties. Vacation in Canada closer to home as opposed to overseas or out of the country. Or at least take advantage of bargain fares on Caribbean and European getaways. Maybe even forego that trip to visit the in-laws, if that isn/'t too big a sacrifice.

Here/'s another strong positive. You can feel particularly good about yourself whenever you do spend money, particularly if it/'s at a “mom and pop” shop. Think how it is helping the “little man” who is desperate for a sale. Actually, this even applies at some of the bigger retailers. You/'re doing your part to help the economy and your fellow Canadians.

First Sidebar – The Price of Gold

There are price bargains to be had everywhere, from cars to investment instruments. This brings me to the first of my sidebars. In the field of commodities, prices are holding up in only two areas – agricultural products and gold. With respect to the former, everybody has to eat and the drop in value of the loonie is having an impact on imported fruit and vegetable prices. With respect to the latter, the high price of gold is an interesting study.

Traditionally three factors push up gold/'s price. First, gold is a hedge against a decline in value of the U.S. dollar. With the flight to safety in the greenback, this is not the driving force at this time. Second, gold is a hedge against inflation. Once again, with year-over-year inflation near zero percent, that is not the current explanation. Third, gold is viewed as a refuge in times of uncertainty. Now we/'ve found the reason. In other words, gold stands at over $900 USD per ounce for reasons having to do with “security blankets” and psychology.

While all the concern at present is about deflation, in the next couple of years there will be a crossover point when inflation takes over as the prime worry again. The reason is that central bankers are now talking openly about printing money as the last weapon in their monetary arsenals, now that interest rates have been driven down to nothing.

When that crossover point in time is reached − say in a year-and-a-half to two years − generalized price inflation and a falling U.S. dollar will again cause gold to rise in value. In the meantime, falling home and equity prices, combined with zero returns from fixed income instruments, are incentives to find another asset vehicle and gold is a preferred choice. It is unique in having winning properties on either side of the outlook.

Second Sidebar – Short- or Long-term Mortgage?

And now for my second sidebar. A bottom to this recession will be touched later this year or early next year. The big outstanding issue in many analysts/' minds is how to clean up the toxic-asset mess at the banks. Yesterday, I wrote an Executive Insights story outlining how this is being corrected in an almost “behind the scenes” way. Click here for an easy-to-understand analysis of near bank and regional bank growth, vulture funds and the benefits of converting preferred shares owned by government into common shares.

Once recovery does get underway, inflation has the potential to rear up again in an alarming fashion. Right now, mortgage rates are coming down, offering the potential to refinance. By the way, it might be a good idea to do this quickly before house prices drop further. You want to be sure that your home value handily covers your mortgage.

I/'m always being asked by people if they should lock in their mortgage rate or go with a lower short-term rate. I/'m conservative by nature and I like to know exactly where I stand with regard to future payments. This helps with budgeting expenditures in other areas. Also, I once got caught a number of years ago, along with almost everyone else, when interest rates skyrocketed and mortgages had to be renewed at much higher levels.

Five- and 10-year mortgages are now being listed at 5.25% as opposed to 3.25% for a one-year rate. But remember that it was adjustable-rate mortgages (and their subsequent adjustments upwards) that led to so many homeowners getting into trouble in the United States from mid 2004 to the present. Go for the longer rate and sleep well at night knowing that you are more likely to always be “sheltered.” This is just my opinion.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

by Alex Carrick last update:Mar 11, 2009

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