Bill Gross has interesting thoughts on the mortgage industry. If his plan is enacted, I don’t see it being anything substantial, as the savings that consumers would be getting from lower rates would mostly be saved, not funneled into consumer spending.
In the summit yesterday, Gross proposed that the administration order Fannie Mae and Freddie Mac to refinance all outstanding mortgages that they back or guarantee into today’s historically low interest rates.
I am of the inclination that the money saved by consumers would not be spent as much as Mr. Gross thinks. Most of the money would go into further savings and the continued repairing of consumers balance sheets. The recession made people realise that they need a buffer or a “rainy day fund” in the event of a job loss or other catastrophe.
The savings rate is currently around 6.3%, the highest level it’s been in decades. For this kind of mentality to change course, it is going to take nothing but time and increased security. You can stimulate the economy all you want, but if the consumer mindset isn’t in a spending mood, there is nothing you can do to change that. That is the point that Gross and the Obama administration are missing.
The past few years have engendered a fundamental shift in consumers’ line of thinking — and I don’t think it will change anytime soon. The jobs outlook and economic outlook need to brighten considerably for consumers to change their behaviour. People won’t be taking out loans to buy big screen TVs and boats again any time soon.
We have been in a recession since December 2007, and while economists tend to believe it ended in the summer of 2009, consumers mindsets haven’t changed gears just yet. Unemployment rates are still incredibly high, wage growth outside of a few sectors is fairly stagnant and the news is bleak.
That being said, there are always a way to make traders/investors money on plans, and this one is certainly no different. While Gross’ plan won’t do anything to help the situation in the long-term, smaller mortgage payments could boost spending in the short-term.
The trade on this idea would be going to discretionary stocks like Target, Urban Outfitters and the like. Investors may also want to take a look at shares of priceline.com and Expedia, Inc. as nothing can put someone in a better frame of mind than a vacation.
Unfortunately, in my humble opinion, this is nothing more than a short-term boost that will not help as much as Gross believes.
Consumers are scared beyond belief that the economy will not get markedly better and as such, the savings rate will continue to go up. Any additional cash savings recognised by then will go into the bank and under the mattress for a rainy day.
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