Remember the kerfuffle over the pesticide DDT? Turns out, DDT doesn't hurt you, your pets, or anything at all, except mosquitos. In fact, it remains the most effective killer of malaria-bearing mosquitos. Millions of malaria-related deaths in poor African nations could have been prevented had developed nations not threatened cessation of aid should they use the effective stuff. Today, more than a million people die each year from malaria—all utterly preventable. Yet, not a single mea culpa from the press regarding their role in fomenting the decades-long campaign against this life saver. Even now, many folks are unaware that DDT is harmless stuff.
Nothing is guaranteed in investing, but we're 99% positive we won't get an apology from the press when a sub-prime-driven apocalypse fails to materialize either. Yet, right now, investors are making potentially costly decisions based on what they read from otherwise respectable news sources. Very dangerous! You're better off drinking the DDT.
The market is a powerful discounter of widely known information, and little information is more widely known today than the alleged dangers of a defaulting sub-prime mortgagee. And what has the market done? It corrected in February—a perfectly normal market event—but has otherwise continued its bull market trajectory, despite ceaseless warnings of impending ruin.
This concern is not unique to the U.S.—it's been fully discounted by the global market as well, as you can see in this article from Britain's Financial Times.
Housing Bubble Bursts into American Elections
By Desmond Lachman, Financial Times
The housing bubble has already burst under the weight of rising interest rates and the ever-deepening mortgage market crisis for those borrowers with weak credit histories.
Really? The housing bubble has burst? That's news to us. Looking at historical home prices, there's no evidence of a burst bubble. Home prices are still near all-time highs. Do people expect home prices to do nothing but go up all the time? It's irrational to expect new highs every month, and to call a pullback from a high point a "bubble." (In behavioral finance, this cognitive error is called "anchoring"—fixating on an arbitrary number, regardless of its relevance.)
Read between the lines of this next article, and you'll get a glimmer of just one reason the housing bubble and sub-prime market won't stall the market.
Subprime Solution: Swap ARMs for Fixed-Rates
By Les Christie, CNN-Money
The House Financial Services Committee has discovered a solution: Have mortgagees switch from ARMs to fixed rate mortgages! Genius! We'd politely point out that perhaps a congressional inquiry was overkill on this topic. Newsflash: People like paying less for things. We'd assert homeowners intent on keeping their homes would naturally gravitate to the now-cheaper fixed rate mortgages, all on their own, without a governmental mandate.
So, no sub-prime implosion, but what about the housing bubble? As our elected officials have finally discovered, fixed-rates are still historically low. Super cheap money will continue to drive demand for homes. Our view is constant bubble rhetoric has actually removed a lot of the risk from the housing market.
We're quite pleased the sub-prime/housing bubble story remains firmly entrenched in the headlines. This nearly universal fear will provide a powerful positive surprise as investors realize their worries are baseless. It's also a cautionary reminder—popular fears, like sub-prime or the DDT hoax, are often wrong or misguided. Don't get swayed by the hype.
For more on why DDT is a boon, not a bane, read Tina Rosenberg's exhaustively researched 2004 New York Times article, "What the World Needs Now Is DDT" - http://query.nytimes.com/gst/fullpage.html?sec=health&res=9F0DEEDA1738F932A25757C0A9629C8B63