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The hidden danger that could cause another US housing crash!

by , 28 June 2013

“Warren, I've never seen so much positivity. Everywhere you go people are buying houses.”

These were the comments of one of my colleagues, Jonathan Bachrach, when he came back from a trip to the US earlier this week.

And on Wednesday evening, data coming out of the US confirmed Jonathan's observations.

The US housing data showed that house prices in the US had climbed by more than 10% compared to one year earlier.

In fact, they'd reached their highest levels in five years.

Now this is great news for the US economy.

You see, house prices go up when people are positive and optimistic about their financial outlook. This is because it’s only when they feel like this that they buy a new house.

And with house prices climbing, people will see their wealth increase and this will drive consumption in the US.
So far, I’m sure you’ll agree this all looks like quite a rosy picture.
But, there is a hidden danger…

And unfortunately, this hidden danger could turn a market recovery into a sudden crash.

That’s why it’s crucial you make sure you’re invested in the right kind of assets.

Let me explain…

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The US Fed has created a vicious circle in the financial world

Now, the vicious financial circle I’m talking about has been created by the manner in which the US Fed has been stimulating the US economy.
Each month it’s been pumping $85 billion dollars into the US economy.

And it’s done this by purchasing $40 billion worth of mortgage debt and $45 billion of US treasuries.

The bit I want to focus on is the mortgage backed securities.

You see, this $40 billion each month has been going towards driving up and supporting the US housing market.

But the problem comes in when you look at how the US Fed is determining how well the US economy is doing.

It’s focusing on is the housing and unemployment.

Now this is where it gets tricky… With the US Fed pumping $40 billion each month into the US housing market, it would be difficult for the housing market to decline. In fact, it would be fair to argue that this is enough money to drive the US housing market higher.

And that means that looking at the US housing market as a measure of how the US economy is doing is not a true reflection. All that shows you is that the US Fed has been stimulation the markets.

That’s why you can’t simply rely on housing figures to show you how the US economy is doing.

But that’s exactly what the US Fed and much of the market for that matter are doing. It’s judging the performance of the US economy by the thing it’s artificially stimulating.

I’m sure you can see the circular effect this has.

The more the Fed stimulates the housing market and the better the US economy appears to be doing. But the second the Fed stops the stimulus, there’ll be a drop in support for the housing market and the economy will appear to be slowing again.

This could result in a steep decline in the US housing market which would cause a whiplash effect and trigger another collapse in world markets, like we saw in 2008/9.

Simply put, when the Fed pulls its stimulus, it’ll leave behind a vacuum in the housing market.

But that doesn’t mean you have to avoid the markets all together.
You rather just need to be a bit selective when it comes to what you invest in.

There’s never been a better time to invest in defensive shares

With positive news in the markets but a threat of collapse looming in the background, it can be difficult to know what to invest in.

But that’s what makes defensive shares so great.

Defensive shares are share s that have more stable and steady prices because of the business that they’re involved in.

This would include businesses like insurance and breweries or tobacco companies.

These companies will enjoy a steady move up when markets rise, but because of their stable businesses, they are less likely to experience a sharp collapse should the markets turn negative.

So make sure you’re invested in defensive shares like SAB Miller or British American Tobacco to enjoy the up-run and stay protected from a crash.

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The hidden danger that could cause another US housing crash!
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