The Physcology of Recession will Tank Las Vegas... or will it?

Warren Buffet wearing a suit and looking to the right Warren Buffet is famous for saying that the “herd mentality” controls the markets and that the markets can be controlled as much by emotion as anything else and the belief that we are heading into a recession could quite easily be yet another example. If people think the Las Vegas market is ailing, it will likely fall in the short term. Fortunately, this mentality can be quickly overturned by the fundamental factors that influence the local economy and markets. So, will the Las Vegas local economy really tank due to a US recession? Read on…

The price of goods and services are only applicable as long as people believe that whatever they are buying is worth what they are paying. The laws of supply and demand certainly apply and when people perceive money to be on sale, as when the Fed cut rates from 2001 until 2004, they began the herd euphoria of “Mr. Market” as Buffet so aptly describes it. This in turn drove up the price of real estate and just about everything else as people suddenly came upon piles of equity that were created from thin air. By the time the Fed realized that they may have gone too far (as Alan Greenspan stated in his recent book “The Age of Turbulence”) they immediately increased the Federal Funds Rate. The Fed then increased the Federal Funds Rate 17 times in row and in affect has helped push the country into recession.

This is where fear comes in.

The Federal Reseve Bank
The central bankers at the Fed understand the market mentality and the corresponding euphoria and panic that can go along with it; which may be the reason they stated in the New York Times this past November that we are NOT heading into a recession. The markets tend to place more credence in the words of the Fed and the analysis of the delivery of those words than just about any other market indicator out there. The Fed understands that emotion and perception have as much to do with the markets as anything. The current Fed chairman, Ben Bernanke, and his predecessor, Alan Greenspan, both like to use the term “resiliency of the market” to describe their strong belief in our economy. This term is used whenever people express fears that our country is in a financial tailspin. Greenspan made the point that the markets were hardly affected after 9/11 and recovered brilliantly after the tech fiasco in the early part of the decade. Some of this can be directly attributed to Greenspan’s actions and the other can be attributed to the way the business world reacted to his statements as though he were a fortune teller.

For the markets, perception is reality. The Fed not only controls the flow of cash but is magnanimously capable of pushing the mentality of the markets. Baron Rothschild famously stated “Give me control over a nation’s money supply, and I care not who makes its laws.” Woodrow Wilson apparently understood all this after he signed the law creating the Fed in 1913 when he stated in his autobiography that his biggest regret was allowing the creation of the Fed.

Most people are unaware that the Federal Reserve is not a government body. The President appoints the President of the Fed, who is usually (although not necessarily) also the President of the FOMC or Federal Open Market Committee (the body that determines monetary policy in this country). Technically, the U.S. President’s only job or responsibility under the law is to appoint the President of the Fed. However, there is to be a separation of the Fed and our government, and be that as it may, the close relationship between the Fed and our government is obvious.

I say all this to make the point that those who control the money supply in our country have a great degree of control over the mentality of the markets and the economic mind of the population. If people perceive that money can not be borrowed or obtained as easily, or that the price of real estate or stocks are dropping they are less likely to jump into the market. This of course puts a cap on inflation. Those who are smart like Warren Buffet love times like this because they consider everything to be on sale. The United States is a country that is not going to dwindle away to nothing. More specifically, Las Vegas is a city that is growing at a fevering pace. We have over $40 billion dollars worth of construction currently in process on the Las Vegas Strip. This is equal to the total amount of construction that has been spent on the Las Vegas Strip thus far! Opportunity is abound for those savvy enough to see it. Rental rates are already on the rise in the valley and renters are increasing due to foreclosures and home buying slowdowns. All of this provides an opportunity of epic proportions for the affluent few to buy real estate and businesses at historic discounts.

There is a window of time associated with these opportunities that is winding down. Even with a United State recession likely, Las Vegas will continue to grow in terms of jobs and a housing shortage in 2009 based on our current migratory influx of new residents. Recession or not, the local economy is poised to boom in 2009 and on.

Many green investors fall into the trap of personally feeling the emotional cycles of the market which often resemble an unstable person in which the cycle flips from exuberant to despair. Savvy investors instead, logically analyze the market factors, cash flows and profitability of their investments instead of concerning themselves with the feelings of joy or pain the markets bring. The facts are that real estate values in many parts of the city are offered at 2001 price levels, foreclosed properties are currently experiencing multiple investor offers and rents are appreciating. These are all exceptional signals for Las Vegas investors to take a look at the market and determine if the time to act is now.

Call or e-mail me with your questions and comments on the real estate market. As an avid investor myself, I love discussing the opportunities at hand. You may also leave comments below.

Timothy Hartman / Luxury Financier
Luxury Mortgage Group
Direct: 702-370-0105
Timothy@LuxuryMortgageGroup.com