Chuck Ponzi August 30th, 2005

As many of you are aware, I spend far too much of my personal time thinking about, worrying about, and generally fretting about the world we live in and the kind of people we live with including the financial decisions they make. I have a personal theory, called the Yahoo theory, that basically states that even mainstream media isn’t dumbed down enough for the general US population. Why, you ask? - It has to do with sensationalism. Mainstream media is like a rabid chihuahua that needs a heavy sedation. On TV, images flash at us for seconds, and whole lives pass before our eyes in less than the time it takes to decide which super meal we’re going to eat at McDonalds. No, TV is too cerebral for most Americans, we need the internet to slow us down. When I see something on Yahoo news, it’s just about dumb enough and just about slow enough for some people to actually read. I don’t personally have anything against Yahoo news, they provide a valuable service to the wondering masses, but the points they make are either so obviously wrong, or so pedestrian, it makes it difficult to discern what they were really setting out to do.

Here are some things I recently found using the Yahoo theory that I know you’ll love:

BUYING THE AMERICAN DREAM: WHAT IT COSTS TO LIVE WELL: a Forbes special
I’ll spare you the details, but basically, it’s a rundown of how much you would need to make to live “well”, not opulently. But, most of these things are beyond the hope and reach of most of the US. However, it’s interesting to note that these are likely the exact things today’s “strivers” are attempting to get in life, and the direct cause of our real estate and credit bubble. While I know that these things will never be mine, it’s hard to imagine in today’s world how you can both make the $370K they suggest to do things like have a vacation home and send kids to private school, and have the life to actually go on vacations or even have kids! But, the most sickening portion of this entire rundown was actually not even a part of the main story… I looked at each of the detailed expenses for each of the cities here. The most disgusting and troubling was the last line of “expenses”, labeled “SAVINGS”. Can anyone guess what the average savings rate (savings divided by income) they recommend for a well to do family? It was a mind jarring 1% OR LESS in most cases.
To put this in perspective, you would need to work for 37 years to save 1 years’ worth of income for retirement assuming an 8% return, and 3% inflation. I guess you could live well until you stopped working, and then it’s into the poorhouse, or cut your expense dramatically. If you didn’t reach these peak earning years until you were 35, you would need to work nonstop until you were 72 just to retire until you were 73, or 74 if you really stretch it.
Luckily for you, death will come quickly, as you will have worked yourself to an early end anyway. Thanks, Forbes, you just made my day.

If the Housing Bubble Breaks… Protecting yourself from a Housing Bubble
While the title itself is a question, the first line reads “The run-up in home prices in many markets around the country makes it a matter of when and where, not if, the housing bubble bursts.” This makes me wonder if someone dumbed down the title after the NAR asked them to go more kindly to reduce potential panic induced to the masses. The article goes on to make some suggestions as follows:
1. Don’t borrow against home equity
2. Build Equity against equity repayment
3. Take a fixed rate mortgage instead
4. Make a larger down payment on your home
5. Live in your home for the long haul

Do I think those who read Yahoo news will actually follow these recommendations? Probably some of them will be fooled, but that’s all it takes.

In a recent discussion on www.thehousingbubble2.blogspot.com, a site I frequent, a recent debate took place over whether well known housing cheerleader and president of NAR David Lereah was going to hell for recent comments that paying off your home was both “unsophisticated”, and meant that “you probably did not manage your funds efficiently over the years” if you did so. What’ s surprising is the opposing viewpoint of Yahoo’s article to Mr. Lereah’s recent hollow-sounding comments. In fact, I would probably say that all 5 of the points the article makes are diametrically opposing to the NAR’s objective.
Which leads me to my conclusion… If this isn’t the top, I don’t know what is. In recent weeks, Alan Greenspan has recently upped his rhetoric on the housing asset bubble, Robert Shiller is sticking by his story, and Paul Krugman has weighed in that the top is now. If the greatest economic minds of this country can unanimously and simultaneously be wrong, we truly have no hope of understanding our financial world.

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Chuck Ponzi August 25th, 2005

In his book, Peddling Propserity, Paul Krugman wrote: “There are many economic puzzles, but there are only two really great mysteries. One of these mysteries is why economic growth takes places at different rates over time and across countries. Nobody really knows why the US economy could generate 3 percent annual productivity growth before 1973 but only 1 percent afterward; nobody really knows why Japan surged from defeat to global economic power after World War II, while Britain slid slowly into third-rate status. At any given time there are always policy entrepreneurs willing to claim that they have all the answers…
The other mystery is the reason why there is a business cycle — the irregular rhythm of recessions and recoveries that prevents economic growth from being a smooth trend.”

Is there any wonder about the source of investment and capital when one considers the deafening cry from the present fad of residential real estate investment?

The famous economis John Maynard Keynes once stated:
“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done.”

The current setup of our economy is increasingly dependent on housing as a three legged crutch, all precariously resting on each other:
1. Increased Debt: In 2000, housing related debt was $4.8B, today it is over $8.0B. As they say, “Value is a matter of opinion, debt is real”, debt MUST be repayed, regardless of what you feel the property is valued at.
2. Recovery nonexistent without it: Since the end of the recession in 2002, housing-related jobs have accounted for 56% of all new non-farm jobs created. How many more entreprenuers have bet their livelihood on this cyclical business?
3. False wealth: Economists often refer to the wealth effect that people have when unrealized gains come their way. People often spend money they haven’t earned because they believe it is assured. Much like the NASDAQ that crumbled 80%, gains cannot be counted on until they are realized. Far too many of us are guilty of counting chickens before they are hatched.

What does this mean to us as a nation? We have a disease; a gambling, spending, gluttonous disease that impairs our ability to make sound decisions that only in retrospect allow us to see how truly deranged we were when we bought some things. Much like a child that spends all of their allowance in the candy store, only to find that binging on sugar only leads to headaches and sickness, our lesson is soon to come. When our asian creditors come to call on our property, we will be giving up a piece of our country because we would rather spend our money on eye candy rather than on investing in our productive capacity. Shame on us all, we will all reap the rewards of our decision.

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