If you remember rightly, the financial crisis of 2008 created a lot of people drawing parallels between that and a war, indeed, even Warren Buffett called it the “economic Pearl Harbor“.
I said it then, that this was fear-mongering and disingenous. The crises of 2009 and 2010 and 2011 will be products of those decisions. The decisions made then by the Banking Cabal (whose long fingers include Paulson, Geithner, Bernanke, Summers, Blankfein and others) will eventually lead to financial indenture. For those who saw this coming, let me share with an excellent quote:
“Naturally the common people don’t want war; neither in Russia, nor in England, nor in America, nor in Germany. That is understood. But after all, it is the leaders of the country who determine policy, and it is always a simple matter to drag the people along, whether it is a democracy, or a fascist dictatorship, or a parliament, or a communist dictatorship. Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is to tell them they are being attacked, and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same in any country.”
Ten points for anyone who can tell me who wrote that. Or at least which decade it was written in.
James Altucher basically lays out the most logical argument countering the stupidity perpetrated throughout the housing bubble. For what it’s worth, I don’t believe we’ll be at the bottom until this is a widely held belief. Houses are risky investments that only pay off in a declining-rate and/or improving demographic environment. It is very unlikely that we will have either in the next 20 years with the Boomer cohort leaving peak earning/spending years, and rates at historical lows. We could see housing declining against inflation for a generation to come. It all depends on how fast we clear out the dead wood of overvaluation based on historical appreciation rates.
The past few years have certainly challenged the idea that real estate prices only go in one direction. But the downside of the “American Dream” is even more pronounced, says James Altucher of Formula Capital.
Owning a home has “never been a great investment,” Altucher says, noting housing went up a dismal 0.4% annually vs. 8% for the stock market from 1890 to 2004, according to the Social Security Advisory Board.
Moreover, Altucher says the notion buying a home is a ticket to financial security is a “scam” perpetrated on the American people by corporations seeking to keep us in debt, less mobile and with the storage to purchase all sorts of needless consumer goods.
That’s a provocative statement, hard to prove, and certainly subject to debate. Such a view also leaves out the intangibles of home ownership, such as the stability and other benefits raising a family in a community can bring.
Still, it’s hard to argue with Altucher’s main point, as detailed in a recent Daily News article: from a purely economic basis, there’s a lot of downsides and hidden costs to home ownership that get lost in the “American Dream” discussion:
* Insurance premium.
* Property taxes (which usually offset any tax deduction you get from your mortgage interest).
* Maintenance (pipes break, electricity problems, etc.).
* Remodeling costs.
* Utilities (utilities and maintenance for renters is often reflected in the rental price, but it’s not reflected in a mortgage when you own).
* Yard work, pest control, etc. (again, rents usually have this built into the price, but mortgages don’t).
* A down payment of at least 15%, which is $90,000 on a $600,000 home.
Closing costs, usually 5% of loan amount, or another $25,000.
Rather than concentrating so much of your wealth in a potentially illiquid asset, Altucher says most of us would be better of renting. If you want to bet on a housing recovery – and he does believe housing is a good short-term bet here – Altucher recommends buying a REIT like the iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ).
So if buying a house is a bad investment, should the more than 20% of American mortgage holders currently under water just walk away, as some advocate? Check the accompanying video to hear Altucher’s take on this highly controversial topic.
Unfortunately, this bad dream, this nightmare is what we are living through. I believe we have reached the tipping point. If the morally decrepit cannot be removed through nonviolent means (voting), they will most assuredly provoke a sleeping giant. I don’t think Americans can take much more evil, graft, stupidity, and lawlessness.
“Could it all be a bad dream, or a nightmare? Is it my imagination, or have we lost our minds? It’s surreal; it’s just not believable. A grand absurdity; a great deception, a delusion of momentous proportions; based on preposterous notions; and on ideas whose time should never have come; simplicity grossly distorted and complicated; insanity passed off as logic; grandiose schemes built on falsehoods with the morality of Ponzi and Madoff; evil described as virtue; ignorance pawned off as wisdom; destruction and impoverishment in the name of humanitarianism; violence, the tool of change; preventive wars used as the road to peace; tolerance delivered by government guns; reactionary views in the guise of progress; an empire replacing the Republic; slavery sold as liberty; excellence and virtue traded for mediocracy; socialism to save capitalism; a government out of control, unrestrained by the Constitution, the rule of law, or morality; bickering over petty politics as we collapse into chaos; the philosophy that destroys us is not even defined.
We have broken from reality–a psychotic Nation. Ignorance with a pretense of knowledge replacing wisdom. Money does not grow on trees, nor does prosperity come from a government printing press or escalating deficits.
We’re now in the midst of unlimited spending of the people’s money, exorbitant taxation, deficits of trillions of dollars–spent on a failed welfare/warfare state; an epidemic of cronyism; unlimited supplies of paper money equated with wealth.
A central bank that deliberately destroys the value of the currency in secrecy, without restraint, without nary a whimper. Yet, cheered on by the pseudo-capitalists of Wall Street, the military industrial complex, and Detroit.
We police our world empire with troops on 700 bases and in 130 countries around the world. A dangerous war now spreads throughout the Middle East and Central Asia. Thousands of innocent people being killed, as we become known as the torturers of the 21st century.
We assume that by keeping the already-known torture pictures from the public’s eye, we will be remembered only as a generous and good people. If our enemies want to attack us only because we are free and rich, proof of torture would be irrelevant.
The sad part of all this is that we have forgotten what made America great, good, and prosperous. We need to quickly refresh our memories and once again reinvigorate our love, understanding, and confidence in liberty. The status quo cannot be maintained, considering the current conditions. Violence and lost liberty will result without some revolutionary thinking.
We must escape from the madness of crowds now gathering. The good news is the reversal is achievable through peaceful and intellectual means and, fortunately, the number of those who care are growing exponentially.
Of course, it could all be a bad dream, a nightmare, and that I’m seriously mistaken, overreacting, and that my worries are unfounded. I hope so. But just in case, we ought to prepare ourselves for revolutionary changes in the not-too-distant future.”
SCREBC has donated all earnings for the past year to relief efforts in Haiti. I recommend you take a serious look at your lives and how you might help others with a little less in yours.
Andy Xie of Morgan Stanley has written some of the best commentary describing the innerworkings and problems of the Chinese bubble (don’t ask me if there is one, although it sounds like there is, I have not done my homework, as I’m sure Andy has).
But, his more recent piece in Caing has me thinking he’s talking about Southern California:
The overwhelming desire for getting rich quick dominates every nook, fissure and strata of Chinese society.
Ok, replace “Chinese” with California, and you’ve got a definite match.
Bubbles exaggerate reality but are not formed out of thin air. Cheap money and strong growth are the usual ingredients for bubble-making.
This is almost exactly what I wrote with “What is a bubble?” several years ago. However, most interestingly is what is happening in China, and happened in California:
China’s property market is creating winners and losers based on timing. All other factors – including education and experience — have been marginalized as the economy rewards speculators. And as more play the game, the speculator ranks rise and fewer people work, perhaps contributing to a labor shortage.
This is exactly what happened during Southern California’s property bubble. Many people got rich simply by being in the right place at the right time. Many of them were incapable of understanding the circumstances of the rise, and so therefore simply did more of the same (buy real estate) without understanding the underlying problem that widespread repetition of that practice would cause a housing shortage (too many people “storing” housing instead of allowing it to be bought). Rents reflected the “real demand”, and appreciated strongly. Meanwhile, properties exploded with enough appreciation in 2 years to account for 30 years of inflation to support the prices.
The most poignant in my mind was a short-sale that Brad (my co-blogger and realtor) and I visited. The original owner was trying to sell from a purchase made in 1996 at more than 300K lower than the short-sale. The “owner” was so destitute that when the pool pump broke and they were unable to replace the $800 unit, the resulting ground shift due to hydrostatic pressure when quickly emptying the pool caused many more thousands in damage to the surrounding concrete. They had been trying to support a 600K+ mortgage with a single income from working at Macy’s. When regular equity withdrawals worked, the Ponzi scheme continued.
In normal times, the ponzi would have never worked, but because of the bubble, it allowed the “owner” to continue to persist in a property many times more expensive than they could support. At the peak of the market, this would have sold for more than $1M, requiring the income of several well-paid professionals, not a single retail salesperson’s income. The world did not make sense in 2006.
This separation of is true of a speculation/investment-centric economy. This is part of the reason why most people make terrible investors; the concept of time is nebulous and fraught with uncertainty. Indeed, I wrote (and bolded) in What is a Bubble? the following:
The most fundamental concept of investing is the concept of timing. The most fundamental flaw in most participants logic is that the asset provides more than just money… everything that costs money is an investment and can be traded again for money, nothing more.
This Southern California phenomenon of irrational belief has been covered extensively in another blogger’s repertoire, Irvine Renter’s Southern California’s Cultural Pathology.
We are quickly approaching the Day of Reckoning in our housing market. In my view this will be Armageddon for California debtors: the spending will stop, they will lose their homes and with it their illusion of wealth, and they most definitely will not be enjoying life. The cause of all the weeping and gnashing of teeth will not be some exogenous event, but rather a direct result of the circumstances they themselves created.
Chris Ripkey of the Bank of Tokyo-Mitsubishi says the Fed will be raising interest rates by June 2010.
I seriously doubt the FED funds rate will be raised anytime this year. The Deflation boogeyman is out to get us, and deleveraging is a bitch. I find it hard to believe, but I’m agreeing with Paul Krugman on many points… not the least of which in his landmark article That 1937 Feeling.
Which makes me wonder. Krugman is hardly even close to a contrary indicator, but has nevertheless been a strong supporter of even more fiscal stimulus as the problem increased in intensity. One cannot fault him for being a flip-flopper. When he takes a point, he sticks with it. Which is why it’s not surprising to see him write this:
As you read the economic news, it will be important to remember, first of all, that blips — occasional good numbers, signifying nothing — are common even when the economy is, in fact, mired in a prolonged slump. In early 2002, for example, initial reports showed the economy growing at a 5.8 percent annual rate. But the unemployment rate kept rising for another year.
And in early 1996 preliminary reports showed the Japanese economy growing at an annual rate of more than 12 percent, leading to triumphant proclamations that “the economy has finally entered a phase of self-propelled recovery.” In fact, Japan was only halfway through its lost decade.
Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.
Which brings us to the still grim fundamentals of the economic situation.
The bigger question is… is this just part of the schtick, or is it a really likely to be that bad.
My gut reaction after absorbing current economic news is that it is. However, it is easy to make 2 types of mistakes in a deep recession:
The first one is that momentum has a lot to do with the physics of the downturn… it will go along until there is sufficient uplift from other economic factors which counteract the downward pressure caused by household deleveraging. At this time, I cannot forsee what that is, but it’s normal to not be able to see the next growth area until it is upon us. Personally, I wouldn’t be surprised to find it being related to energy, alternative or otherwise, since at current oil prices, many alternatives can still be profitable (just not ethanol or solar).
The second one is that growth does not normally come from the area of the last economic bubble… housing will not lead us out of the downturn, and this is where much of the economic commentary is now. Think 2003 when journalists were still covering the tech stock market, while housing was going gangbusters. It wasn’t until we were deeply entrenched in a bubble of absolutely massive proportions that the general focus changed.
At the same time, a grave risk has arisen with respect to another bubble, especially one in gold. Unlike the 2 previous bubbles in stocks, which provided useful (albeit squandered) capital to very useful web-based technology and increased productivity and bubble in housing, which substantially increased and improved our housing stock, gold does little to provide anything of use to our country. You can’t eat it, you can’t live in it, it doesn’t improve productivity, and it certainly doesn’t earn any income; which makes this the worst kind of bubble; an unproductive one. At the end of it, we will only have great piles of shiny yellow metal. Difficult to store, illiquid, and barely wanted. But, that is looking past the peak. In the meantime, we can all feel safe in saying that we will continue to delude ourselves that little blocks of shiny yellow metal makes us safer, or richer, or god forbid happier. Personally, I’d be more interested in ensuring that we have adequate stocks of food, water, and financial reserves, both in households, and in government to prepare us for further downturns. As sure as the famine of 7 years came after the 7 fat years, so too will recessions follow booms; it’s the natural order of things.
This natural order has not been able to take its natural course; the worst banks in lending are still wards of the state. Instead of our chance to build a smart, efficient, and secure banking system, instead, we are perpetuating a bloated, mismanaged, stupid, and short-sighted banking cartel. Eventually, nature will have to be satisfied. As sure as the invisible hand balances the supply and demand, so too will the banking system that never cleansed itself of debt through bankruptcy stagger on, zombified with bad housing bets that the population can never and will never pay for.
Housing, on the other hand is woefully oversupplied, with shadow inventory reaching monumental proportions, with only more stacking up behind it faster than it is depleted. We’ll drag this housing recovery out another 10 or 15 years at this rate.
