Friday, September 19, 2008

More Regulation is not the answer - FRAUD IS ALWAYS ILLEGAL!

Sorry I've been so remiss in posting, but it has been a busy month. I closed on my house last Friday and now we are planning on moving out of here next weekend. I was also on vacation the first week of this month, so I just haven't had much time to do anything, much less blog.

WTF are we doing? Why is our government bending over backward and giving TRILLIONS of dollars to banks, financial institutions and Wall Street when they have committed fraud on a massive scale?

Why haven't I seen a single person in the financial industry get called to Congress for questioning, not to mention a single arrest of ANYONE?

In the past few weeks our government (meaning us, the taxpayers) have decided to guarantee $5.3 trillion dollars of Fannie Mae and Freddie Mac bonds, loan $85 billion to AIG, and now we are going to nationalize the losses on real estate to the tune of $500 billion (that's the government number, expect the real number to be much higher) to bail out Wall Street?

Where is the money going to come from to pay for this?

Oh, I'm sure our Senators and Representatives will be working very hard this weekend to make sure there are "safeguards" and new regulations to protect us against this sort of thing happening again.

The problem is that this wasn't caused by a lack of regulation, there was absolutely no enforcement of the laws by any of the "cops" that are supposed to be protecting us investors. Congress, the President, the SEC, SIPC, FBI, Secret Service, Treasury Department, etc. etc. did NOTHING to stop these abuses and risky behavior when they were in process! You can pass all the regulations you want, but if you don't enforce the laws you get fraud and corruption on a massive scale.

Fraud is always illegal, you don't need to pass any new laws. If you lie, if you decieve or misrepresent, if you knowingly sell a faulty product in the course of business YOU ARE LIABLE! There it is, end of discussion. Aggressively prosecute the fraud and the markets will stay in line, end of story.

Obama's plan is pretty typical for the Democrats, more regulation to protect us.

If John McCain was smart he would be jumping all over this and call for massive investigations and arrests of those responsible for plunging our economy into a crisis! Republicans have always been the law and order party, just another example of the fall from grace this party has had under George Bush. There's no shortage of people McCain can go after and it starts with the executives of all these companies we're bailing out: Freddi Mac, Fannie Mae, AIG, Bear Stears, Lehman Brothers, Countrywide Financial, Indymac Bank, etc. etc. etc.! How about calling Alan Greenspan to testify, or call out Bernake and Paulson and ask them how they could have said just over a year ago that the subprime problem is "contained" and won't spread to the rest of the economy.

How about a little follow up when predictions made by government officials not only prove to be wrong, but so wrong that our goverment is now spending hundreds of billions of dollars to bail out private companies nearly every single week!

To hear our representatives talk about this you'd think it was a hurricane. An act of God that no one could have forseen or done anything about. All we can do is come in after the fact and try to repair the damage because nobody is at fault.


Many, many people saw this coming for years and have tried to warn our Government about it. Our goverment allowed this to happen because the fraudsters greased their palms with campaign contributions in order to turn a blind eye to what they were doing.

This is not a Republican or Democrat issue. They are both complicit but I blame the Republicans more because George Bush runs the institutions that are supposed to police this stuff.

I'm also horrified to think that Congress is going to railroad through another horrible piece of legislation that doesn't really address the problem with our economy. It will most certainly make the situation worse because it won't be well thought out (because of the urgency of getting something done before they go on recess - because, god forbid, you lose any vacation time because of some stupid crisis) and it will be filled with wierd amendments that don't have anything to do with the actual legislation.

Did you know the housing bill passed a few months ago has an amendment that requires credit card companies to report all of their customer transactions to the IRS? WTF does that have to do with a housing rescue plan?

It will be passed quickly with only limited input from us taxpayers, even though it is us who will be responsible for the bill. It's become pretty standard to introduce huge, complex pieces of legislation on a Friday afternoon and have it passed by Sunday (like the Patriot Act or The Military Commissions Act, Housing Bailout Bill, etc. etc.).

Welcome to the U.S.S.R.A, all the profits will be privatized by the wealthy few - but any losses will be borne by everyone! The government no longer serves the people, it serves the corporations and the foreign governments it owes money to.

Saturday, August 30, 2008

What does it mean when this huge housing bear decides to buy a house?

I am buying a house.

This is way sooner than I expected to buy (I was thinking early next year or even later), but a fantastic deal on a bank owned property came up and my wife and I have decided to jump on it.

Why did I decide to buy?

The biggest reason is my wife is expecting and she is in major nesting mode right now. However, I was not about to buy an overpriced house and she knows that. According to my calculations, homes in our area should be in the $130 - $150/sqare foot range and that is the target I've been looking for. I calculated this by taking the pre-bubble value of my first home in 1998 ($96 square foot) and adding 3% - 4% inflation over the next 10 years. Most homes on the market right now are still priced $190 square foot and higher.

The home we are purchasing is for sale at the rate of $112/square foot! That is well below my target rate and, adjusted for inflation, is cheaper than the house I bought in 1998! The nominal purchase price is $30,000 lower (with about 40% more square footage) than what we sold our house for in 2006 and it sits on 3.5 acres!

This house also has some nice features we were looking for including straw bale construction (very well insulated), radiant heat, and a separate 800 square foot studio on the property.

On the negative side, this house is close to the highway, so there is some noise from that. I also wanted to move closer into town and this is about the same distance to Santa Fe (about 14 miles each way). So it's not an exurb, but it is farther out than I'd like.

Does this mean the housing market has bottomed out?

Not in your life, the resale market is still way too high. As I said before, most homes in my area are still over $190 square foot (and that is down from previous years). On the positive side, I have seen two houses in good condition being sold by motivated owners at $139/square foot this summer. Now that the summer selling season is over, I expect home sales to fall dramatically and only those people that are pricing their homes competitively will be able to move them in this market.

Nationally, the Case Schiller home index is down about 15% in the past year. I expect at least another 15% decline nationally in the next two years and it could overshoot that. Just as homes overshot on the high side, they will overshoot on the low side.

Am I concerned about my house value declining?

Absolutely. But I am buying this house a such a discount below the market that it would take a decline on the order of 40% from today's market to break below what I am paying for this house. I can live with that cushion and I still stick with my fair valuation of $130 - $150/square foot for this area.

The most important thing to know if you are buying in this market is to not overpay for real estate. There is such a dearth of qualified buyers that you can dictate the terms and the seller will probably capitulate (if he's smart). I recommend you look at the value of comparable homes pre bubble (2000 or earlier), then inflate that number by 3% to 4%/year to get your target. Only offer at or below that number.

I actually got the bank to agree to drop their price by $10k because I was paying cash for the property and promised a quick close! REO properties almost never drop their price so you can sense some desperation on their part as they are trying to unload their foreclosed properties.

Tread carefully in this market, there are bargains out there but you have to be patient and diligent.

Thursday, August 21, 2008

MSM Headline: Commodities, Gold and Oil Plunging! Dollar rallying! Jim Cramer calls it "Economic Nirvana"

I'm just assuming Jim Cramer was talking about the rock band "Nirvana" with the suicidal heroin addicted lead singer, but maybe he was talking about something else.

The truth is, if you bothered to actually look at the charts is that all of these commodities are still much higher than they were 1 year ago - right before Ben Bernake started cutting interest rates.

Please note: I am not giving investment advice. You need to do your own due diligence when it comes to any investment. I am an idiot and if you do what I say and lose money, it's your own dumb fault!

Let's look at some charts:

First gold (ticker: GLD):

Shares of the SPDR Gold shares went for 65.07/share (1 share = 1/10 oz. of gold) on August 21, 2007. Seven months later the shares surged to $99.17/share on March 17th, that's a 52.4% return! Since that time the direction has been basically down and it now sits at $82.30/share - but that is still a 26.4% return in 1 year!

Compare that to the Dow, Nasdaq and S&P since last August and it's no comparison. There's also wierd things happening in the gold market. Gold has sold off about 20% from its peak, but the US Mint just announced they were stopping production of their American Eagle gold coins (they did the same thing back in March with the American Eagle silver coins).

If the price of something goes down, its usually because demand is crashing (example: housing). How can prices be declining at the same time that physical supplies are disappearing?

So is gold down? Yes, from it's peak, but year over year its still up huge.

Next we've got oil:

ONE YEAR AGO OIL WAS AT $67/BARREL! Even with the recent pullback, oil is still 80% higher than it was last year! Sorry if I'm not happy that gas prices have come down about $0.50/gallon since it peaked in June. I'm still paying about $15 more per fillup on my vehicles than I was last year at this time.

How's the dollar doing?

One year ago the dollar index was at 81. After the most recent dramatic rally, the dollar now sits at 76, down 6% in one year.

It is true that all of these items have reversed course pretty dramatically this past month, but I'm thinking that the original trends will start to assert themselves strongly very soon.

How much lower can gold go when physical supplies of gold coins are almost non-existant right now?

How much higher can the dollar go when the government is getting ready to issue hundreds of billions of dollars in additional debt in order to bailout or nationalize Fannie Mae and Freddie Mac? BTW - Fannie and Freddie shares have crashed below their share price when the bailout was announced last month.

How much lower can oil go with all this crap happening between Russia and Georgia? Not to mention the continuing problems with Iran, Iraq and Nigeria constantly popping up in the news?

My thousand yard stare ( says that we are not done. The market was falling apart until March when Bear Stearns was bailed out, but that rally failed and the market plunged even further until Fannie Mae and Freddie Mac were bailed out. Now we look to be at the beginning of another dramatic leg down that could smash through the July lows in the market.

The past month hasn't been kind to my portfolio. In Mid July I was kicking ass and was up more than 5% on the year. However, over the past month I have faced a dramatic reversal and am now down about 6% on the year. That hurt, as I thought I had stress tested my portfolio pretty well.

However, compared to how the market has done this year. I'm still in good shape, even with the loss.

The next month should be interesting.

Monday, August 11, 2008

FJ Challenges the Conventional Wisdom: Who Really Benefits From Lower Interest Rates?

If you ask your average economist, it will be taken as gospel that lower interest rates are a good thing. Lower interest rates lowers the cost of money for consumers, businesses and governments. When money is cheap, people and institutions spend more of it and that helps the economy.

It sounds like a pretty good arguement, and it sounds so benign. However, my argument is that lower interest rates benefit the banks much more than people and businesses.

It's clear that savers are being brutalized by the Federal Reserve keeping short term interest rates substantially below the inflation rate. The discount rate is at 2% right now and inflation is at 4% or more (depending on who is calculating it). That means the savings you can earn at your local bank causes you to lose purchasing power every year.

Contrast that to last year, before Ben Bernake started drastically cutting interest rates, when you could easily earn 4% or more in a money market account. At least last year you could keep up with inflation, not so this year.

But look at the banks. Because of these artifically low interest rates (that can only happen because the Federal Reserve manipulates interest rates to serve their members) one of their biggest expenses has been lowered. The interest rates they pay their depositers is substantially reduced.

This is very important when banks are as capital impaired as they are right now. They are capital impaired because they made reckless loans to people who couldn't afford them and now they need to be bailed out of their own bad decisions!

Keeping short term interest rates artifically low also spurs inflation. Remember, low interest rates means there is more money chasing the same amount of goods - that causes inflation. In response to inflation, bond investors start demanding higher interest rates for longer term bonds.

This causes the spread between short term interest rates and long term interest rates to widen. That is very profitable, especially when you borrow money with low short term interest rates and lend it out at higher interest rates like banks do. When spreads narrow, it becomes very difficult to make money.

So, the banks benefit from lower short term rates because it lowers their expenses. They also benefit as longer term rates rise because they can make more on the money they lend out.

That's Win-Win for the banks. Unfortunately savers get screwed in the process and debtors only end up getting a little relief.

It's quite ingenious how the debate around interest rates revolves around should the Fed cut interest rates or raise interest rates? Unfortunately, nobody ever asks why the market isn't allowed to set short term interest rates. After all, if the market can set long term interest rates fairly and efficiently, why would it be any different with short term rates?

Just something to think about the next time you get your bank statement and they've paid you $0.10 on your $100 deposit.

Thursday, July 31, 2008

What's the Problem With The Economy, Part 1: No Organic Demand

Sorry it's been so long since I posted last, I actually wrote this last week, but then I lost it before I was able to post it to the blog.

Everybody in the media (except for Phil Gramm) appears to be on board at this point that the economy is in the crapper. However, most people really don't understand why. There are several big factors that are affecting the economy right now and a lack of organic demand is the one I want to talk about today.

What is organic demand? Simply put, organic demand happens when someone decides to replace a product they own or they decide to purchase said product for the first time.

Think about cars. Every year you have a whole new group of people that are ready to buy their first car (mostly teenagers and young adults). Likewise, there's also the large group of people that own cars but they need to replace it for whatever reason (cars break down, leases run out, etc.). This is a built in customer base for the auto industry and every month of every year these two groups of people provide a revenue stream for the auto makers. That is organic demand.

Now I want to go back to a dark day in our history. The terrorist attacks of September 11th, 2001. I don't know if you remember, but in the days following those attacks the economy almost completely stopped. General Motors decided to roll out a very bold advertising campaign in order to spur sales for the company.

The campaign was called "Keep America Rolling" and it appeared to be a great success. GM, for the first time, introduced 0% financing for up to 60 months on all new GM cars.

They thought they were spurring new sales, however all they actually were doing was bringing demand forward. People that were thinking about buying a new vehicle in the next 6 months decided to buy now. All GM was doing was stealing from the future.

Then the campaign ended and GMs sales fell through the floor. In order to bolster their sales they had to bring back the 0% financing and then start adding cash back incentives to spur sales. More people came in and bought cars, but again all they were doing was stealing from future sales.

The next step for GM was to start lowering their credit standards. Now marginal buyers, people who were "upside down" (meaning they owed more than their trade in was worth), or people that needed to finance a car for 6 or 7 years in order to afford the payment bought cars. In many cases people were getting greater than 100% financing to drive away in a new car.

Eventually what happens it that you hit a wall. You've pushed forward demand as far as you can go. Your pool of potential buyers has shrunk down to almost nothing because everybody that needed or wanted to buy your product for the next few years already did.

Then you throw in $4/gallon gas and you are ready for a catastrophie. GM sales are down 25% as compared to last year (and last year wasn't that great, either). There is no market for the big SUVs and trucks (GM's bread and butter) because of gas prices.

And it's not just GM. Ford, Nissan, Hyundai, even Toyota are getting hit hard with plunging sales. In June, only Honda was able to eek out a 1% gain in sales, and that's because they specialize in smaller vehicles. Every other manufacturer saw sales crash 20% or more. Only small, fuel efficient cars are selling well right now.

What can be done about this? Right now, nothing. You have to naturally allow that organic demand to form again. With high gas prices and a slowing economy, people are holding onto their cars longer. You have to let that demand build back up. Sadly, this could take several years and I'm not sure GM and Ford can wait that long for the economy to turn around.

It is the exact same problem for housing. Basically, everybody that wanted to buy a house did over the past 4 years. It didn't matter whether or not you could afford the house, or had a down payment, or even a job. The organic demand for housing is almost non-existant right now.

On top of that, you have a massive housing glut from all the overbuilding of the past few years (and they're still adding about 1 million housing units a year to our housing stock!). Right now the only real demand for housing is from people like me who are waiting for prices to come back down to a reasonable level. It will be years (maybe 2012 at the earliest) before organic demand comes back into the real estate market.

Monday, July 14, 2008

How Safe Is Your Bank?

With the recent Federal siezure of IndyMac bank and many banks and financial institutions getting a beatdown on Wall Street, it's important to check and see if your bank is okay.

First of all, here are the rules for FDIC insurance:

The insurance is for up to $100,000 per depositer per insured bank. IRAs are insured up to $250,000 if the money is deposited in a FDIC insured bank account.

However, don't wait for the bank to be taken over by the FDIC (there were lines of people outside the IndyMac bank waiting to get their money today). Once the bank is taken over, your ability to access your money will be severely limited. If your bank is in trouble, go there tomorrow and take all your money out and put it in a better institution (again, do your research).

FDIC only has about $50 billion in capital available to insure every bank account in America. They estimate IndyMac is going to cost them about $10 billion. If one failure will suck up 20% of their capital, how much is the next one going to cost, and what's going to happen when they run out of money?

You can check the rating on your bank at They rate it on a 5 star scale (my bank still has a 4 star rating) and you can purchase a report on your bank if you're interested.

However, there is no guarantee. Apparently FDIC keeps a list of troubled banks (not disclosed to the public). There are about 90 banks on this list right now. The shocking news is the IndyMac WAS NOT ON THAT LIST WHEN IT FAILED!

Also, try to keep an eye on your bank appearing in the news. Have they had to do any emergency capital raising? Is the bank based out of California or Florida (ground zero for the housing bubble)? Has their stock price recently plunged? Is Senator Chuck Schumer talking about your bank? All of these can be signs that there are problems.

At this juncture, it might make sense to keep a little cash around the house just in case. Am I being paranoid? Probably, but better safe than sorry.

Be proactive! Don't be a victim! This is going to get worse before it gets better.

Friday, July 11, 2008

The Pickens Plan

I was at the gym last night doing my cardio and watching Lou Dobbs. Then during a commerical break (where I normally tune out), I happened to catch an ad for "The Pickens Plan". Here's the website:

The man in charge of this is T. Boone Pickens, the billionare oil man. I have been following him for a while and this guy is very, very smart!

Several years ago, when talking about oil prices, Pickens said in a interview that the world will never see much more than 85 million barrels a day in output no matter what we do. Why is this? Because any gains we get from new fields (like ANWAR or offshore drilling) will be completely offset by declines in existing, aged fields (like Cantarell in Mexico).

This is important. The era is cheap oil is over. From here on out oil is going to be expensive and difficult to get. Likewise, we import nearly 70% of our oil from foreign countries, meaning we spend $700 billion a YEAR on oil imports (that's 4x what we are spending in Iraq). We have to spend our wealth in order to get this oil, so every year our country becomes poorer while totalitarian countries like Saudi Arabia, Venezuela and Iran become richer.

Not only is this a bad idea, it's not sustainable and we need alternatives.

This is a viable solution and it makes a lot of sense. His proposal is to start a massive investment in wind power across the great plains of this country (which he identifies as one of the windiest areas in the world) and use that capacity to replace the electricity that is currently generated by natural gas power plants. We can then redirect the natural gas they were burning to our transportation network and he estimates that would reduce our oil imports by 38% in 10 years!

Natural gas should be thought of as an equivalent to oil. It is highly portable, can be transported through pipes, and has a high energy content per unit - all of these are the same as oil.

Oil is what powers our transportation because of it's portability and high energy content. That's the reason why you don't see any coal powered cars on the streets. Coal has to be mined (which is more difficult and expensive that drilling), it has to be transported by rail, and the energy content is much less than oil or natural gas (you get more BTUs out of a pound of oil than you do out of a pound of coal).

Right now about 20% of our electricity is powered by Natural Gas plants. Using Natural Gas to generate electricity is wasting a valuable resource. Natural Gas should be diverted to our transportation needs just like oil (we already do have natural gas vehicles in this country but they are not widespread).

Other benefits include helping revive many of these small towns in middle America that have been in economic decline for decades. This will also spur investment in cars that can run on natural gas and expanding the infrastructure to distribute natural gas (Now I'm thinking since most homes already have natural gas service, why not just add a pump at your house? You can fill up at home and pay for it when you pay your utility bill.- Business opportunity!!!!)

Does this solve the energy problems we have? Absolutely not, but I think it's a step in the right direction and will help reduce the price of oil (because demand will fall), increase the wealth of this country and help the environment (natural gas burns clean and wind power has no emissions).

I encourage you to talk to your friends and representatives in government about supporting the Pickens Plan.