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.

THIS IS BULLSHIT!

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.

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.

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 (http://financialjudo.blogspot.com/2008/07/1000-yard-stare.html) 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.

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.

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.

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:

http://www.fdic.gov/deposit/deposits/index.html

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 bauerfinancial.com. 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.

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:

http://www.pickensplan.com/

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.

Day of Defiance

Happy 4th of July, everyone!

I hope you get your fill of hotdogs, beer and fireworks today, I'm sure I will. And it is a day to celebrate the fact that we are Americans and we are lucky to live in a country with the freedoms we have.

However, when you think about the term "Independence Day" and what it represents, this is a day that we should celebrate our defiance of authority.

Our brave forefathers rose up and defeated a world power to finally achieve their freedom. Think about the brass balls that were required to do that! Britain had colonies all over the world and we were one of their crown jewels. They had a fearsome army and a formidable navy that could outmatch anything our "rebels" could muster.

Have you actually ever read the Declaration of Independence? If you haven't read it in a while, you really need to read it again. Here's a link:

http://www.ushistory.org/Declaration/document/index.htm

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

BRASS FUCKING BALLS! Imagine sending that letter to King Fucking George. I would be shitting my pants delivering such a message! (Pardon my French, I just got a little worked up.)

Here' another thought, George Washington was a terrorist according to the British Empire! He was the most dangerous person in the world in 1776!

We were the rebels! We were the insurgents! We were the terrorists! Just because we didn't want to be ruled under the iron fist of a foreign power.

That is what independence day should be all about. It should be a clear and consistant message to our government that they need to "keep on the straight and narrow, or else!"

We should have rallies in front of the capital buildings of all 50 states and in front of the White House and Congress as well on Independence Day. Not about any particular issue or anything. Just to remind them that WE THE PEOPLE are the boss and THEY are the servant.

You look at all the shiftless corruption, bribery and scandal among those 535 congressmen and the president and it makes me sick! It's time to remind them exactly who they are, what their function is and that their job is to serve us!

The 1,000 Yard Stare

...


What is the 1,000 yard stare?

I first learned about the 1,000 yard stare when talking about soldiers returning home from Veitnam. The stare was them constantly scanning the horizon for any trouble, even if there was absolutely no danger where they were at. In this case it was trauma, but the idea of a 1,000 yard stare intrigued me.

In my case, it is the long term view that I consider when looking at economic and financial issues.





Whenever I see a new trend developing, I always ask myself what are the long term consequences if this continues? Regardless of whether the trend is positive or negative, I move my investments to areas that will be positively impacted by that trend.





Using this technique, I was very skeptical of technology stocks as early as 1997. The housing bubble popped up on my radar in 2002. These things were easy for me to see because I knew that the long term fundamentals were out of whack.





I am firmly convinced that most people, not just in America but around the world, are severely nearsighted when it comes to financial matters. I often have told my friends and colleagues that most people are absolutely unable to see things more than 30 days out from today. Why 30 days? Because that's when the next bill is due.





One of my favorite blogs is the Irving Housing Blog. One post that always makes me crazy are the refi and Home Equity Line of Credit (HELOC) abusers that he talks about. Most of the comments are from exasperated readers wondering how someone could refinance their house 5+ times this decade, taking out hundreds of thousands of dollars in additional debt under increasingly onerous terms (the borrowers always move from a fixed mortgage to an ARM to an Option ARM before the house ends up in foreclosure) only to lose everything to a foreclosure.





In my view this was a completely logical choice for them. They were so busy with their distractions: work and family, buying expensive toys, taking exotic trips, plastic surgery, home renovations, etc., etc., that they couldn't see the impossible levels of debt that were building up. As soon as they got in any financial trouble, the easy answer was to refi or open a HELOC and the problem went away for a while. Rinse and repeat until the home is taken away from them.





Lets look at the recent runup in commodity prices, especially oil. When did this start? Oil prices have been steadily rising since 2000, but all of a sudden last September they moved from about $70/barrel to now at $142/barrel. A 100% gain in 9 short months.





What happened? Is this the fault of speculators, as the commentators on MSNBC or politicians are saying? In fact it is not. This was the easiest thing in the world to see, I saw it coming from a mile away. Last August/September Ben Bernake, the Chairman of the Federal Reserve decided to start cutting interest rates in response to the subprime crisis on Wall Street.





Why is that significant? Last year it was very easy to earn 4-5% in cash on your accounts. So if you had $100,000 sitting in a money market you could pocket about $4,000 - $5,000 in interest essentially risk free. Now, after multiple cuts, most money market funds are paying between 1% and 2% (treasury funds are paying even less). So your cash is earning significantly less than it was last year.





On top of that, inflation has picked up. Even the government statistics (which I feel are massively understated) show inflation is running at about 4% right now. So the return on money is lower than inflation. If you keep your money in cash you are losing purchasing power!





So, what is the logical response of people who have their money in cash? The response is that they move their money into riskier investments (also called engaging in speculation) in order to try to earn a rate of return greater than inflation. This is the same thing happened when the Fed lowered rates to 1% in 2003 - 2004, all the cash flowed into real estate causing the housing bubble. This time the money has flowed into commodities causing tremendous hardship because of high energy and food prices.





This will not change until the Fed starts raising rates again. Once the interest rates on cash start going up, people will be less inclinded to put their money in risky commodities. The Fed knows this but won't do it because raising interest rates would kill the housing market and tank the economy.





Unfortunately, the housing market and the economy are not going to be saved by low interest rates. Both are still going into the toilet, all we're doing is prolonging the pain.





I've already given several predictions and we'll see what happens with them. Right now it appears I'm on the right track on all of them, plus I was right on with the gas price call back in February.





One big trend I'm looking at now is a possible crash in oil prices. As I said earlier, prices have doubled in 9 months. We're at $4/gallon gas. The economy is slowing and you can see demand destruction everywhere. Just this week I read an article about how teenagers aren't cruising nearly as much as they used to and Indian truckers are on strike because of high fuel prices.





This indicates to me there will soon be a glut of oil on the market soon. I've been debating whether or not I should be shorting oil at this time. I think it's a solid play, but I'm not sure how much farther oil has on the upside. Everything I'm seeing now suggests to me that we've got a blow off top on oil (think Nasdaq in January - March of 2000 when it moved up 20% in less than 90 days right before it crashed). On the other hand, it looks like oil could push as high as $200/barrel before it pulls back (and Iran is a big question mark, too).





Of course, I'm not giving investment advice and you need to do your own research.

Inaguration Day

Back on June 6th, in my diatribe against George W. Bush I made a prediction that the Dow would be lower at the end of his presidency than it was at the beginning of his presidency.

However, I miscalculated when his presidency started. I said January 20th, 2000. In fact, George W. Bush became president on January 20th, 2001.

That makes a big difference because the Dow was lower in 2001 than it was in 2000. January 20th, 2001 was on the weekend so the last close before he took office was January 19th, 2001. On that day the Dow was at 10,587.

However, I AM STICKING TO MY PREDICTION! The Dow will be below 10,587 on election day this year.

I'm not really sticking my neck out here, The Dow closed today at 11,453 today, only 102 points higher than my previous prediction. We could cross that threshold tomorrow.

It was another great day to be betting against the American economy. Gold and Silver soared, dollar was down (benefitting my foreign currencies), oil was way up, the markets were way down (benefitting my Bear market funds). However, I must mention that every day the market goes down (both real estate and stock) makes me a little more bullish. I'm not moving into stocks or real estate yet, but we are getting closer. There is still a lot of excess that has to be wrung out.

We've been through this before

This is a print from 1875.

It's funny how people have to keep learning the same lessons over and over - the hard way.

Thanks to Housing Panic for finding this! You can check out his blog on the right.

John McCain is a debt addict

John McCain and his wife, Cindy, have just released their Senate Financial Disclosures

http://www.nytimes.com/2008/06/14/us/politics/14disclosure.html?_r=1&adxnnl=1&oref=slogin&adxnnlx=1213719453-ooHy+UQsLIo2G7EQs6+DXQ

The bulk of the McCains’ obligations stemmed from a pair of American Express credit cards that are held in Cindy McCain’s name. According to the disclosure reports, which present information on debts in a range rather than providing a precise figure, Mrs. McCain owed $100,000 to $250,000 on each card.
Another charge card, held by what was described as a “dependent child,” had also accumulated debts of $15,000 to $50,000. In addition, a credit card held jointly by the couple was carrying $10,000 to $15,000 in debt, the filing indicated, at a stiff 25.99 percent interest rate.

Here's the confusing part

In other filings, the McCains have reported total household assets of $24.6
million to $39.5 million. In recently releasing a summary version of her 2006 tax return, Mrs. McCain reported income that year of more than $6 million, some $300,000 of which was derived from her salary as the chairwoman of Hensley, which was founded by her father.

Why in the world would you carry so much credit card debt at high interest rates when you easily have the assets and income available to pay them off. By my calculations, they could save anywhere from $52,000 - $130,000/year in interest charges by paying those cards off! American Express must LOVE the McCains!

That's almost John McCain's gross salary from the Senate (his salary is $167,000/year)! Shoot, after taxes they probably spend all of John's net salary and net pension (from the Navy) on interest payments on these two credit cards! And somehow, $6 million in income isn't enough to keep from accumulating large amounts of debt on credit cards!

This is just one more big question mark in regards to someone who is running for the most powerful office in the land. How can he run as a fiscal conservative when he handles his personal finances so recklessly? This just reeks of irresponsible spending but fortunately they have enough in assets to bail themselves out if they get into trouble.

I can't say the same of most Americans who find themselves deep in credit card debt.

Housing Re-Virginization

I found out something interesting this past week.

Did you know that if you sell your primary residence and are out of the market for 2 years that the IRS considers you a "first-time homebuyer" again?

That's right! I read about this online and called the IRS to confirm that it is correct.

I was directed to Publication 590, page 55

"Generally, you are first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquistion of the home which the distribution is being used to buy, build or rebuild. If you are married, your spouse must also meet this no-ownership requirement"

This means that if you sold your house more than 2 years ago, you can take up to $10,000 out of your IRA with no penalties (you do still have to pay income taxes). If there's two of you buying a house, each person can take out $10,000!

The big caveat on this is that

"When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000."

So, if you already dipped into that well the first time you bought a house, that penalty free withdrawl is no longer available. However, if you only took out $5,000 from your IRA the first time you bought a house, you could take out another $5,000 for the next house.

This is also only for IRA accounts. You cannot do this if you have a 403b or 401k (those plans often allow you to borrow against your balance if you need the money).

Given that I didn't use any IRA money for a down payment on my house back in 1998, I will now be able to use this, if I want to, starting in January, 2009. My next big question is would I qualify for all the various "first-time homebuyer" programs available in Santa Fe?

Please contact a tax advisor for more information about this if you are going to use this strategy.

Why I hate George W. Bush and 3 Shocking Predictions

Ronald Reagan coined a great phrase when running for reelection in 1984. He asked, "Are you better off now than you were 4 years ago?". His reasoning was that if the answer was "yes", then you should vote for him. We all know that 49 states went for Reagan in 1984. What a glorious time to be a Republican.

Asking that question now, I would have to answer "yes" again. Since 2001, my net worth has doubled and then it doubled again. I should be in the rabid, hard core Republican consituancy (you know, the 25%-32% that still think the President is doing a good job or the 19% of the population that thinks the economy is going in the right direction).

Fortunately, I am not in that brainwashed camp. I think this administration has done more harm to our economy, our foreign policy and our laws than any other administration (maybe even all previous administrations, combined).

So where does this venom come from? Point of fact, I never voted for George Bush. I was more ambivalent about him than anything else back in 2000 (not being a big fan of the first George H.W. Bush administration, I wasn't eager for a sequel). In 2004, I was not liking what was going on with a Republican controlled congress and executive branch, so I voted for Kerry in an effort to bring some balance back to the branches of government even though I thought Kerry was a putz.

My turning point happened during Hurricane Katrina. That was when it finally clicked for me that this administration, despite all of it's pandering and efforts to keep us "safe" from the terrorists, was found to be nothing more than one big lie. Watching those people at the Superdome, which was a FEMA designated Hurricane shelter, literally starving and dying on television while our government did NOTHING was enough to send me over the edge.

All that money that was spent on forming the "Homeland Security" department, all the money that was designated to help states, cities and communities "prepare" for a horrible terrorist event was wasted on ineffective, politically connected contractors that never did a damn thing. My biggest issue with Katrina was what would be the difference in Al Queda loaded up some big trucks with high explosives and blew up the levees around the city? The end result would have even been more death and destruction (remember, the city was virtually abandonded when Katrina hit, imagine those floods with it's 2 million citizens trying to get out).

At that point I made a drastic move with my investments. Over the next two years I moved most of my money to investments outside of the American Financial system. I purchased foreign equities, bonds and currencies. I purchased gold, silver and precious metals stocks. I purchased oil, energy and commodity positions as well.

I could see what a falling dollar was going to do to our economy. I could see how a housing bubble was going to devastate our economy once it popped (it was still going strong in 2005). I could see the fraud permeating from the highest levels of government and business and it made me sick.

I found myself betting against the United States and I was rewarded richly for it.

That is why I hate George W. Bush so much. He made me bet against my country. Our country, the shining city on the hill, the last greatest hope for the world has devolved into the bubble chasing, conspicuous consuming, debt addicted, gambling addicted, balkanized society we see today.

Of course, not all of this is President Bush's fault, but his policies made these problems worse during his tenure and that's where I fault him. If you look at almost all of his policies and initiatives they all have the same fundamental problem. He hires politically connected lobbiests to run his various departments and he stops enforcing the laws that are on the books.

Why do we have an illegal immigration problem? Because he defunded the department in Immigration and Naturalization that enforces immigration law on employers. The result of this is the construction, hospitality and agriculture industries were able to hire as many illegal immigrants as they wanted with almost no chance of getting caught. It's the same as outsourcing our jobs for cheap foreign labor.

Why did we have a housing bubble? Because he used the Office of the Comptroller of the Currency (OCC) to stop states from passing any anti-fraud laws against predatory lenders back in 2001-2002. The result is that fraud exploded by both lenders and borrowers because they knew there would be no repercussions. Likewise I can't help but think, in my most cynical thoughts, that the banks encouraged this fraud because they knew when the whole thing blew up, Congress and the President would bail their sorry asses out because they are "too big to fail". I am still holding out hope that Bush vetoes the latest housing bailout legislation that's moving through Congress, maybe he can be redeemed in the next few months.

In Iraq we have notorious contractors like Halliburton and Blackwater who receive billions of dollars on no-bid contracts, with no accountability and are given complete immunity from our government. We also conduct a costly and, in my opinion, neverending war but don't ask the citizens of this country to sacrifice one tiny little thing outside of that small minority of citizens that have actually served in Iraq. Of course, we are still sacrificing at the pump, but instead of that money going to the government to pay for this war (through a gas tax)- it goes to Exxon Mobile and to fund the very foreign governments in the Middle East that hate us and want to kill us. In the meantime, Osama Bin Laden and Al Queda are allowed to reform and regroup unmolested in Pakistan. This is insanity!

There are dozens of other issues (trade policy, dealing with Iran, outsourcing, growing the size of government the most since LBJ's Great Society, government surveillance, repealing Habeus Corpus etc.) where I am in complete disagreement with George W. Bush. Shoot, even things I agree with him on, like privatizing Social Security, were completely bungled by this President. It's like he can't do anything right!

I am not one of those "hate America" or "blame America first" types. However, I do think our country has become the drug addicted son that I am no longer willing to help. This self destructive behavior has to stop or else the country will die. That's right, our country is on the verge of a massive O.D. unless it drastically changes its ways. Unfortunately, the pusher is George W. Bush and nothing's going to change as long as he's in office.

That is also why I am flummoxed by John McCain. I actually supported McCain's bid for the presidency in 2000, but in my eyes he has lost all of his independent and "maverick" credibility during the course of his current presidential campaign. He is parroting the same crap policies that Bush has been forcing down our throats for the past 8 years. It's like he sold his soul to the devil in order to be the nominee. For God's sake, John, you've got to distance yourself from this administration if you have any hope of getting elected

In the end, I offer the following predictions for our President by the end of his term:

1. On January 20, 2000 the Dow was at 11,351. I predict that by election day, the Dow will be lower nominally. Adjusted for inflation, the stock market will have lost 25%+ during the course of his administration.

2. November will see a full scale rout of Republicans at the National, State and Local levels. Karl Roves "permanent majority" dream will come true. Unfortunately, it will be the Democrats who inherit this mantle. The Republicans will become a permanent minority party and may split up (cultural/religous conservatives seem the most likely to start their own party).

3. The Dollar index will sink to 60 before election day (it's currently at 72). That means this President will have overseen a 50% drop in the value of our currency during his tenure.

Mr. President, if I may coin a phrase, you are the WORST. PRESIDENT. EVER. You have been a disaster for this country and we will be a better place once you are gone. I hope you appreciate the scale of your efforts. You destroyed the economy. You destroyed your party. You have failed in nearly every effort you have undertaken as President.

I will be one that cheers on January 20, 2009. Don't let the door hit your ass on the way out!

FJ Quote of the week

In a bust that has lasted three years, they have gone through phases: denial, blaming the media for messing with the heads of buyers, predicting bottom soon and laying off staff. Now a chastened industry has reached a new stage, openly acknowledging its mistakes.

“‘We’ve effectively stolen from the future. The demand we should be having now we stole in 2005 and 2006. We’re paying for the sins of our past right now.’”

President Tom Sullivan of San Diego's Sullivan Group Real Estate Advisors.

http://www.sacbee.com/103/story/975645.html

My Take on Inflation versus Deflation

It is really hard to make a case for deflation when the price of just about everything is going up right now. My previous post was about $4 gas (up 25% in a year). Likewise, commodities and precious metals have been soaring over the past year and have been in long bull markets for the better part of a decade now.

But what if I was to tell you that we are actually in a deflationary environment right now. Deflation is defined as a contraction of the money supply, it is achieved by banks lending out less money and credit being destroyed in the marketplace.

If you look at the housing market and the credit markets, they are screaming deflation right now. Yesterday, the Case Schiller Home index says that housing values fell by 2.2% in March! That's on top of a 2.6% drop in February (revised up). That's almost a 5% loss in two months! Annualized out that's a 30% drop in home values.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aYDfc3P6rZys&refer=home

The value of housing in America is about $20 trillion. That means we lost $440 BILLION in housing wealth in March alone. We lost nearly $1 TRILLION in housing wealth in those 2 short months!

Can the price increases were seeing in food and energy possibly offset that gap?

Oil prices have risen from $80/barrel to $135/barrel in the past 6 months. America consumes 20 million barrels of oil a day. That means we are spending $1 BILLION a day more on oil than we did last year. That's only $30 Billion a month in inflationary pressure against that giant wall of deflation coming down from the housing market.

When you consider the fact that the energy market is bigger than any other commodity, and it has moved up much more than any other commodity over the past 6 months, it's easy to conclude that commodity inflation is no match for housing deflation.

The housing market is too big. Even when you add in the inflationary pressure from a falling dollar, it doesn't appear to be enough to overpower the losses in the housing market.

Just today there was a major move down in commodities and oil. I'm thinking most of these markets are overbought at this point and we will see a pretty good pullback over the next few months. That's deflationary, too.

In deflation, cash is king. People scramble to unload their assets at greater and greater losses. Those with the cash can buy up this stuff for pennies on the dollar. I still think this is the end scenario, but we may not see it until after the election.

The losses in the housing market are almost unfathomable they are so huge!

Follow Up on FJ Prediction from February 11th, 2008

Back on February 11th, I predicted that we would be seeing $4 gas by Memorial Day. Here's a link to the previous post.


http://www.blogger.com/post-edit.g?blogID=1336300683106618557&postID=2190842543631246914

BTW, the picture above is from a local gas station here in Santa Fe. As you can see, I was damn close in my prediction! Of course, at the rate oil is going up right now, I'm probably a week early on my prediction. But $4 gas is a reality now in many parts of the country.

Saudi Arabia and OPEC have us literally over a barrel right now. Poor pathetic Bush went to Saudi Arabia begging them to pump more oil, but why would they do that? Of course they said no, and they also told him that they don't like us devaluing our dollars like we've been doing.

They've told us they are going to raise the price of oil $4 (or 3%) for every 1% the dollar goes down in value. That's a pretty steep penalty but I'm still not sure that our leaders get it, yet.

Well, they get it, but they're doing the wrong thing. Congress is talking about suing OPEC, like that's going to help us get more oil. We've also got Hillary and Obama wanting to increase taxes to oil producers (which I think is a big mistake).

The biggest impact our Government could have on energy prices right now is to support the dollar. Just think what would happen if Bernake on Tuesday made a surprise 1% rate increase to the Fed Funds rate. Immediately, you'd have a flood of money move out of the commodity market and into dollars. Likewise, ending the war in Iraq and bringing the troops home would also be a big support to the dollar. Pipe dreams like a balanced budget would also work, but I'm not counting on that happening until China and Saudi Arabia decide they don't want to loan us money anymore.

In the meantime, the best way we can fight back is to use less oil. That means driving less, being more strategic with your errands so you can combine trips helps. Keep your car tuned properly and make sure the tires are properly inflated. If you're in the market for a new car, buy a more fuel efficient vehicle.

Oh yeah, call your congressmen and women and tell them you're not going to vote for them in November unless they do something to strengthen the dollar!

More predictions coming soon! They will be doozies!

Masking a lousy market with a declining dollar

So, what do you think of the bull market in stocks that we've been in since 2003? In 2002 the Dow bottomed out at 7701. It recently closed at about 13,000, and has been as high as 14,000. That means the market has gone up about 81% during that time.

The S&P also doesn't look that bad. It bottomed out at 800 in late 2002. It currently sits at about 1423, which is about 78% higher.

However, during most of this time, the dollar index has been declining against most other major currencies in the world. In 2002 the dollar index topped out at about 120, today it sits at 73, which is a decline of 39%. That means that the dollars you hold can purchase, on average, 40% less than they could just 5 short years ago.

So what, you say? After all, if your investments are up 80% and the dollar is down 40%, then that means you are still up 40%, right? Actually that's wrong. Losses are magnified on the way down. A 50% decline wipes out a 100% gain.

It's important to view our market from a foreigners perspective. After all, they have lots of money and they choose where they want to invest it. Many foreigners like to invest in the United States and our stock market because it has been such a good place to keep their money for many years. That is, until this latest bull market.

From 2002 to 2004, the stock market was in major rally mode. Aggressive rate cutting by the Federal Reserve (down to 1% on the Fed funds rate) gave the stock market a reason to rally. The market jumped up 33% during this time, but to foreigners the rate was not that great because the dollar declined 30% during this time. So all the gains in the market were not realized by foreigners, they essentially broke even on a nominal basis.

2005 was a more interesting year. The Federal Reserve decided to start raising interest rates again. They steadily moved the Federal Funds rate up from 1% in mid 2004 to 5.25% in early 2006. During this time the dollar rallied 10%. However, on the stock market side, it was the weakest year of the rally. The stock market went up about 5% in 2005. For American investors, this was a so-so year. Foreigners, on the other hand, had their best year of the current market because the 10% gain in the dollar juiced their 5% market gains to give them a 15% return for the year.

Then, starting in 2006, the dollar resumed it's slide down from 90 all the way down to where it currently sits at 73. That's a 19% decline in the value of the dollar. However, on the stock market side, the S&P 500 went from 1285 to it's current value at 1423, that's only a 10.7% gain. This means the market has been declining for foreigners during this time, they're down 8% even if nominally the market is higher.

So, over the past 5 years the average foreign investor has not made any money in the stock market. I could make the argument that it's the same for American investors because our dollars buy so much less than they did back in 2002 (thank you inflation).

I have talked in the past how dependent we are on foreigners to fund our excesses. If you were from France, or China or Saudi Arabia, how much longer would you have patience in the American stock market if it's earned you a big fat goose egg for 5 years running? I've got a feeling that their patience is wearing thin and they're looking for any excuse to pull their dollars out of our market and go invest it in something else.

Of course, everyone is talking about how the dollar is set to rally right now. After hitting an all time low of below 71 in March, it has moved up to 73 currently. However, what is going to cause foreigners to want to buy more dollars (more demand for dollars will cause the dollar to rally)? I don't see any rally in the dollar until Ben Bernake grows a pair and starts to raise interest rates.

Despite the tepid rally in the dollar right now, I think it's setting itself up for another 10% plunge before the end of the year, maybe more. In the meantime, any rally in the stock market will be completely offset by declines in the dollar.

There is no new wealth being generated in our country, there hasn't been for a long time.

Meat!

With all the bad news about inflation going on right now, especially regarding food and energy prices, there is some good news out there.





The price of meat is going down. Way down.





In fact, last week I picked up some 85% lean hamburger meat for $1.65/pound. I also picked up boneless, skinless chicken breasts at $1.88/pound.





This week in my Albertsons circular they are advertising USDA Choice Top Sirloin or Petite Sirloin steaks at $2.99/lb. Roast beef is only $6.99/lb. These prices have to be about 30% lower than they were a few months ago!





Are you ready for the horrible reason why these prices are going down? The herds are being culled. Feed and grain has gotten so expensive that many ranchers are killing off a big portion of their herds to save money. This has created a temporary glut of meat in the marketplace. Therefore prices are going down!





It is time to go to your local grocery store and stock up! Fill your freezer to the brim with as much as you can now, because in a few months the glut will be over and prices are going to rise in a dramatic fashion.





A typical frost free refrigerator can keep meat fresh for about 6 months. A deep freezer can keep meat fresh for years. I recommend you try to estimate how much meat you will eat during the next 6 months to a year and go out and purchase it now!





Likewise, look to milk, eggs and other dairy products to keep going up (hens and dairy cows are getting slaughtered, too).

An Inflation First

Sorry I haven't posted in a while, it's been a busy few weeks. Last weekend I drove up to Denver from Santa Fe and I got my first real inflation shock.

For the first time ever I spent $100 on gas in one day.

I did two fillups and that's all it took to put me over that limit. I also had to fill up twice on the way back and again on Wednesday.So, since last Thursday, I've spent close to $250 on gasoline.

Holy crap that's a lot!

Also, since last Thursday when I filled up in Santa Fe, gas has gone from $3.39/gallon to $3.65/gallon. Again, this is in one week.

I'm pretty confident that my $4/gallon prediction will happen in the next month.

Once again, I just wanted to thank our illustrious leaders for leading us down this path of inflation hell. How are those rate cuts working for you?

So, Ben Bernake and the Feds have desperately and recklessly cut the Fed funds rate to save the banks and the housing market. They have failed miserably because housing is still imploding and the banks are still insolvent (for making too many bad loans to jerkoffs that could never afford them).

Now the value of the dollar is imploding (it's fallen from 82.5 down to 72.5 since they started cutting rates last August). Energy and food prices are exploding (now we have rice rationing at Sam's Club and Costco). Rates on money market funds are in the 1 - 1.5% range - well below the current rate of inflation.

This is the Fed solution, blow another bubble to bail out the housing bubble. Only this time we get a commodity bubble and people are going to starve to death! Right now, people in Haiti are eating DIRT because they can't afford food anymore!

We are being led by failures who don't know when to stop making bad decisions. I urge you to call your Senators and Represenatives and tell them to stop bailing out the morons who caused this mess. Tell them to stop spending money we don't have and tell them to stop destroying the dollar and the economy!

Do something, or else you'll be left with nothing.

FJ Quote of the Week

This goes right back to my previous post about 3rd Generation Wealth. I encourage you to read the whole post. "Market Ticker" is one of my links and I encourage you to check out his blog. I may not agree with everything this guy says, but he is right way more than he's wrong.

America simply will not stop being foolish. We have no leaders in this nation who will tell it like it is, and give it to us hard and straight, even when that is exactly what we need. Stocks are always supposed to go up, even when there is no consumer income growth to support rising sales. Home prices never go down. Incomes never decline and people never get laid off and businesses never fail.This is the fantasy land that America lives in, and it sucks.

I fight the outrageous consumerism that is drilled into my daughter's head by everyone she comes in contact with each and every day. No, you cannot have a $500 cell phone, and I don't care if your friend has one. No, you don't need a $100 pair of jeans; the $20 pair is just fine. No, you don't need three more swimming suits; you have two that fit. No, you don't need a new IPOD, you have an MP3 player and it works perfectly well.

This is not an accident. It is a matter of ingraining greed into our youth and ultimately into us, and it will destroy us. When times are good its fine to spend on vacations and toys, but not beyond what you can afford, because times are not always good.

Yet we never seem to remember that, or if we do, we don't care. We continue to believe that we can have something for nothing, whether its "free" health care, "free" prescription drugs, "free" retirement money or "free" digital music. When we don't get what we want we either whine to our government and demand it or, in some cases, we just steal it.

I'm tired of it folks. I see it every single day, all around me. Kids who think they are entitled to cars when they turn 16. No, they don't need to go get a job and buy one, they deserve that car and Daddy must buy it for them. Kids that once they get that car, don't need to buy their own insurance or gas - that's the parent's problem too. They won't ride the bus to school because its
"beneath them", and insist on driving the day they turn 16 - but they won't work to earn the money necessary to make that happen.

Here's the link to his post

http://market-ticker.denninger.net/2008/04/unbelieveable-stupidity-whiffs-abound.html

We Are All Paris Hilton

Bleech! I can't believe I'm putting a picture of this spoiled, brainless princess (with the dead eyes) on my blog, but I need to in order to make a point.

When it comes to family wealth, it typically follows this path.

Generation 1 is hard working and earns the wealth.

Generation 2 inherits the wealth and feels guilty about it, so they try to compensate by spoiling their children excessively.

Generation 3 is the most entitled and lazy generation and they usually end up pissing the family wealth away and end up broke.

Guess which generation Paris Hilton belongs to? Here's another one to ponder... guess which one George W. Bush belongs to?

Even though I am a member of Generation X, I feel that we are that Third Generation. And even though my generation is bad, Generation Y and the Millennials are even a more amplified version of spoiled and entitled.

We are constantly told that we are the richest and most powerful nation in the world, but if you look at the facts it speaks otherwise.

Americans have had a declining savings rate for decades and for the past 3 years we have had a negative savings rate.

Americans equity in their homes has hit it's lowest point since since the 1940s.

One of the biggest issues in this presidential campaign is National Healthcare. But, like the Medicare Prescription Drug Plan from a few years ago, no one is talking about how to pay for it. The Prescription Drug Plan added $9 trillion in unfunded liabilities for our government. The fact is there is no way it could have passed if the Medicare tax had been increased to pay for it. I feel it's the same for National Health Care, there is no way it will pass if it requires a tax increase because everyone is broke and the voters expect something for nothing.

Here's more insanity. The big $600 tax rebates everyone is going to be getting in a few months is being 100% financed by debt. We are borrowing money from the Chinese so we can go out to Wal Mart and buy some Chinese crap!

The Iraq war is also being 100% financed by China and the Middle Eastern nations buying our debt. If you think the war is unpopular now, just wait until they pass some kind of "war tax" or "gas tax" to help pay for it!

Big American corporations like Citibank, Merrill Lynch and Washington Mutual have had to go begging sovereign wealth funds (again owned by China and Middle Eastern Nations) and hedge funds to give them a cash infusion or else they'll implode. The concessions that the corporations are giving these entities are obscene and essentially loot the companies and screw the shareholders!

Our country requires $2 billion/day in foreign capital inflows in order to function.

Look at the proliferation of gambling in our country over the past 30 years. The poor play the lottery and gamble at the local Indian Casino. The middle class gamble in the stock market and in Las Vegas. The upper class have their hedge funds and gamble in Monte Carlo. The problem with this is that none of this actually creates "wealth", it's all just pushing dollars around while the dealers (the casino, Wall Street and hedge fund managers) skim a percentage off the top.

We actually spent through all our wealth years ago. The past 12 years we've been living in a bubble economy (first tech and then the housing bubble) which gives us the illusion of wealth and allows us to borrow money in order to maintain that illusion. However, like spoiled, 3rd generation heiresses, there will come a time when the banks say "no mas" when you call to get another increase in your credit limit.

We'll kick and scream and cry. We'll say "Do you know who my daddy is?!?" We'll threaten them with lawsuits or worse. However, in the end it won't matter. We'll have to reap what we have sown. It won't be pretty, but it will be necessary.

Maybe our country will learn a very valuable lesson. Nobody owes us a living. We're going to have to figure that out for ourselves the hard way.

Who knows, maybe the next generation (post-Millenials) will know how to build real wealth again.

Excess Capacity

A few years ago I read the following article.

http://dir.salon.com/story/tech/wire/2003/08/29/cars_and_drivers/index.html

In 2003, our country had a major turning point. For the first time in history, there were more automobiles in the United States than there were DRIVERS! What did I read into this article? I read that used car prices were going to plunge. Why? Because in a supply and demand model, if there is more supply than demand – prices go down!

In fact, this past week Yahoo had an article on the fastest depreciating automobiles. One item that stuck out on me was they were talking about the Kio Optima Minivan. This is a car that retails in the Mid $20k range if you buy new. It’s also one of the fastest depreciating autos in the country, losing more than 80% of it’s value over 5 years!!! To put it another way, the driver of the Kia Optima is paying about $416/month in depreciation costs just to drive that vehicle (that's on top of fuel, insurance and maintenance costs).

Even the "best" vehicles that maintain the highest resale value (think Honda and Toyota) lose approximate half their value in 5 years. That is a huge cost incurred by drivers of new cars, but if you are a buyer of used cars - this is to your advantage because you are able to keep more of your wealth.

I talked about autos in detail in my post “The Depreciation Monster” back in December (check it out).

I don’t want to sound like a broken record, but excess capacity is the problem with housing right now. There are simply too many houses/condos/lofts out there when compared to current demand.

It is very, very hard for me to pay full price for anything anymore. The big reason is that I know there are hundreds, if not thousands of people who I know bought something at full price, have never used it (or used it once or twice), and now want to sell it for pennies on the dollar.

Here’s another example. I am currently renting a house (I sold my house last year) which has a very dated kitchen. When we moved in, both the dishwasher and the refrigerator were original appliances and somewhere near 30 years old. Our landlord, who is a very old gentleman, was very resistant to replacing these artifacts. So my wife and I took it upon ourselves to find suitable replacements. Last year we found a 10 year old dishwasher in great shape at a garage sale. What did we pay for this dishwasher? It only cost us $25. We then went to our landlord and said we would give them the dishwasher if they would pay to install it. It was a done deal.

Then we set our sites on the refrigerator. Our landlord didn’t want to buy a new one. So we negotiated that we would replace the refrigerator if he gave us a break on the rent. He agreed, so this past weekend we finally found a suitable replacement. Someone in our neighborhood was selling their 5 year old refrigerator for $200. I went to see it and it was in great shape, I offered $175 and he accepted. This is a fridge that would easily cost about $600 if it was bought new.

Did you know that most retailers do have a policy that allow you to negotiate on the prices of what you purchase? Even big national chains like Best Buy allow it!

http://www.nytimes.com/2008/03/23/business/23haggle.html?ref=todayspaper
Excess capacity is everywhere. Remember how hard you work for your money and use every tool at your disposal to get the best price.

"...since the Great Depression."

Maybe it's just me, but I've been seeing this comparison more and more in the media when it comes to our economy.

Here's some examples:

"Savings Rate Lowest Since Great Depression"

http://www.breitbart.com/article.php?id=D8FF6D700&show_article=1

"Lawrence Yun, the Realtor's chief economist, said it was likely the country has not experienced a decline in home prices for an entire year since the Great Depression."

http://biz.yahoo.com/ap/080124/economy.html

"Fed takes boldest action since the Depression to rescue US mortgage industry"

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/12/cnfed112.xml

In fact, if you Google the words "...since the Great Depression" you get 2.1 million hits! Apparently this is becoming a popular phrase.

I'm pretty sure that it's going to get even more popular as we move forward.

Bill Fleckenstein is my hero! FJ Quote of the Day

"Congress and the White House are now attempting to right past wrongs with bailout schemes -- some aimed at lenders and others at borrowers. And of course, the Fed is being called on -- and has willingly obliged -- to provide more easy money in the hope that more of what created the problem can solve it.

The latest example by the Fed: Handing JPMorgan Chase a $30 billion credit guarantee to get it to buy Bear Stearns.

The insidious and dangerous unspoken corollary to all this: Financial pain is now unacceptable. Those in trouble demand to be rescued, and the government seems to agree that the "creative destruction" component of capitalism must not be allowed to do its work. It's a sad irony that as former communist countries embrace capitalism, we seem to be headed in the other direction."

- Bill Fleckenstein, "Contrarian Chronicles"

March 21, 2008

Here's the link to the article:

http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/CateringToTheBailoutNation.aspx?page=1

FJ Challenges the Conventional Wisdom: High Housing Prices are BAD for the economy and consumers!

Are high housing prices a good thing?

If you listen to the media, the politicians and the financial industry when asked about the housing crisis - overall you'd come away with the impression that this is true. And all of their "solutions" come down to finding a way to maintain those high prices no matter what!

However, if we delve into the pre-bubble mentality. High housing prices are often seen as a liability for a community.

I live in Santa Fe, NM, which has always had a certain cache - it's considered a highly desirable place to live (and retire to). Because of this, it's always had high housing prices. There are other places like this including Aspen, Colorado and Jackson Hole, Wyoming.

1. The biggest problem with high housing prices is that it makes it very difficult to attract businesses and develop the local economy. Employers aren't that eager to have to pay above market wages to compensate for the high cost of living. In Santa Fe's case, we are the state capital, so there are lots of government jobs. Likewise, we have a large tourist economy that is highly dependent upon the economy. Housing is the third biggest employer in the city (and we know how that's going right now). We have no major employers outside of these sectors (Thornburg Investments and Thornburg Mortgage are probably the single largest private employers in the city, but Thornburg Mortgage is on the verge of going bankrupt because of margin calls and that could result in 400+ high paying jobs evaporating and further damage a struggling housing market).

Because we have no industry, wages in Santa Fe are not good. We often have a problem with teachers, policemen and firemen being able to afford houses in the city where they work. If you want to find "affordable housing" in Santa Fe you have to go to the ghetto-like southwest side (where, according to an article in the paper today, affordable is $250,000+), buy a mobile home and live in a trailer park, or buy an affordable house in Albuquerque and commute 60 miles each way to work.

Likewise, we have a brain drain where the smartest kids in our city can't wait to leave because the opportunities in this city are so limited. We are also saddled with a high dropout rate amongst the disenfranchised kids and minorities.

2. Another big negative for high housing prices is high property taxes. One good thing about New Mexico is that we have very, very low property taxes (most of our school funding is paid for by our "gross receipts tax" which is like a sales tax on everything except medical care and food). On the house I owned until last year, my annual taxes were only about $1,200 on a home that I eventually sold for $345,000. However, in most parts of the country, property taxes come to about 1% of assessed value. That means that over the past 5 years the average person's tax burden on their home doubled or more, even if they didn't do anything to the property. When you talk about someone paying $3,000/year in property taxes on their home when a few years ago their taxes were only $1,500/year - that creates financial pressure on homeowners, especially when wages have been stagnant like they have been this past decade.

3. Then there's the whole maintenance issue. If you have all your money going toward a high house payment with high property taxes, how are you going to be able to afford to pay for the upkeep of your property? When it comes to budgeting for the purchase of a home, they say that you will spend about 1% of the cost of your house on maintenance and upkeep each year. Then, every 10-15 years expect a major repair, like a new roof or the house needs to be restuccoed. Major repairs can set you back $10,000 or more. High housing prices hurt the homeowner's ability to properly maintain their property.

So, that's what you get with inflated housing prices:
Communities can't attract businesses
Brain Drain and high dropout rates
People who work in the community can't afford to live in the community.
Depressed wage base
High property taxes

On the flip side, lower housing prices aren't the end of the world. People will be able to afford houses again without having to take on a toxic mortgage. Property taxes will come down. People won't have to commute hundreds of miles a week to their job. Maintenance issues will be a minor nuisance as opposed to a financial crisis. Finally, you and your partner won't have to work 80 hours a week at multiple jobs in order to afford a home.

That doesn't seem so bad to me.