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.