Irrational Pessimism

Many remember Alan Greenspans claim of irrational exuberance during the 1990's stock market run up. Now the market value has dropped about 40% from its peak and each day brings news of triple digit market losses. Foreclosures are up as well as joblessness and it's hard not to be afraid, especially for those in their mid-fifties who were hoping to retire in 5 to 10 years.

So is the world ending as we know it? Many people are thinking that way, claiming that this is the next Great Depression. The media claimed for over a year that we were in a recession despite the fact that the economy was still growing. Self fulfilling prophecies are part of the reality we deal with and as people are told that things are bad they change their behavior until things do become bad.

One contrarian is Warren Buffet who recently published an article recommending people buy now. I think that is exactly what smart investors need to do. Stocks have always come back. And some areas may have good real estate values where sellers have irrational pessimism (though I think that values will have to drop by 50% or more in some markets).

Stocks Vs Real Estate III

I've written in the past about why I thought real estate was a better investment than stocks. The current 40% (and counting) drop in the stock market serves to underscore many of the points I made.

Now, many people who were trying to use the greater fool theory to flip houses in rapidly escalating real estate markets during the past few years may disagree. I used to watch "Flip this (or that) House" and wonder if I could ever make money in real estate in the Buffalo area. However, at the moment I seem to be at the right place to own real estate. My real estate basket has a positive cash flow and is appreciating.

Meanwhile my 401k has lost over 6 figures in value and if I look at that alone, I have no hope of retirement until I am in my 70's. I think that the country is in the verge of electing the most far left socialist in our history. His ideas of increasing capital gains taxes and taxes on small businesses as well as anti-NAFTA rhetoric is reminiscent of the 1930's. I wonder if it will make FDR look like a conservative a few years from now.

Fortunately, hockey season starts tonight and the Bills are winning. Otherwise, I might just jump off a skyscraper.

Third Quarter Net worth update

Well, like most people my net worth fell in the third quarter of this year. You can see the chart along the sidebar or at NetworthIQ. The primary reason for the drop is the loss of $30k in my 401k. Retirement is getting further away with each passing drop. Wish I were 30 and could take advantage of this market. After a long decade (in the 70's) the stock market came roaring back for nearly 30 years and made many people rich.

Fortunately, I live in a area of the country where real estate is actually appreciating, so at least I have one investment that is not being hurt (My REIT fund has been going down, so my 5 houses here are what is helping).

In terms of debt, I'm treading water at the moment - neither going down much nor increasing too much (most of the increase is due to increased appraisal of a home I own with my ex and my "debt" to repay her share)

Congress Acts - Extends Crisis 10 years

Every one is running around in a panic predicting that we are facing imminent doom if Congress doesn't pass out a bail out bill for Wall Street. Politicians are all about blaming greedy capitalists but greedy home sellers are as much to blame. But people, whether on Wall St or Main St were simply acting in direct response to the incentives that our benevolent politicians have provided for us. Easy money and the Community Reinvestment Act have combined to drive up housing prices to unsustainable levels. Having the government buy these "bad" loans at inflated prices will not solve the problem. Houses in most areas will still be over priced.

How do I know this? Just look at prices of homes in the greater Buffalo area. Housing prices in many areas of the country are still 400-500% greater. Now, I know people will pay a premium for a better location. But once the lending industry is reigned in, most people will not be able to afford a 500% premium. So, they will default or move.

So, I predict that we will (like Japan did) suffer from slow economic growth over the next decade or until we let the free market set housing prices unrestricted by government intervention.