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.

Liberal Fascism and Free Markets

I've been reading Jonathon Goldberg's book Liberal Fascism during the current economic crisis. The book is an eye-opening look at the "religion of the state" as Goldberg defines fascism. Fascists, progressives, and liberals are all one and the same and dedicated to the idea that the government alone can solve all problems, prevent all harm, absolve all sin.

There is no doubt that the real estate bubble was created by the religion of affirmative action. Government intervention (with a push by Obama) in the markets black-mailed banks into loaning money to people that couldn't pay for it. The solution proposed to solve the "crisis" is more government intervention into the markets.

President Sarkozy of France has declared that laissez-faire capitalism is dead. But, truth be told, the fascists have been in control of the markets for most of the past 100 years and the free markets of Joseph Schumpeter have not been allowed to work.

There is wide spread panic that if the Congress doesn't pass this bail-out package we are headed for the second Great Depression. I believe that we need the creative destruction of the free market to wring out all of the stupidity that has been fostered during the past 15 years by bad government policies.

I was happy that the bail-out package failed but I fear that ultimately, politicians cannot do the right thing. Here's a good description and solution to the problem.

P.S. You don't think we have a religion of the State???? Here's a creepy worship song to the Dear Leader.

Root Causes of the Market Turmoil

Based on what I've been able to discern there are two causes to the current market crisis. The first began a decade ago when our meddling politicians decided that the lenders were being racists by not lending to poorly qualified minorities in slummy urban areas (CRA). So the government relaxed lending standards and created tremendous liquidity. This allowed people to refinance property and created two bubbles - first the stock market and second in real estate.

I was able to purchase property because of this liquidity with virtually nothing but my credit score. Some of the property I got was foreclosed when the homeowners couldn't pay after borrowing many times the value of their property. (One property I got for $5k had a $71k loan against it. In truth it was probably only worth $1k, but it was owned by a minority and no one wanted to discriminate by valuing the house at its real value)

The second part of the crisis is due to a FASB accounting practice called "mark-to-market". About 8 months ago I started getting letters from all my HELOC's stating that the value of my property had fallen and my credit line was no longer available. Although property values in our area have increased, suddenly the loans I owed money on were valued at over $100k more than I owed on them. So the big companies like AIG and Lehman had to revalue all of the loans to market value suddenly showing tremendous losses and cutting all market liquidity. It didn't matter if I (and most other homeowners) were still credit worthy and paying off the debt. These firms found themselves stuck.

So the politicians that created this mess are all decrying the "greed" of the Wall Street managers (and no doubt there is greed there). But the truth is that Washington created this mess by trying to interfere in the market.

Credit Crisis Hits Home

I've been using a lease-purchase method to keep my 4 houses filled during the past 2 years. The first people to purchase an option on the first house I had bought 2 years ago decided to buy another property. So I was able to re-lease the property and collect another option payment.

The second couple has been quite religious about paying their rent on time and counting their rent credits in the hopes of buying the house. Their option expires this month and they have been unable to obtain a loan. It looks like stricter borrowing rules from the banks are the culprit. They asked if they could have another year to figure out how to buy the house since they really like it. They seemed really despondent about the possibility that I was going to evict them.

So, I am debating how to structure another option. Do I give them credit for any money they paid or any of the rent credits they earned (my position) or start from scratch (my wife's position)?

At the very least, I won't have to worry about having a vacant property. Despite the current climate of fear being generated by the media and politicians, my properties remain rented out and my cash flow situation seems stable.

Rent to Own Troubles

After my tenants deserted my property in Cheektowaga, I spent about a week cleaning it up and put our a "Rent to Own" sign on the front lawn- no other advertising. I received about 50 calls in the past 2 weeks and 3 serious contenders for the house.

The first was an older couple without children who I thought would be ideal tenants. They called my excitedly last Friday indicated that they had received a large legal settlement and wanted to sign the paper work. I drove 40 minutes up to the house and met them. They proceeded to tell me that they could not get out of their lease (wife in tears). I suggested they negotiate a pay off with their landlord.

A second couple contacted me through a Realtor several times and kept making verbal offers but all lowball offers. Sunday another couple came to the house and gave me a check for $1750. I told them I would decide Monday night and called the other two couples.

Monday I contacted the other two parties. The buyers came up slightly and the first couple could not be reached, so I deposited the check from the third party and told them they could have the house.

Today the second couple called and offered my asking price - too bad that their Realtor didn't give them good advice (She had sold a lesser property for $196k last fall)

The first couple called and said that they had paid their way out of their lease. When I told them I had leased the house, the wife broke in tears again because now their land lord would not let them continue in their apartment.
So now I've added to the ranks of the homeless - must be Bush's fault!
Now I've created a

Whiny Blacks

While I was away on vacation I did not answer my voice mail to check for calls. About 30 people left messages, many several times. One woman called about 6 times. After I did not return two calls she started leaving more and more hostile calls accusing me of being a racist. Some were quite vulgar.

This type of behavior is so sad. It seems that many blacks believe that when something is lest than perfect, it must be about race. I'm not sure if these people have super low self esteem or just developed a sense of entitlement that they deserve special treatment. I find many of Obama's whines about race repulsive. I think he is using guilt as a political tool. Maybe this woman was as well.

The experiences that I've had dating a black woman in college and adopting a black child 15 years ago have led me to believe that most of the racism in this country today is in the minds of blacks - not in reality.

I don't think electing Obama is going to solve any racial problems in this country. In fact, I think it may just create more whiny blacks.

Bad Tenants vanish while I'm away

While I was away on vacation my MIA tenants reappeared at my Cheektowaga house after being away for two months. They took about half of their stuff and left me a mess. They didn't leave any of the $3500 that they owed me behind. They wouldn't leave the mail man a forwarding address and the utility company didn't want to switch the power back on unless I put up a security deposit, so I guess they screwed everyone and don't want to be found.

Fortunately, with the security deposit and option money I had collected, I am not out anything. I put up a "rent to own" signs and have had 50 calls already. Hopefully I can do another lease-option before the end of the month, otherwise I'll be borrowing against credit cards to pay the mortgage.

The Best Energy Plan

Well we've heard from the great guru Al Gore about his plan - a fool's idea if there ever is one. The great Al ignores the millions in invested infrastructure that would have to be mothballed, the trillions in investment for a new infrastructure. And, oh by the way, even if we did this it wouldn't be economically feasible.

Then there's is T. Boone Pickens who will harness all the wind power blowing up the center of the country and reap millions in profits. Talk about a self-serving interest.

So what is the best energy plan? How about letting the free market work? It's failed you say - look at what has happened to the price of gas!! No, it hasn't failed. The laws of supply and demand are working perfectly. Demand is way up due to the growing economies of China and India (I've witnessed China's first hand and know this to be a fact). The problem is on the supply side. The monopolists have been restricting supply for decades that has resulting in the rapid rise of prices. Oh those evil oil companies (you think), raping us to get obscene profits!

No, the monopolists in this case are the environmentalists - restricting building of nuclear plants, restricting drilling for oil offshore and in ANWR, restricting development of oil shale and now stopping the building of clean coal plants. (a third of my electricity bill goes towards paying for a nuclear plant that was built but never used due to environmental law suits)

The best energy plan is to start protecting our energy supply from lawsuits from these environmental monopolists. Once this happens:

• oil companies can use new technology to recover an almost unlimited supply of oil from existing supplies as well as oil shale
• nuclear plants can be built
• gas will be cheap, electricity will be cheap and both will be abundant
• we will stop the myth of carbon dioxide causing global warming

Net Worth Update for 2nd Quarter '08

I've updated my net worth at NetworthIQ. My net worth dropped by $5k. Despite adding $3k to my 401k that account dropped by $6k. My debts dropped slightly, off-setting some of the loss in retirement savings.

One interesting thing has occurred which (I hope) underestimates the value of one of my properties. In 1998 I made an offer to purchase a home on 5 acres for $180k. Someone else outbid me and now has that property on the market for $369k. I purchased a slightly nicer property nearby for $195k which I have valued at only $235k. I still own that property (with my ex) and think that it is pretty comparable. If so, I may have more equity than I currently think in real estate.

Data from the local Realtors indicates that property values have continued to rise at their slow 3-6% rate as they have for the past 8 years. However, the banks have all sent me notices that the values of my properties has dropped dramatically (20%!!). I guess that they don't want to loan out any more money. At any rate, I've not changed the values of any of my properties.

Tenants are such liars

Some properties just seem to have a dark cloud over them. We purchased and renovated a nice home in Cheektowaga last year. We were unable to flip it and so after dropping $16k in holding costs we rented it out. Meanwhile the loan interest rate ran up from 7.9% to 11.1% and makes the property a money loser every month.

We thought we found some great tenants for the property, but 3 months ago they started paying late. Last month I payed a visit to them on the 10th and the husband said that his wife had the check and they would drop it off as soon as she got home from work. Well, I didn't get the check until the 20th.

Now in June it's the 24th and still no check. I went over to the property last night since both their phone numbers are all out of service. The lawn hasn't been mowed for a month and the inside looks like a disaster. There was a notice on the door from a Rent to Own company. I called the number and the store manager told me that they wanted to pick up some appliances since the tenants told them they were moving to Illinois!

I talked to the lady next door and she told me she had seen the tenants within the past 2 days. I tracked down another phone number for the husband through his employer. As soon as he answered and I told him who I was he hung up. Minutes later his wife called to tell me she was in a hospital in Illinois due to a heart attack (she's in her thirties) and couldn't talk because she had a tube in her mouth! This is too rich. Her husband makes his sick wife who has tubes down her throat call me rather than telling me she is sick??? (and she wanted to know how the #?!% I had gotten her brothers phone number?)

Of course, the wife told me they will pay the rent - the check is in the mail

Bernanke signals end of peak oil pricies

Yesterday Ben Bernanke signaled that the US was going to start supporting a strong dollar policy. This will no doubt start to stop the run up in commodity prices, especially that of oil. A look at gas prices in the chart above shows how irrational the market is at the moment. A smart, high risk trader would certainly short oil futures. If I had the cash I would also buy US dollar futures.

The gloom and doom crowd is predicting $6 a gallon gas prices. It's more likely that by year end we will be at half that price.

Update: from Senate hearings:

“Speculators now account for about 70% of all benchmark crude trading on the New York Mercantile Exchange, up from 37% in 2000, said Rep. Bart Stupak, D-Mich., chairman of the investigations subcommittee.”

Since then, oil has risen by more than 300 percent. Any questions?

Banks Panic - One size property drop for the country

During the past 3 weeks I've received 3 letters from 3 different banks about HELOC's on 3 different properties in 3 different towns. Each letter essentially cut off all of the credit in the HELOC. Each bank claimed that the property values had dropped drastically in the past year in "my area" and so, by the terms of the HELOC agreement, they were, without providing any comps or data, going to revalue my houses 20-30% lower.

Now certainly in some areas of the country when housing prices were increasing 20-30% a year and with prices are crashing back to reality this makes sense. But in Western New York housing prices never increased more than 2-3% a year during the great real estate boom. And data from the local Realtors showed that last year was the first time prices increased a lot - a whopping 5%!! I've been watching real estate sales this year and they are pretty brisk and there is no sign of price drops - quite the contrary.

But in order to prove this, I have to hire an appraiser and shell out $400. This I'm not going to do. So the banks are doing their best to hurt the local economy by over-reacting to their poor choices in other areas of the country earlier in this decade.

The average time to foreclosure is 445 days in NY. I sometimes think about punishing these banks by just collecting the rent for a couple years without paying the mortgage. Unfortunately, the fools that run these institutions never pay the price for their stupidity.

the latest bubble bursting and what's next?

Oil ran up to $135 a barrel increasing in price nearly daily. This despite drastic drops in US driving over the past year. Oil may be ready to crash as prices have dropped by $10 a barrel in the past week. Whether this week or next year, prices will crash eventually.

This is the third time in the last 15 years that we have seen this scenario. It seems to me that there is a tremendous supply of dollars chasing the next big thing. In the 90's the stock market marched to new highs due to "irrational exuberance", companies like Enron and WorldComm created new accounting to rack up "profits". When the curtain was pulled back and everyone realized the people pulling the strings didn't have the fundamentals, the bottom fell out.

In the early part of this decade the same scenario played out in real estate. The Wall Street gurus found new hedge founds to sell sub-prime loans and run up housing prices to irrational levels. The greater fool theory kept people buying until some started defaulting. Suddenly the curtain was pulled back again and look at the mess the real estate market is in.

I have no doubt that something similar is afoot in the commodities market. Oil prices are in the irrational range based on my years of working in oil research. Will we find new "funny" structures that traders have created? Possibly. Then Congress will hold some hearings and the money men will move on to some other way to find a way to invest all these excess dollars.

What that will be, I have no idea, but I'd bet money that it will happen. The world is awash with dollars.

Update: An interesting article I found several days later predicting $50-$70 per barrel oil in our near future. Also comparisons with housing bubble.

Rent Vs Buy

Many have debated the rent Vs buy dilema with regards to a home. Now the NY Times has offered a calculator that you can tailor to your local conditions.

Here's the numbers for my current house. Since I plan to stay here for at least 10 years, its looks like a no-brainer.

A Global Warming Report with Perspective

Fred Singer is a well regarded professor and expert on climate. This paper when read without the religious bias of the earth worshippers can provide perspective on how phony the climate change claims of Pope Gore are.

A key point:

Fortunately, there is a method that can be used to check on whether the observed warming is anthropogenic. It relies on comparing the observed pattern of warming with the one calculated from GH models. Essentially we try to see if the “fingerprints” match. The fingerprint is the pattern of warming, that is, the rate of warming at different latitudes and altitudes. Greenhouse warming should give increasing rates as one goes from the surface up into the atmosphere -- peaking at about 10 kilometers, where the rate of increase is about a factor of two greater than the surface rate, and quite pronounced in all the models.

The observed pattern, however, does not show any increase at all; in fact, the data from balloon-borne radiosondes show a slight decrease over the equator. Evidently, the observed and calculated fingerprints don’t match, indicating that the human contribution to current warming is insignificant, too small to be discerned. The cause of warming must therefore be natural, either an internal oscillation of the atmosphere-ocean system, or an external effect, perhaps stemming from the Sun.

The recent revelation that sea buoys have not detected any warming but cooling also boast the magnitude of the hoax the environmentalists are forcing on us to drive up gas prices and destroy our standard of living.

Of course, why let data get in the way of your religious beliefs.

The Environmental Conspiracy to raise gas prices

I'm a big skeptic when it comes to believing in conspiracy theories. I think that 99.9% of these theories are believed by mentally imbalanced people. However, there is one "conspiracy" that I'm a firm believer in that no one is talking about. That is the conspiracy of environmentalists and politicians to foil the free market for energy in order to reduce our standard of living.

It was instructive to listen to oil company executives try to elucidate causes of high energy prices at Congressional hearings yesterday. Now, I believe, that politicians smart enough to graduate from Law School should have a fundamental understanding of the Economic Law of Supply and Demand. So why are these politicians spewing their ignorance?

Lets review some facts:

• we have lots of oil in this country - more than 75% off-limits due to Environmentalists
• we have even more shale-oil deposits off limits due to ???
• We have enough coal to last for centuries. In the 1970's I worked for a coal company developing technology to convert coal to oil. Why aren't we working on that?

But wait you say - what about global warming?? We can't burn all those carbon based fuels, can we? Besides the lack of evidence to support AGW (man made global warming), let's assume that it's true. Well obviously we should be going full speed ahead to the only green-house friendly energy source that is economically viable. Windmills?? No. Solar energy?? No.

Nuclear power!! But wait- we can't build new nuclear plants. Why? Well the environmentalists feel that the truckload of waste fuel that that has been accumulated over that last few decades will threaten their god planet.

So politicians paid off by environmental interests have reduced supply of energy in all manner (except for really expensive sources like solar and wind). So it's no surprise that prices are high.

It's time to stop blaming oil companies when you go to the gas pump and put the blame squarely where it belongs - the wacko greens.

The Non-Recession Recession

I wrote a few weeks ago that despite the news media proclamation and the consensus of economists that we were in a recession (or a depression) was wrong because we did not have any data to support that notion. Now that first quarter GDP shows a positive growth of 0.6% (note:revised up to 0.9%!!!). Unemployment is a historically low 5% and manufacturing data shows an upturn in orders. It turns out consensus science was once again wrong.

And we won't go into a recession!!

How do I know that? I work for a big international company and like all international companies we have been expanding into growing markets like gang-busters for the past 10 years. And there is no slow down over seas. With the weak dollar, exports are booming as American goods are cheaper in non-US markets.

This is brings jobs and dollars back into the US, counteracting a lot of the outsourcing that has been going on.

The economy has been growing since 2001 and we have not reached a peak. Maybe when the Democrats fail to extend the current tax cuts we will see that come to pass.