Real Estate Market / Inflation / Recession / Depression (mortgage, debt, incomes)

[hello-world]

Originally Posted by Bob from down south

At this point, I would suggest that nothing is obvious or to be taken for granted. The range of possible scenarios is wide, and the probabilities of some of the most extreme downside scenarios are not nearly as remote as anyone would like. One thing glaringly obvious to me is that there are a hundred ways of losing your a$$ in the near term if you're not exceptionally careful. The other is that any major decision looming that assumes availability of credit should have a contingency plan associated with it...particularly something like a mortgage refi, or selection of an expensive college that's going to require a large student loan to pull off.

or maybe find a way of getting a perfect SAT score and graduating near the top of the class to get a scholarship! (how many cheap test prep courses and "top of the class" graduating positions are available, ANYhow?)

With my retirement just months away, my tolerance for risk is at rock-bottom. My money is in treasuries and FDIC-insured deposit accounts and instruments spread across the banking sector in a number of smaller institutions that I feel worthy of some measure of trust.

Bob

yeah, this sounds wise. a few weeks ago i was thinking buying into a few public "organizations in troubled sectors" (can the SEC get me for naming a sector on this thing?) might be a good strategy, for example - hey, they can't ALL tank, and who ever's "left" is bound to increase many fold in value again, right?? but now, i'm not so sure...

[Bob from down south]

Originally Posted by hello-world

or maybe find a way of getting a perfect SAT score and graduating near the top of the class to get a scholarship! (how many cheap test prep courses and "top of the class" graduating positions are available, ANYhow?)

I was thinking more along the line of going to a less exclusive but more affordable state university. The insane runup in tuition prices at private (and some public) universities has been driven by the same explosion of easy credit. Mom and Pop will always find a way to get junior to his dream college if it's just a matter of signing away their house with a HELOC, right?

The difference in cost between a decent state school and a private one can be 2-5x...no way junior is getting two to five times the education. I took my B.S. from a midwestern public university, and my first masters degree from a private university in the NE (with my employer paying most of the cost). Sure, I liked the private university education more, but the differential in quality of education was much less than the price delta would suggest. This is just another symptom of a country that knows no limitations in its dreams when there is no limitation to the credit bill you can run up chasing them.

Asian markets are open now. Australia is down 5%, New Zealand 2.5%, Japan another 4.5%, Hang Seng over 6% already a few hours into their Tuesday trading. Clearly this slide was not a one-day bump.

Not a lot being said in the US mainstream media. I'm certain they are afraid of spooking the herd...well at least before they can get out themselves...

Bob

[hello-world]

Originally Posted by Bob from down south

I was thinking more along the line of going to a less exclusive but more affordable state university. The insane runup in tuition prices at private (and some public) universities has been driven by the same explosion of easy credit. Mom and Pop will always find a way to get junior to his dream college if it's just a matter of signing away their house with a HELOC, right?

i know. i was kidding, of course. though, things like legacy and false measures of "capability" ("false" in that they can be bought, to an extent...with debt, even!) DO get some people into US News' version of "top flight" for the price of a state college. i personally know of people with NO college education that are better educated than many college educated people i know.

interesting on the world markets' second day of wild slides...

[Bob from down south]

An interesting day indeed. We dodged a bullet. Dow and S&P lose 1%, NASDAQ down 2% at close. Bernanke is a hero on Wall Street and Main Street, at least until the inflationary consequences of today's rate cut start to show up on the supermarket shelves. The dollar was dropping again by mid-morning in Chile.

But, that said, it's like we're in a cold room with a smoldering fire in the fireplace. Uncle Ben pours three quarters of a gallon of gas on the fire (and now he has only 3.5 gal left), and we get a lot of smoke, some sputtering, and instead of a blazing fire, the fire dims some more and the room just gets a little bit colder still. Given that the flue is plugged up with loan papers, how much more gas should we add to warm ourselves up?

I guess if we wake up three weeks from now with the Dow down another 1,000 points (and the dollar over 1.50 to the euro) it'll feel a lot less dangerous than if it had dropped 1,000 today and stayed there.

When will we learn that you don't help an alcoholic by giving him a triple-martini when he's got the DTs?

Bob

[jazzlover]

Put another way, the problem in the US economy is a major asset bubble in the real estate markets, and--to a large extent--in the equity markets. Think of it as a large balloon which has overinflated to the point that it has split a seam and started to deflate and plunge earthward. The Fed's action amounts to blowing some more air into the bottom of the balloon. It may marginally slow the balloon's deflation and earthward plunge, but it does nothing to fix the gaping hole in the seam. The best it can do is give some time for people standing underneath the damned thing to get out of the way--but the balloon is still going to crash. At worst, it rips the hole bigger and thing goes down in an inflationary blaze of glory. Think Hindenberg.

[hello-world]

Originally Posted by jazzlover

Put another way, the problem in the US economy is a major asset bubble in the real estate markets, and--to a large extent--in the equity markets. Think of it as a large balloon which has overinflated to the point that it has split a seam and started to deflate and plunge earthward. The Fed's action amounts to blowing some more air into the bottom of the balloon. It may marginally slow the balloon's deflation and earthward plunge, but it does nothing to fix the gaping hole in the seam. The best it can do is give some time for people standing underneath the damned thing to get out of the way--but the balloon is still going to crash. At worst, it rips the hole bigger and thing goes down in an inflationary blaze of glory. Think Hindenberg.

hindenberg. lol

yes, it does seem like the United States of Addiction. funny (scary?) how societies can be so much like individuals can be so much like societies...

[Bob from down south]

Here's the latest sunny forecast from Merrill Lynch. Seems that since their $15Bn write-down they've become a tad more circumspect...

"The recession in housing has spilled over to the rest of the economy, in our view. We now expect an outright contraction in economic activity in the first three quarters of 2008. This downturn should be led by consumer spending... As we saw in prior post-bubble de-leveraging episodes, the healing process takes time as the bad debts get extinguished and balance sheets repaired.... Home prices are expected to decline by 15% in 2008 and by a further 10% in 2009, with more depreciation likely beyond the forecast period. The inventory situation has become intractable and home prices are still far above historical norms when benchmarked against other measures such as rent or GDP. Housing starts will probably slide another 30% from current levels, to 700k by the end of 2008 – a historic low needed to clear inventories amid the worst housing financial crisis in decades... We anticipate job losses in the range of 2.5 million, close to what we saw in the last recession. This in turn is expected to push the unemployment rate up, to 5.75% by the end of 2008 and to 6% by early 2009. Rising unemployment, $6 trillion in lost housing wealth combined with slumping equity valuations, and the lack of participation from the baby boomers for the first time in three decades likely will result in the worst consumer recession since 1980..."

[Mike from back east]

Bob, that outlook mirrors that of Harry S. Dent, who goes a lot further in his outlook. Anyone who wishes to see Dent's full story, via a 25-minute video which I certainly recommend, should go to Dent's website:
- H.S. Dent Foundation and click on his video to see:
- VBrick Presentation

Dent claims we are in the tail end of a 'bubble boom' where we see a 40-year cycle of successive bubbles play out before entering a 10-12 year depression cycle.

Merrill Lynch's words "... lack of participation from baby boomers for the first time in three decades likely will result in the worst consumer recession since 1980..." surely mirrors Dent's own POV that boomer spending is peaking and will turn down in 2011, kicking off economic doldrums until about 2023 or so. His video runs 25 minutes and has a set of accompanying charts to illustrate the waves and booms. Dent sees the stock markets peaking late in 2008.

We discussed Dent's outlook at a recent chapter meeting of AAII. A local money manager explained the charts and feels no matter who is elected this fall, it will be a 1-term president; the electee getting tarred with bad news that begins late in 2008 or early 2009. I've seen 40 years of stock/realty markets and have a gut feeling that things will go downhill for some time before we see a return to robust times, and it may be that Dent is right.

[Shuffler]

Let the good times roll, eh?! You guys ever follow Kunstler? Pretty amusing insight, and I tend to agree with him most of the time...he's pretty much dead-on and had predicted that this implosion a long time ago. His book The Long Emergency is an interesting read as well.

[jazzlover]

Originally Posted by Shuffler

Let the good times roll, eh?! You guys ever follow Kunstler? Pretty amusing insight, and I tend to agree with him most of the time...he's pretty much dead-on and had predicted that this implosion a long time ago. His book The Long Emergency is an interesting read as well.

I've been reading Kunstler for several years. He can be a little overblown in his hyperbole at times, but I have not been able to refute much of either his research or his logic.

The problem that Kunstler has is the same one that I do when I talk about what I believe is ahead in Colorado, the rest of the US, and the world:

a) It's nearly impossible to predict the exact timing. I've felt, for example, that the Colorado real estate market was eventually going to go off of a cliff for over 10 years now. I was amazed that the run-up was like the Energizer Bunny--it just kept going and going. But that market is just like a battery--no matter how good it is, it eventually runs dead. I think the "low battery" light is on bright now--the Bunny is on life support. Of course, the people who have heard me predicting this for these many years say I'm like a broken clock--right twice a day. Of course, many of these folks are the ones who told me--and fervently wanted to believe themselves (and invested accordingly)--that the market could only go up. That belief only defies a couple hundred years of economic history in the US, and several thousand years of human behavior.

b) People don't want to believe that--economically--the self-indulgent, over-consumptive party is over for them, probably their children, and--very possibly--their grand- and great-grand children. People enjoying the drunken party on the deck of the luxurious USS Good Ship Lollipop don't like to hear that the ship has just scraped an iceberg and that there is a 200 foot-long gash way below the waterline. People are drowning down in steerage and more and more cold soaking wet refugees are appearing on the deck screaming for help. People up there on the deck don't want to hear that and tell the band to play louder so they won't have to hear the truth--that ugly truth that the ship is going down and they better be making an "alternative plan" to find a lifeboat. People so wish the disaster not to be true that they will do anything to deny it, or listen to anyone that will tell them that it isn't so. While the ship is sinking, they will blather over the latest fashions, about how nice their vacation home in Aspen or Telluride is, about what Paris Hilton and Lindsay Lohan are up to, about how they would like to relocate to hither and yon to "improve their lifestyle," and about all nature of soon-to-be-irrelevant things. Only when the cold water is lapping at their feet will they accept the truth--and by then, for them, it is probably way too late to change their cold, and deadly fate.