[4plexowner]

Monetary debasement (also referred to as inflation), makes all financial analysis very difficult.

When we assume a constant-value US dollar we are kidding ourselves but trying to account for a steadily declining dollar is very complicated.

And besides that, we don’t even know the rate at which the dollar is being debased because the US Federal Reserve stopped publishing the M-3 money aggregates in March of this year.

Inflation adjusted wages have been declining steadily for several years now. I don’t see anything on the horizon to change this trend.

I would modify your statement “If inflation is raging, interest rates would also be sky high.” to “If inflation is raging, interest rates SHOULD also be sky high.”

Paul Volker (Fed Chairman from 1979-87) raised interest rates into the 20% range to control the inflation raging at the time.

Raising interest rates enough to contain inflation today would cause the housing bubble to collapse worldwide.

So, take your pick, do you continue printing the US dollar and let inflation rage (while driving the value of the dollar to zero) or do you reign in the monetary debasement and raise interest rates to where they should be (in an attempt to save the dollar) and then watch the world’s economy collapse? Not a great choice is it? Coming soon to a theatre near you …

[4plexowner]

Let’s see, a 10×12 storage unit is about $185-225/month.

There is a studio condo currently on the market in the east village for 350K. If we deflate it by the 60% correction I am expecting for trash properties, we get a price of $140K.

At $2700/year for a storage unit it would take us about 52 years to break even on the condo-as-storage idea (and that ignores HOA fees, taxes, insurance, etc).

Maybe you and I can split a condo-storage-unit so we each break even in 26 years. This idea has potential …

[4plexowner]

History of Bubbles

Another way to consider how far prices will retrace is to look at other financial bubbles in history and what has happened to them. {If you choose to deny history and that San Diego real estate is currently in a bubble, you can stop reading now.}

ALL financial bubbles have been fully retraced. Not some bubbles, not most bubbles – ALL bubbles. Pick your bubble and it was fully retraced: Tulip Mania in Holland; Mississippi Company in France; South Sea Company in England; Florida real estate in the 1920’s; US stocks in 1929; etc, etc, etc.

That tells me that the San Diego real estate bubble will be fully retraced as well.

So the next question becomes “when did the bubble start in San Diego?”

Since real estate historically rises at the same rate as inflation, I would maintain that the bubble started when housing prices began to increase faster than inflation. I believe this was in the 1997 – 1998 timeframe. (Perhaps Rich can chime in with a more exact date.)

If I go to http://www.zillow.com and pick a typical house in Clairemont (92111), the 10 year chart of prices shows me that it was 2000 or 2001 before prices rose above 200K.

Based on my bubble-retracement analysis, I might expect that the 3/1 in Clairemont would retrace to its 1997/98 price of 170-180K.

I’m not expecting that big a drop. I will stick with my 225k target.

[4plexowner]

I’ve given a lot of thought to the topic “how low will prices go”.

I think we have to be more specific about housing type and area of town before we can start picking numbers for a decline.

One of the most important questions, IMO, is “what will an entry level house cost at the bottom?”

Will the 1100 SQFT 3/1 house in Clairemont be selling for $350K (27% decline from 490K) or will it be more like $225K (54% decline) or 161K (67%)?

Once we decide what the entry level house might cost we can then talk about the upper end of the market.

Personally, I’m expecting a 40-60% decline with the Clairemont 3/1 going for about $225K.

If I can buy entry level for 225K I’m not likely to pay 600K for today’s 800K house.

[4plexowner]

The glut of condos in downtown is one of the reasons I got out of the landlording business.

When real estate doesn’t sell it becomes rentals.

There will be many thousands of condos downtown that will be rentals in coming years.

These rentals will depress the local rental market (although maybe not the market for single-family houses on their own lots).

Great for renters – bad for landlords.

To all you landlords who bought rental property in the last two years: Get out while the gettin’s good (OK, so you missed the chance to get out while the gettin’s good but you still have a change to get out – suck it up and take the loss now – it’s only going to get worse).

[4plexowner]

Where to invest?

Before we can answer that question, I believe we have to have a ‘big picture’ view of the economy and what the significant trends are.

Remember the adage, “the trend is your friend”. Before we can befriend that trend, we have to figure out what it is.

Unfortunately, nobody has a crystal ball to identify economic trends so each of us has to decide for ourselves what the trends are and how far along we are in the progression of the trend. There are numerous investing books and newsletters that can provide us with quidance and advice along these lines but there are no guarantees in the investing world.

Right now, for example, some people believe that the US equity markets are in bull mode and headed to new highs. I personally believe the equity markets are putting in a top that will not be surpassed in my lifetime (and I’m only 42) before they crash (3000 or lower on the Dow).

Obviously, I’m not going to invest in common stocks right now based on my beliefs but other people are loaded to the gills with common stocks and even have them purchased on margin.

My point is that we can talk forever about generalities related to investing but actually putting your money at risk in any given market is a TOTALLY personal decision. You have to decide what YOU think the markets will do and take a position based on that belief.

I have formed my view of the economic world and I have invested accordingly.

My economic view tells me to sell investment real estate and put the money in silver and gold and the companies that mine those metals. So far, that view has served me well.

I have shared aspects of my economic view in these forums. Here are some highlights:

> we are in a commodities bull market that will run until at least 2013 and probably longer

> silver will be $80/oz and gold will be $1650/oz before the bull market is over – perhaps much higher for both

> the US dollar is in the process of losing its status as the world’s reserve currency

> the US dollar has been debased at a tremendous rate since 9/11 and this debasement has accelerated since the US Fed stopped publishing the M-3 money aggregates in March of this year

> we have seen the end of cheap energy whether we are at peak oil or not

> war with Iran serves many purposes for the Bush administration and is most likely inevitable – this war will cause the energy and precious metals markets to soar

> the baby boomers have been promised retirement bennies (social security, medicare, prescription drug benefit, etc) to the tune of about 30-50 TRILLION dollars and NONE of this money currently exists – there is no “Social Security Trust Fund” that the boomers are going to start drawing on when they retire – this money will come straight off the printing presses

In summary: I can’t tell you where to invest – all I can do is share with you how I am investing and why. All my investment money is in the commodities bull market with a heavy emphasis on silver. I will add to this position as funds become available and I will be holding this position until at least 2013 unless events dictate otherwise. Hope that helps.

I will post later in the week about the newsletters and web sites that I find most valuable inre the commodities bull market.

[4plexowner]

I’m going to take ‘whacko’ as a complement since most visionaries are considered crazy until history proves them correct.

[4plexowner]

The fiat US dollar is backed by debt. New dollars are created when somebody borrows money against some asset. No new money is created unless some new debt was also created (this is true even when the US Fed prints money to buy treasury bonds for its own account – they wouldn’t do THAT would they?! LOL).

Given this constraint on the creation of new US dollars, the US government and the US Federal Reserve (which is a private corporation that we the people pay interest to for the money they create out of thin air) need some asset class to rise in value so people and businesses can borrow new money against the rising assets.

Real estate has provided this rising asset class since 9/11 – several trillion dollars worth of new debt/money has been created based on increased real estate values.

Prior to 9/11, the rising equity markets served as the recipient of new debt/money.

Because it takes money to service all the debt (interest expense) that is created, each new dollar provides less ‘bang for the buck’ in stimulating the economy. It now takes 4 new dollars of debt/money to create 1 dollar’s worth of GDP (this ratio was below 2 prior to 2001).

As of 2005, we the people are paying over $352 billion in annual interest on the national debt. That is almost $1 billion / day JUST IN INTEREST. And remember that we the people are borrowing about $2 billion / day just to keep our economy running.

So, let’s see, we are borrowing $2B per day in new debt and using almost half that money to pay the interest on the existing debt.

How long could you run your household using this type of financing?

America is headed into the Next Great Depression and most Americans don’t (and won’t) understand why.

The ‘rising prices’ that you are currently suffering from are caused by the debasement of our money supply. Prices aren’t rising – what’s happening is that your debased dollars are buying less and less. Inflation is a lie which has been sold to the public for decades – we’ve been told that a little inflation is necessary and even good. There is no inflation (short of serious supply/demand imbalances), only monetary debasement.

The coming depression will restore honesty to our fraudulent monetary system but it will be a VERY painful process.

Silver and gold are the only real money and they will serve you well as the US dollar heads towards its true value – ZERO!!!

[4plexowner]

If Rich isn’t paying powayseller (or using powayseller as an alias), he should be.

From my perspective over the last few months, powayseller has been the main contributor to this blog (which makes me think she has too much time on her hands or is being paid).

For the most part I enjoy powayseller’s posts.

I find some of them amusing too.

Like suggesting that the NAR start a campaign to educate sellers that they should get realistic and lower their prices.

Are you serious about that? On what planet do you think that might happen?

[4plexowner]

Psychology of Denial

If you really care about influencing the opinions of others, I would recommend that you read a little bit about the ‘psychology of denial’.

The psychology of denial says that once a human being has made up their mind about something you have almost zero chance of changing their mind.

Related to the psychology of denial is a feature of the human brain called the reticular activating system (RAS).

The RAS causes us to focus on what we are interested in and filter out all of the other extraneous input. For example, you go buy a new car and as you are driving home you ‘happen’ to see numerous cars just like yours – your RAS is alerting you to something you are interested in – and your RAS had been filtering all those cars out until you bought one.

The RAS also helps up maintain opinions that we hold. If I decide that the world is flat (and can convince my brain of that), my reticular activating system will cause me to focus on all the ‘facts’ that support my (incorrect) view of the world. My RAS will also filter out (deny) any facts which would upset my view of the world being flat.

So, how does this apply to real estate?

Currently we have a nation of people that mostly believe: “real estate only goes up”; “you can’t go wrong with real estate”; “it is better to own than rent”; etc.

Some local beliefs: “we are running out of land in San Diego”; “more people are moving to San Diego everyday”; “if I don’t buy now I will be priced out of the market”; etc.

The RAS’s of the people holding these beliefs cause them to focus on the positive news about real estate (which is provided in spades by the real estate industry, US government, media, etc) and filter out (deny) any of the reality about the current trends in real estate (which we discuss in this forum).

When you try to point out real estate realities to these people their RAS has to do something to allow them to deny your input. Categorizing you as a ‘gloom and doomer’ or ‘pessimist’ or even ‘arrogant asshole’ helps them maintain their (delusional) reality.

I have been on the ‘gloom and doom’ bandwagon for about 4 years now and I have made numerous attempts to educate family and friends about the future we are facing here in America.

None of the people that I tried to educate about silver and gold purchased any (too bad – could have bought gold for about $375 and silver for less than $5).

None of the people that I have tried to educate about real estate have been influenced by my input either.

Between 2002 and 2005 I sold five fourplexes and explained to many people why (the market is about to tank) (yes, I sold “too early”). Regardless of my words and actions, my sister bought a 400K house in 2003 and one of my co-workers bought a 900K house in late 2005.

Anyway, my point is that you shouldn’t get worked up about people denying what you perceive to be reality. They will eventually realize that you were right and then they will like you even less!!!

[4plexowner]

Who’s buying gold?

Some facts:
> smart money has been moving into silver and gold – Bill Gates owns over 10% of Pan American Silver (likely to be the largest primary silver miner in the world) – Warren Buffett bought 120 million ounces of silver in 1997
> Russia has announced that it is increasing its reserve holdings of gold
> articles have been published in China suggesting that the 600 ton gold reserve be increased to 2500 tons in the short term and 3000 tons in the long term (Chinese media is still state controlled)
> significant amounts of gold are purchased by Indians for dowrys and wealth preservation (they haven’t been fooled by the fiat currency BS) – and the Indians have been becoming increasingly wealthy in recent years as they have replaced the US work force – Indians also buy and hold silver for wealth preservation
> Chinese citizens are buying gold for wealth preservation – the state-run department stores are selling more and more small golden ornaments and statuettes as the Chinese people become more wealthy (bullion markets in China are still limitted)

Some speculation:
> huge profits in oil are moving into silver and gold – oil countries have HUGE profits over the last two years (and that’s ‘HUGE’ with all capital letters!)
> Iran knows it is about to be bombed so it is re-arranging its finances for war conditions
> people with connections (power circles in politics and business that currently run the western world) know the US dollar is at the end of its lifespan and are moving into silver and gold before the collapse (which is likely to be quick when it happens) – why have six reserve bank presidents resigned in the past two years? these are prestige jobs that bankers strive for their whole careers and all of the sudden six of them retire? makes me go ‘hmm, interesting’
> people with connections have been told that the US is about to bomb Iran so they are re-arranging their finances for war conditions
> people like me are putting 2 and 2 together and realizing that it adds up to 4 – and 4 means protect any assets you have and the best protection is silver and gold (as it has been for at least the past 5000 years)

[4plexowner]

China and Gold

Let’s start with some assumptions:
1. the world’s leading power usually has the reserve currency (Brittain and the pound – America and the dollar)
2. America currently has the world’s reserve currency because of the depth and breadth of her financial markets (it certainly isn’t because of the inherent strength of the fiat US dollar)
3. the Euro is just another fiat currency with the same problems that the US dollar has (unfunded welfare state that will be funded via monetary debasement)
4. China would like to be the next leading power in the world

Now let’s explore how China could provide the world with a reserve currency.

China doesn’t have the depth and breadth in its financial markets to provide a reserve fiat currency for the world. The world doesn’t trust China’s markets enough yet and there are still questions about the health of China’s banking system and about obsolete and useless state-owned industries being kept alive by the government(as the USSR did before its collapse).

So what could China do to quickly provide the next reserve currency for the world?

Back the yuan with gold both internally and internationally.

I believe that backing the Chinese yuan with gold would catapult the yuan to reserve status almost overnight. It would be the only non-fiat currency in the world and lots of smart money would start moving into the yuan and yuan-backed assets.

China will need LOTS of gold to back her currency. I have read analysts who maintain that China couldn’t obtain enough gold off the open market without causing gold to go to thousands of dollars an ounce. I understand that argument but I’m not willing to write off the Chinese that glibly – they are long-term thinkers and inscrutable business people. Underestimating them is probably a less-than-intelligent thing to do. (I also see occasional references to LARGE amounts of gold that got ‘lost’ during WWII – could this gold show up in China or some other country as backing for their currency?)

Are there any signs that China is moving towards a gold backed currency?

Not directly although the Chinese government is encouraging its people to buy silver and gold.

The government has been opening up the gold markets for the last few years making it easier for people to buy. Some of the Chinese banks are now able to sell gold to their clients and there are a few markets for trading gold.

Widespread ownership of gold by its citizens will provide another layer of depth and trust to a Chinese currency that is backed by gold. Remember that Americans had silver and gold money in their pockets when the US dollar was backed by those metals.

Summary: at this point it is just speculation that China will back her currency with silver and gold but it makes strategic sense to me that she will at some point – If China was angry at the US (because we bombed Iran where China has completed several MAJOR petroleum contracts perhaps?) she could take a multi-pronged economic attack on America:
1. start dumping the $800B in US treasury bonds that they hold as part of their currency reserves
2. stop buying additional US treasury bonds (the US needs $2B per day to fund its bloated society and a big chunk of this money has been coming from China)
3. announce to the world that the Chinese yuan will be backed by silver and gold on an international level

This type of action, I believe, would put the final nails in the coffin of the US fiat dollar and would probably hasten the collapse of the US empire.

China doesn’t want to lose the American consumer as a customer until internal demand from her own citizens (or from an Asian trade bloc) can replace us Americans. When that occurs Americans should be very afraid …

[4plexowner]

Why is gold rising? Consider these factors:

> the age of cheap energy is over – whether we are at ‘peak oil’ or not, the day of $40/barrel oil is clearly over – prices for everything we use will be rising across the board as this reality sinks in
> the new prescription drug benefit for Medicare is unfunded to the tune of at least $700B over the next ten years
> minimum payments on credit cards doubled in early 2006 (part of bankruptcy changes in 2005) – average American has $8000 in credit card debt – the effect of this change may be appearing in rising bankruptcy rates
> as much as $2T (yes, that’s ‘trillion’, with a ‘T’) in ARMs will reset in 2006/7 – average reset will be +2%
> harder to declare bankruptcy after changes in 2005
> in 2008 the leading edge of the baby boomers will be eligible for early social security retirement
> in April 2005, in a speech given at Univ of Western Virginia, president Bush acknowledged that the social security trust fund is full of empty promises (unfunded IOUs from the government) while trying to sell his “privatize social security” idea
> empty social security trust fund means $$$ for boomer retirement comes off printing presses or boomers get stiffed on their expected bennies
> ongoing exportation of US jobs and declining real wages (personal belief: we are headed towards a global wage level of $10/hour or less – this means significant downside in Ameriacan living standards from here)
> competitive currency devaluations – fiat currencies are currently being expanded at about a 10% rate anually – there are no non-fiat currencies on planet Earth right now
> US government chooses to hide economic data from its citizens – as of Mar 2006 the M-3 money aggregates will no longer be published – no other country’s central bank chooses to hide this information
> US government chooses to hide real inflation data from its citizens – data is massaged for ‘hedonics’ (this year’s car costs less than last year’s because it has more horsepower and a finer grade of leather interior – even though the price tag is higher than last year’s model) and the ‘substitution effect’ (which says that grandma will choose to eat dog food instead of steak as the price of steak rises but her cost of living won’t change (ergo, no inflation))
> In 2010 the leading edge of the baby boomers will be eligible for full social security retirement as well as medicare and the prescription drug benefit (all of these programs are unfunded but we have a technology called a printing press …)
> The ‘economic recovery’ since 2001 is the weakest on record – nearly 4 dollars of new debt has been required to create 1 dollar of GDP (ie, the cost of supporting the existing debt is becoming more and more burdensome)
> Average 401K account has $50K – about 33% of all 401K accounts have less than $35K (ie, boomers don’t have 401K money to retire on – this could indicate that they are relying on their (paper) real estate equity for retirement)

Got gold?

[4plexowner]

Commodities Bull Market

See my post by the same title under the “Housing Burst Will Cause National Recession” forum – I shared a letter that I wrote to my parents about the current bull market in commodities (including silver and gold).

Silver will be $80/ounce before the current bull market is over and gold will be $1650/ounce. Many people think these numbers are too conservative.

Throughout 5000 years of recorded history, human beings have favored silver and gold as money.

I believe we are seeing once again that people are choosing real money (silver and gold) over the paper trash that is being forced on us by governments. This movement is just getting started (and I mean just!).

Yes, there will be corrections along the way but keep the final numbers in mind: silver $80 / gold $1650 – allocate your long-term and shorter-term investment money appropriately.

[4plexowner]

Commodities Bull Market

This is in response to powayseller’s question “how are you positioning your investments at this time?”

I wrote this e-mail to my parents this past weekend:

You shared the April 9 Union-Trib business section with me. Probably because the front page has this headline above the fold: “Some would-be gold bugs need to be aware of past volatility.”

We are going to see lots of articles like this in coming years.

Here are some facts for you to consider so you have an idea of what I expect from the current bull market in precious metals and other commodities.

All markets ebb and flow. One aspect of the ebbing and flowing is that commodities and equities take turns being the preferred investment vehicle (ie, when equities are hot, commodities are dogs, and vice-versa).

There have been 5 bull markets in commodities during the last 200 years. The shortest one was 14 years and the longest one was 40 years. The average was 18 years.

The current commodities bull market started in 1999 (when gold finally bottomed in its 20 year bear market) or in 2000 (when the equity markets tanked).

1999 plus 14 years takes us to 2013 so 2013 is the earliest that I believe the bull market in commodities will end.

Given that 3 billion new people (China and India) are trying to reach the living standards of the Western world, the current commodities bull is likely to run for much longer than anyone currently expects (and will likely take prices much higher than anyone expects). Think about all the metals and energy required to make TVs, refridgerators, cell phones, computers, cars, air conditioners, cities, etc and you can understand why demand for commodities is high.

My last point is supported by the behavior of the base metals over the last five years. Aluminum +105% Zinc +230% Lead +263% Copper +287% Nickel +302%

Notice that articles urging caution about the precious metals don’t point out that we are in a commodities bull market and that ALL commodities are surging in price.

So, this is my main point #1: we are in a commodities bull market that is supported by the addition of 3 billion people striving to achieve a western lifestyle – based on past commodities bull markets, the current one is likely to continue until 2013 AT LEAST and probably much longer.

Another significant factor in the current bull market is that commodity production has been in decline for the last 20 years. Low commodity prices caused numerous exploration companies and mining companies to go out of business and/or stop exploring for new resources.

It takes years to bring a new mine into production (5 to 7 years is typical) so it will take several more years before commodity production can ramp up to meet surging demand.

Some commodities (copper) will stop surging in price once supply is ramped up to meet demand – other commodities (uranium, zinc, silver, etc) will probably never be available in amounts large enough to stop them from continually increasing in price.

So, main point #2 is the other side of point #1 – ie, not only do we have surging demand for commodities we also have a lack of supply caused by the previous 20 year bear market in commodities. This lack of supply will take several more years to address.

The last point I’m going to make today has to do with money.

My understanding of monetary history says that fiat currencies have a lifespan of 50-70 years before the people reject them and (usually) move into silver and gold-backed currencies. Bankers and politicians reluctantly follow the people into silver and gold-backed currencies until they can pull the wool back over the people’s eyes and introduce another fiat currency.

The US dollar has been a fiat currency within the US since 1933 (illegal for US citizens to own gold) and outside of the US since 1971 (Nixon closed the gold window) – ie, based on history the US dollar is reaching the end of its lifespan.

This movement from fiat currency to real money (silver and gold) occurs because people lose trust in the governments that are (over)producing the fiat currency.

I won’t bore you with the laundry list of financial issues that the world is facing – let’s just say that part of the current rise in silver and gold prices is due to the poor economic state of ALL the western countries. As people become more aware of these economic issues they move into real money to protect their assets.

This would indicate that one way to stop the rise in silver and gold prices is to fix the economic issues that are causing people to move into real money. In the 1970’s, Paul Volker (Fed Reserve chairman) raised interest rates to 18% before economic issues were ‘fixed’ and the bull market in silver and gold was crushed.

So, from a monetary perspective, I expect the current bull market in silver and gold to continue until the economic issues of the world are fixed or at least addressed in a serious manner.

In the US ‘fixing the economy’ means all three deficits (trade, current account, budget) have to be resolved. In all of the western world, ‘fixing the economy’ means that all the unfunded promises that have been made to people (welfare state) have to be funded or revoked.

I believe it is likely that some country (probably China) will choose to back their currency with silver and gold before all the western countries resolve their economic issues. The next reserve currency for the world will most likely be the first one that is backed by silver and gold.

Point #3 – it isn’t reasonable to expect the bull market in silver and gold to end until the economic issues of the world are resolved and, probably, until some country backs their currency with silver and gold.

Bottom line for me: I’m not going to be swayed from my commodities bull market position until I see economic issues being seriously addressed in western countries or until some country backs their currency with silver and gold. I expect that the soonest this will happen is 2013.

I didn’t discuss it in this e-mail but real estate and equities should be making significant bottoms in the 2010-2012 timeframe and I will probably be moving investment money out of commodities and into real estate and equities when those bottoms occur.

end of e-mail

Hope this helps, powayseller.

[Author]

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