[Jim Brubaker]

Thanks PrivateBanker for the SIPC correction. I’m just getting old.

What I was trying to convey with mutual fund managers, is that they have never experienced a bear market. The market has only gone up since 1972. The idea of holding cash to wait for a good buying opportunity doesn’t exist with them. They must invest the money as fast as they receive it. There is no performance factor for holding cash.

If the market ever decides to tank, everyone of these money managers has made the same bet, the market is going up.

Normally if the market did tank, investors could wait to sell hoping that the market would make a come back.
The case is different with Mutual Funds. If their holders say sell and give me cash, they have to sell into a downward spiraling market. These manager’s might be very intelligent and skillful, but their hands will be tied if and when this happens.

[Jim Brubaker]

The thing that irritates me about this deferred interest on Option ARMS, is that the lending institution can count that as cash received on the books. When you show 60 million in profit from option ARMS, your counting your chickens before they are hatched. It looks real good to the stockholders, the only trouble being that is isn’t really REAL!

What’s the count now, three financial lenders in Las Vegas have gone belly up now?

[Jim Brubaker]

The idea is sound, but it sucks. This allows the loan writer, and the Real Estate agent to max out a new buyer and have him upside down in 5 years when he’s ready to sell.

Its like being sold a pair of shoes that are too tight–they will stretch.

As a refi tool where the house owner makes a free willed decision (without a realtor trying to hook a commision and a kickback from the lender)it could work out pretty good.

[Jim Brubaker]

I saw it and can’t believe it. It kind of gives you a feeling that the ground we are walking on is not too firm. Something funny here–not sure what

[Jim Brubaker]

People do not understand what gold really is. Imagine if your body temperature went from 98.6 to 106 degrees. More is better right??? Gold is a measure of what your currency is perceive to be worth, it is a thermometer.

In the late 60’s, if you had 10% of your savings in gold, at $32/oz you would have doubled your savings when it jumped to $320/oz. Gold moved one decimal point to the right. It wasn’t because gold was perceived a a commodity, the government had been printing too much currency to fund the Viet Nam war and LBJ’s social programs.

Now step ahead, oil has doubled in price. Ask yourself one question: Has oil doubled in price or have we printed so many dollars that they aren’t worth what they use to be. Oil was $4 a barrel in 1965 and a pack of cigarettes was 25 cents.

Gold is not an investment. When you purchase gold, you keep your government honest. If the price of gold shifts one decimal point to the right, you haven’t doubled your savings. Your 10% investment in gold has kept up with inflation. The rest of your portfolio has been raped royally.

If you are buying gold to speculate, you are in a different ballpark. Gold hit $960/oz in the 70’s and silver (if you remember back that far) went to $50/oz.
That was a special case, Mr Howard Hunt cornered the silver market and the Chicago Commodities board screwed him royally by changing the rules. It was a nice play and it shows you that playing by the rules doesn’t work all the time. I think that the Chicago board of commodities traders just about threw him into bankruptcy. It was either them or him–go figure.

Realistically, if you go back in time to 1970 when gold was $300/oz and a house was $52,000 dollars; a house was valued at 175 oz’s of gold. Now go forward to today, by todays standards, gold should be around $1,000 to $3,000 per oz.

Think of it this way, if gold and oil are going up in price and there is no shortage–its your government at work— printing money.

[Jim Brubaker]

I think that you have to realize that persons that buy into a bubble are not really playing with a full deck.

I don’t think that you will see a panic, rather just a bunch of REO will appear on the market. These should drop the property values dramatically. From that point you will see a bunch of pissed off home owners that can’t move or change jobs because they can’t sell their house.

The big question that has to be asked: When this stuff gets liquidated, who has to eat it? Your retirement plan or mine?

[Jim Brubaker]

Here is what happened in the 1930’s. It became against the law to own gold. Everyone had to turn it in. As I’ve said before, you cannot print gold and silver, there is only a finite amount. Governments will keep on printing money. I always recommend 10% in gold and 10% in highly speculative stocks and/or real estate in a portfolio. Thats not hard to do.

The problem occurs with Mutual Funds, Retirement Funds and Ira’s and 401K’s. Here is where you will see the most shrinkage of your assets. The Managers of these funds have the same mindset as real estate agents–the market always goes up.

I would like to point out to you that there aren’t many money managers that have ever seen a bear market.
How about next to none.

Are these funds federal insured, absolutely not. They are SPCIC insured (a private insurance company)

They have no reason to be conservative, low producers get dropped, therefor max to the hilt on the market going up. Everyone of the 31,000 mutual funds is doing it. Does it sound like there is anything wrong here?

I think that most of the retirement plans, 401k’s and Ira’s are sitting ducks. Most us baby boomer’s are going to “take it in the shorts.”

[Jim Brubaker]

I would argue that this “will be the first national housingcrash”/debacle, it will be the second. I studied the 1929 depression and it happened there first. Everybody then had an interest only 5 year loan.

When I first studied the depression, I wondered why all of the loans were for 5 years, renewable and most were interest only.

When the depression went full force, there was no money left to renew the loan obligation. If you delve further, states declared house foreclosure moratoriums.

I think what you are saying, although inadvertently, is that there is no one around that remembers the last time that this happened. Therefore we are destined to repeat the past.

[Jim Brubaker]

I think that most of the predictions are rather mild; I see something more along the lines of the 1929 Depression. The only loans that banks wrote back then were 5 year loans and interest only ones. After the crash, there wasn’t any need to pass legislation to restrict these loan practices; it was obvious you wouldn’t get paid back.

The big issue right now is the Fed funds rate vs. the housing interest rate. The Feds have raised rates 3 ½ points and at the same time the 30 year fixed rate has only gone up about 1 ½ points. This suggests that the Fed is a pretty small player in a global market. They are literally pushing on a string. This isn’t just a USA thing.

The second issue is the spread between long term rates and short term. Just last month the curve was still inverted the 3 year note paid more than a 30 year. This suggests that there is no fear in the bond market. To simplify what’s happening, every banker, mutual fund or what ever has “insurance” on their holding, called hedges and/or derivatives.

Somewhere along the line, fear is going to hit the bond market. Maybe it will be the collapse of Fanny Mae. A lot of Bonds will be discounted. Take a 1 million dollar bond at 6% will be discounted to 500,000 in order to sell it. The face value of the bond remains the same but you’ll notice that now the interest rate has doubled to 12%. Notice that now 5% interest is for low risk and 12% high risk.

In order to shorten the scenario lets just say in the following 3 weeks the Stock market along with all the mutual funds market tanks. The baby boomers will be walking around like they’ve just been nuked and in shock, all because of the speculative real estate market.

Now in walks a guy wanting to refi his 800,000 McMansion. The bank won’t write the loan it cannot sell the package to a third party. What he going to do now?

At this point, you would see severe dislocation of service industries, like Starbucks, nail salons, dry cleaners and restaurants. Remember 13 trillion dollars worth of hypotheticated real estate is going to have to be marked to market (maybe 3 trillion). How long will it take, is unknown. If the government steps in, probably just as long as it did in Japan. Half of all home owners won’t be affected they bought before the speculation occurred.

From here, the question of how much of a house do you want to buy? An 8 million dollar house in Beverly Hills in 1929 went for $48,000 in 1953 ( Don’t quote me on this last statement, I read it but I cannot find the source).

[Jim Brubaker]

Lets pick the car I bought in 1969 a brand new Pontiac convertible for $3,000 (I’ve still got it–much to my wife’s dissapointment) That would convert to 8 1/2 ounces of gold at $350 oz back then.
Now if you pick a car at todays prices, say $25,000 and divide it by 8.5 gold should have a value close to $3,000.

Now I’m not a gold bug, but in that same span of time from 1969 to now, the M3 money supply has increased by more than a factor of 10.

Inflation has to be perceived by the masses or it doesn’t exist. It is a tax on people who save for their retirement. The borrower loves this arrangement, borrow expensive dollars today and pay them back with inflated ones later.

My suggestion was to protect your back side with a 10% investment in gold and silver. The decimal point on gold and silver has to move one digit to the right just to keep up with the volume of paper printed. Oil just did it and nobody blinked an eye.

Probably 95% of the worlds gold is in a bank vault. From that perspective, its hard to compare it to the jewelry consumption of current gold production.

I agree that in todays world, our perception of gold is, as a commodity. That view is just not supported by the last 10,000 years of history.

Now lets take the rule of 72. Take the interest rate and divide it into 72. You get 3% in the bank so its going to take 24 years to double your money. Of course the government is going to stop printing money and the Tooth Fairy will be found alive living in downtown Chicago.

Here is an interesting link on M3 (the figure that the government has stopped releasing)

http://www.gold-eagle.com/editorials_04/paulos020504pv.html

Take it with a grain of salt

[Jim Brubaker]

Colorado is a strange area. I bought a house there in 1985 when prices were distressed and people looked at you as if you were crazy if you mentioned buying a house. There were real estate signs everywhere. The house has about doubled in price since then–nothing to write home about. They are about 6 years out of sync with California’s real estate cycle.

My sister and her husband are real estate brokers above Denver, and business has been so bad, that both have second jobs. There is no problem with listings, there just aren’t any buyers.

Its the last place I would suspect of being a speculative bubble, but if you look a Arizona a few clicks away 40,000 houses for sale and 5,000 are selling a month it kind of makes you wonder.

Maybe the baby boomer’s have hung up their skis and have moved the the elephant graveyard of Phoenix. Its kind of like watching water run up hill.

[Jim Brubaker]

You need to change your perspective.

Gold doesn’t go up and down in value, it is a measure of value. When you see gold go up in value, what you are viewing is the appeared value of the dollar.

They cannot print gold but they can print money. In the late 60’s when gold went up quite a bit, it took about 175 ounces of gold to buy a house (350/oz $61250 house) If you reverse the logic today you would come up with a value for gold of about 3,500 per oz (house value 600,00175=$3428 per oz)

If the US government was to devalue the dollar, it would not affect gold, it would appreciate in price.

If you want to hold gold, take delivery and put it in a safe deposit box.

Remember, there are a billion people in China that might also want to own one ounce of gold. That could seriously affect the price of gold

[Jim Brubaker]

Farls

Enjoyed your post. As a sucessfull real estate agent, your familiar with the saying 10% generate 90% of the business.

A lot of us got into the business because we were over the age of 45 and no one wanted to hire us. And admit it, the real estate test is not very hard to pass, and even easier to keep your license current. I’m a perfect example.

I was specializing in selling VA repos to investors to rent out. Cash outlay was $5000 and back in 1999 you could collect 6,000 in rent per year. That dried up after a while for very obvious reasons.

Todays real estate agent has to be a reincarnated used car salesman. I compared the Real Estate Agent to the Used Car Salesman, with the assumption that they work off of commission. If you don’t sell something before the bills are due, you go home and sweat and get mad as hell at the least little thing.

There is no incentive for a real estate agent to tell you that you can’t afford to buy a house and just like a car dealer, he’s going to show you how to get the financing. If he can’t he’s going to have to move on.

I had to quit selling because I could not look into someones eye and tell them that “its a good time to buy real estate,” when the rental fundamentals failed. My wife says that my worst short coming is that I’m just too honest. Go figure

Hope this explains what I meant. From a suggestive implication, I was suggesting that a used car dealer could only screw you for 60 payments whereas a Real Estate agent could nail you for 360–that makes a real estate agent six times more dangerous (tongue in cheek)
:>) :>) :>)

[Jim Brubaker]

SDrealtor your last sentence is easy to choke on.

“The best analysis on what is going on still comes from an experienced, knowledgable local realtor or appraiser.”

The only difference between a used car dealer and a real estate agent, is the number of payments. The only difference between an appraiser and a con artist, the con artist has to know what he’s doing.

I read the April link to Bob Casagrams’s column. It looks like he summerized about 20 blogs that I read daily. After reading his April column, I don’t think your average buyer would be ready to buy a house from any realtor–let alone him.

His candidness is going to cut into his sales. A good realtor keeps his mouth shut and is a very good listener. I think your being too hard on the guy. He’s going to starve to death selling real estate, with articles as good as his last one.

I’ve got a valid real estate license so I’ve got some room to talk.

[Jim Brubaker]

I can identify with 4plexowner. I share his views. I think that one thing needs to be pointed out, its not the banks that are going to “take it in the shorts,” its going to be the Mutual Funds that everyone is into.
They are not FDIC insured.

Don’t accuse me of yelling fire in a movie theater,but the banks are not that stupid, its your Mutual Funds that are going to eat you alive. After all, 31,000 mutual funds linking to the S&P500 index with a index fund is a sheer lunacy. Using that option leaves them free to invest in real estate loans. If one goes down, they all go down.

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