Be Careful Out There!

We've all heard the cliches "dollar-wise, pound foolish" or "win the battle but lose the war" and even "fool me once, shame on you; fool me twice, shame on me." Well, there is some great advice to be had from these longstanding catchy phrases.  Each of which seems to apply to the housing market today as we start to see double-digit price appreciation once again in many California markets.  Didn't we just get through a very deliberate housing bubble not too long ago!  But, leave it to the real estate industry to be the leader once again as they gear up their marketing machine to promote housing as historically a sound investment.  This home price history chart just out from the California Association of Realtors:

Wow, housing has jumped 1,196% from 1970 or a simple average annual rate of 28.5% over 42 years.  That's smoking good!  Hard to argue with those numbers isn't it?  Anyone owning a home in 1970 and selling it later reaped a windfall of good fortune for sure as did many others over the years.  This chart suggests anyone buying now should feel good knowing "that homeownership in California is a solid long-term investment."

Well, is the historical reference to housing appreciation going to have any correlation to how housing might perform going forward?  I have my doubts.  So, before jumping into the foray of homeownership, think about the economic backdrop in which we live as it seems quite different then these four preceding decades.

First, the Federal government only started going into debt in the early 1980's and it has always seemed manageable as a % of GDP.  We are now approaching clearly unmanageable levels at nearly $16.7 trillion or over 106% of GDP.  Modest forecasts puts this well above $20 trillion in a few short years.  Current economic theory states for developed countries this is still manageable but we all know it's a runaway government debt-train that can't possibly stop without crashing hard...and soon as GDP can also shrink (go figure!).  A shrinking GDP and burgeoning national debt would surely make mince-meat of those low three-digit manageable percentages.

Second, the Federal Reserve has established an unprecedented monetary policy that has pushed interest rates down to historic lows and has resulted in the printing of trillions of "diluting" dollars to pump up the banking system and consumerism.  This has never happened in any of those four preceding decades so the true consequences of these actions are still to be realized. Just know that the historic bond buying of the Fed can only last so long and at some point, the bond buying will stop.  And...rates will rise - quite substantially considering the then size of our national debt and knowing the average maturity of this debt is just over four years; too short for my comfort.  Wow! at $20 trillion that equates to finding nearly $5 trillion of U.S. debt buyers each year.  So, it's not "if" but "when" rates rise that needs to be considered when looking at housing as a good long-term investment.

Third, the majority of housing price appreciation during this period is really inflation based and according to our government at present inflation is relatively non-existent with deflation posing a bigger risk.  Want to see how quickly the government can make such a sizable return on this chart substantially disappear?  Well, factoring in the loss of U.S. dollar purchasing power over this period of time yields a much more telling line on housing.  One U.S. dollar in 1970 is worth 17 cents in 2012 or a decline of 83%.  So, really that 2012 median home price of $319,340 is worth only $54,288 in 1970 dollars due to the effects of inflation. This makes the true annual market driven supply/demand price appreciation much more comprehensible at 2.86% over this period of time.  This would be fairly consistent with population and real economic growth not government inflated "wealth" creation. 

So what does that mean?  Well, in California, we have just seen an 11.6% jump in the median home price from 2011 and in most markets there is further evidence that the supply part of the equation is well out of line with the demand side (thanks to the aforementioned historically low interest rates and many other factors which I'll blog about separately).  For example, over 72% of currently listed properties are seeing multiple offers according to the California Association of Realtors.  This unbalanced market shift is skewed and therefore driving prices higher when in reality prices should appreciate only at the previously determined historical rate of 2.86% since inflation is not a factor at present.  This tells me the jump in 2012 is over four years of "true" price appreciation and quite possibly one more year like that in 2013 and we've had all were gonna get until 2020.

Fourth, the theory of large numbers compresses growth percentages as the base numbers in beginning years get larger and larger.  From 1970 to 1980 median home price appreciation was nearly 304%.  From 1980 to 1990 it was 94.6%.  From 1990 to 2000 it was 24.5%.  From 2000 to 2010 it was oddly higher at 26.4%.  However, the 2010 median home price was surprisingly $31K higher than 2009 but strangely $21K lower the following year in 2011. Assuming 2010 was an aberration, then that decade the real median home price appreciation was approximately 18%.  So, as one can see, California housing prices are of diminishing returns over decades.  There's nothing to say those percentages can't turn negative too!

I wonder what happens to my industry when another housing bubble implodes through rising rates and our government's inability to finance its debt obligations.  What will the housing market look like when it is being crushed by foreclosed properties, massive Fannie Mae and Freddie Mac bailouts, and countless bank failures not to mention high unemployment? But, didn't we just go through this!  This next one could get very ugly is my guess and looking at that chart gives me no comfort in thinking the next ten years will be equally as rewarding to property owners.  Like an alcoholic, sometimes you have to find the "true" bottom before things really start looking up.  There is always something greater to expose the weaknesses in what man believes they can tame, control, manage or manipulate.  To me, this is the American economy at this juncture in our country's history.  We are on a path of massive wealth destruction and not generation.

Government Math Needs Some Schooling

We have seen this time and time again whereby U.S. politicians and their inept political parties argue their positions and point fingers at the other side regarding budget deficits and the national debt.  We could surely solve the problem if the other side would just cooperate they say. Holy crap, seems no one in office made it past kindergarten math and no one wants to be truthful about the "true" state of this country.  They agree what we are doing is unsustainable but taking action is just not in their pre-school vocabulary.

Nearly every media article gives you a glimpse of the enormous problem we face.  Here's a math problem for a student - what's the national debt in four years under the sequester law if fully implemented by reading the below excerpt (without either party trying to water down its impact as we speak - which they are doing in earnest)?:

AP Tom Raum 2/22/13 Gov't downsizes amid GOP demands for more cuts: ...The federal budget deficit for the fiscal year ending Sept. 30 is estimated to be $845 billion — the first time it's dropped below $1 trillion in five years. But it's on track to rise again as more and more baby boomers retire and qualify for federal benefits and as interest payments on the national debt keep going up. The national debt first inched past $1 trillion early in the Reagan administration and has grown in leaps and bounds ever since through both Democratic and Republican presidencies. It now stands at $16.6 trillion and is on a path toward soon becoming unsustainable, both parties agree. Unchecked, entitlement payments will add roughly $700 billion to the debt over the next four years. ... Under the sequester law, roughly $85 billion in federal spending would be slashed in the remaining seven months of this fiscal year and a total of $1.2 trillion in cuts over 10 years.

Answer: $16.6T + ($845B x 4) + $700B - (($1.2T / 10) x 4) = $20.2T

According to the U.S. National Debt Clock on this day in 2017 the answer is $22.6T.  Let's just say anyone with an answer above $20T gets an "A".  So, what does this all mean...politicians are squabbling about pennies when we have $100 bills at stake!  Austerity will come and it will be forced upon us...and it will be ugly.

I'm actually of the opinion that it has gone on too long and it is not possible to solve our national debt problem without default...yes, I'm talking about the U.S. defaulting on its debt obligations.  Of course, this is the "event of last resort" but it will take this action (effectively a negotiation of reduced principal amount for a sustainable long-term payment stream) to rightsize this sinking ship.

To this end, let all U.S. citizens stop being hypocrites and complaining about the spending in Washington all the while buying the "safehaven" of U.S. Treasury's in our IRA's, 401K's and other investment accounts.  Sell your investment funds that even dab in these instruments.  Sell your US dollars for safer currencies like C$, A$ and Swiss franc.  Let's tell the politicians their math stinks and their debt instruments including the fiat US$ are worthless like a piece of gum stuck under the desk!

The Tsunami of Ponzi Schemes

Madoff is a drop in the bucket.  Even Social Security pales in comparison to what is transpiring before our very own eyes.  It takes no special investigative unit of the government to uncover this massive fraud nor a congressional inquiry to analyze how this could happen.  No, this is the grand daddy of all ponzi schemes and it's in plain sight yet so many continue to play despite all the warnings and the magnitude of the problem. Buyer beware because the time will come when there is not enough to support the bottom rungs of the US debt pyramid and the collapse will be catastrophic.

Think about it! The US continues to sell bonds, notes and t-bills ("treasuries") at an enormous clip building a mountain of debt nearing $16 trillion with no end in sight.  The funds from these treasuries are used to pay-off maturing treasuries keeping those holders happy and satisfied with their return on their investment.  In the meantime, the culprit of this massive fraud continues to sell even more treasuries to splurge on a lavish lifestyle (military, bailouts, social services, massive government, etc.) to which it can ill afford.  Like every ponzi scheme there is no basis for paying back the earlier investors (e.g., sufficient invested capital for which revenues can be generated) other than through the continual flow of funds from new investors.  As long as new investors keep the blinders on this "bonzi" scheme (as I will call it) it can continue to prosper as a "sound investment" but the time will come...

If you're in these, you better get out.  And now is the time!  The 10-year US treasury bond is at an interest rate of 1.6% after hitting an all-time historic low of 1.47% this month.  Keep in mind that treasuries filter everywhere within our society so you better know where your money is and how it's invested.  For example, many mutual funds hold treasuries while they search for new investments consistent with the main objectives of the fund.  Banks hold treasuries while they evaluate the lending potential of new borrowers.  Corporations hold treasuries as they look to obtain nominal returns whilest they pursue their primary mission for their existence.  You may even have some United States Savings Bonds lying around the house from birthdays or Christmas - time to cash those in.  I'd rather be early to the exit like I was in the housing bubble than to be caught in the tsunami of this debt bubble.

Time to learn what's in your investment portfolio and begin to divest yourself of holdings that are exposed to US government debt. The end result of this ponzi scheme will leave investors holding the bag.  There won't even be the satisfaction that the culprit in this case will serve time in prison - they'll be free to do it again!

Budgeting Our Way To Greece

President Obama has just released his 2013 Federal budget with a whopping $3.8 trillion in proposed spending.  This figure is only matched in U.S. history with his 2010 budget submission but granted that was at a time when we were fighting two wars and the severe effects of the Great Recession were taking a stronghold into our everyday lives.  A projected $900 billion shortfall in 2013 between spending and receipts translates into much of the same; we need to borrow just to pay our current bills.

When will it stop?  What president and congressional leaders of this country will step forward and actually make the severe cuts that are needed to halt this catastrophic borrowing year-after-year.  The George W. Bush Administration added $5 trillion to our nation's debt load during his tenure as President when initially campaigning on a promise to be the first president to "reduce our national debt by $2 trillion over the next ten years." Neither Republicans or Democrats can find a way to turn the spigot off.

We are on a path of destruction that likely the majority of the people of our nation are completely ignorant too.  In many ways, I believe that comes from our leadership as they seem to turn a blinds-eye to what road we are traveling.  Just improve the economy and it will take care of itself many at the Capitol seem to believe.  However, once the wheels of motion on the credibility of our country turns and our good faith promise of having the ability to pay our debt is viewed from a true lenders perspective, they will cut-off our "line of credit" and start demanding performance in the way of austerity and debt reduction.  Sound familiar?

The austerity, riots, chaos, death and destruction in Greece seems so far away and so unrelevant to a country the size of the United States.  And, with our economy improving, many feel that we are on the road to recovery, the last thing on their minds is a "return to the abyss."  Unfortunately, that is where we are headed.  So, when our national debt begins to approach $20 trillion by 2015 there will be grave concern from main street to Wall Street to the White House and it's not going to be pretty.  I just wish we didn't have to wait so long to actually start to fix the problem.

Taxpayer Protection Pledge - How to make sense of this!

60 Minutes ran a segment on November 20th regarding a signed pledge by hundreds of congressional politicians to always oppose any and all efforts to raise taxes.  There are 41 Senators and 238 Representatives that have committed to this Americans For Tax Reform "non-binding" political pledge.  This was the first I had heard of such a powerful "doctrine" controlling our political landscape.  Those that have gone against their pledge have mostly been eliminated from office at a future election.

With the stalemate on deficit reduction having reached epic levels (nothing is being done), I thought I would look at this pledge a little deeper.  On the surface, I think most Americans would say this doesn't make sense and how could a politician with the best interests of America in mind vehemently oppose some tax increases to help solve our financial crisis.  After all, we want to be reasonable and if they can cut spending and increase taxes at some level then we are that much closer to reducing our deficit.  Seems like a good compromise all things considered.

However, this "pledged" group opposes any increase in taxes so finding a compromised solution is not in the cards.  Basically, they are stating that any and all deficit reduction must come from spending cuts alone.  In theory, I oppose what they are doing but in practice, it makes total sense.  Have you ever seen executive management of a corporation sign a pledge or state in their mission statement to never increase prices to its customers, ever?!  Heck no.  At times, it makes for good business to charge more for ones products and services when other things have been attended to first.  Specifically, the entity has developed a superior product or service, is operating efficiently, knows in which markets it can compete, has streamlined operations, cut corporate waste and overhead, etc.  Then, once all of this has been done, a corporation may be able to look for increased revenues by enacting price increases for its products and services only if the market will bear it.  Customers of course can opt to not buy so management had better be right or it will negatively impact their financial model.  I can't imagine an executive management team believing they can get out of the red by passing along their inefficiencies on to their customers!

Unfortunately, the problem with government is many politicians look to tax increases as a way to solve shortfalls well before anything substantial is done to provide for an efficient and effective government.  We are running in the red every year for the forseeable future including 2012 despite nearly $3 trillion in projected federal receipts.  We all know there is incredible waste and unnecessary programs that drain our financial resources.  Let's purge all we can now and start operating within the constraints of our current revenues.  Some day, it may make sense to increase taxes as taxpayers are getting what they want from their government and/or we need to fund a war or other strategically important initiative.  But until then, it requires drastic measures like "the Pledge" to get things right-sized in government.