Everyone is asking the same question.  More to the point, I get asked regularly for my opinion, on, “what’s going to happen to real estate around here” (Peshastin to Lake Wenatchee and everything in between)?  As a primer, for those a little unsure about WHAT is happening in the world business markets, here is an excellent recap of the current crises, at least on the front end: http://www.vimeo.com/3261363  .  When you are done viewing this, please come back to the paragraph starting below.

It would be nice if there was a “simple answer”.  That is not the case though.

…  Also, this is my opinion and not the opinion of any of my other partners at Prudential, whom may believe President Obama…or any president for that matter (liberal, conservative, republican, democrat, socialist, communist, libertarian: this particular blog’s basis is intended to be non partisan), will be able to get us back into a  meaningful growth cycle again…or, any time in the near future, that is, say anything before 7-15 years.

 1929/2007:  Somewhere in 2007, CDO’s (collateralized debt obligations) were becoming suspicious to the largest…and most educated investment entities.  Heads of major national banks, and the masters of investment companies like Goldman Sachs or Lehman Bros were surely suspecting something amuck (OK, they helped create it).  Prices of homes, overall, began to level off and in most states, make subtle downturns.  From most realtor’s viewpoints, this is when we noticed commission checks weren’t coming in at quite the same rate as 2006.

Move forward to late 2008: Although the market made a nice tempoed, bearish drop from a high in October 2007 of over 14,000 (15,600 point high, actually; corrected by a CPA, CFP client, Rick Leonard, thanks Rick!) points to the high 11k’s in August of 2008.  We didn’t really take notice, or otherwise get scared until the drop from 11,388 points to 8450 points in the very short period spanning Sept 19th/08 to Oct 10th/08.  With the exception of only a few days of rebounds over 9000 points since October/08, the market apparently looks as though it is being pressured downward with the low as of 2/23/08, being 7105, or 1/2 the Dow all time high.

 In the 1929 crash  the market lost 25% overnight (350+ to 200 points),  it continued to be decimated through 1932 where it leveled out in the 50’s ( at this point it lost most of its value: 350 points down to 50 points).  A great graph I found, here, http://www.mrci.com/special/out/ddji31.pdf, shows, in adjusted 2007-2009 dollars (vs. 1929-1931), that the market is making a very similar downward trend in value.

 Everybody who has parents or grandparents who lived through the 30’s, doesn’t need an introduction to the days of hard living.  If you want to know the particulars of life in the great depression, please google it.  Moreover, as bad as things were in the 30’s, there are some differences you should acknowledge.  In 1929 out of 47.6 million, employed workers, 10.4 million were in agriculture-farmers-farming, see- http://www.census.gov/statab/hist/HS-29.pdf .  With farming families generally being large at that time, it is not a stretch to believe that even 20 or 30 million people (children, older dependent parents) were eking out some kind of living from farming. With a population estimate in 1929 of 121 million people, this amounts to a lot of people/families that should and WERE able to take care of themselves relative to 2009  populations . 

Ah, farmers were kicked off their land, hence no land to farm…true.  Even with that fact taken into account, the point is, people knew HOW to farm.  Farm land that was arable did not go to waste; sure, a farm owner may have become a squatter or tenant to his once owned farm, but either by barter or long term agreement with the bank or new owner, the farm land was being used to grow food and at this point, just for survival and barter with others in the community who were, in most cases completely cash poor.

Move forward to 2009.

With a max of only 2% of the population living on farms http://www.epa.gov/oecaagct/ag101/demographics.html the general U.S. population is for all intensive purposes, completely unable/ unknowledgeable/land poor-able.

What I’m saying is a “safety valve” of a large part of the population, to feed themselves and their neighbors, does NOT exist anymore.

Sure, I, you, can pick up a book and read about how to grow a couple of acres of corn or wheat or potatoes; herein lies the problem for 98% of Americans.

Land.

City or urban dwellers, go ahead and look outside your window and tell yourself what you see…

A small yard, possibly a vacant lot…?

Even if you are a 10th degree black belt in gardening and have mastered the art of intensification farming…growing/yielding say, 3 acres of potatoes on only a .15 acre lot, or a shared vacant city lot; how do you guard crops 24 hours a day?

Is it possible for people to even grow (with their 10th degree gardening abilities) enough food for themselves…neighbors?

Probably not.

“Alarmist”, you say.

“Fringe notions”, with nothing of substance.

Please google Friday, February 20th, 2009’s news and you will see the preposterous story of  water being cutoff for at least two weeks  to California farmers from Redding to Bakersfield (Central California Valley), here is a typical article: http://www.nctimes.com/articles/2009/02/20/business/zd3ba31effd9355328825756300775fc1.txt ; the 500 mile long breadbasket of California; a state which provides “more than half the nations fruits, vegetables, nuts…”  http://www.venturatoday.net/californiafarming.html .

Certainly more wells can be drilled; other areas in the United States can be geared back up for the foods we need as a nation.  The counter notion to that would be; wells/aquifers dry up and if we can grow all the foods we grow in California, somewhere else, then why don’t we now?  Temperature, costs, seasonal intrusion on other crops?  I don’t know.

That’s besides the 60,000 jobs that will be lost from the 3rd worst drought in California history.

“We’ll get the foods we need from other countries, like South America, where we get many of them now, depending on the time of the year.”  That is a fine notion, and may relieve our problems for sometime…however, do you want to have any level of dependency on a country like…Chile’, whom has had leadership with the likes of Pinochet (regardless of the U.S.’s involvement in his installation)?

Probably not.

“Well, you say; why can’t we all just move to the rural areas or countryside, where there is plenty of land?”

“Sure.  Why can’t you?”

Private property.  Private property is just that.  In Chelan County 88% is owned by the USFS and the State of Washington. The rest is owned by people like you and me.  Two main problems with subsets of problems should be considered.

Scarcity (of land) and inflation.

There is a lot of land in say…Washington.  Not all the land is for sale.  Not all the land has enough water for farming.  Not all the land is really decent for living anyways…you don’t want to live somewhere where it gets too cold or too damn hot.

Chelan, Okanogan and Yakima counties have some great land to farm, read: there is water available.  I don’t include Western Washington counties because of the population densities (do you want to compete and exist in potentially, socially, unstable areas?)  Portions of other counties, like the Palouse in Spokane, have great agriculture.  Unfortunately, I assume they will be exploited at the federal level as a supply to the entire U.S. and prices and supplies to Washington citizens could be expensive and rationed.  Also, these non mountain, large, eastern Washington farm areas have incurred their own droughts, not dissimilar to the California plight.  The counties just east of the Cascades, I would submit, will almost always, even in the worst of droughts, have surface or available water- a gift from the mighty Pacific ocean.

Since I only sell in Chelan county, I can’t speak too much on the other two or three counties that would be great candidates to live and grow in.  I’ll just say that they are mostly good and have personality traits like the Chelan county general areas.  Worth investigating.

Inflation.  To be honest, we have been incurring disinflation lately, that being the rate of inflation is going down, but not under 0% or a negative number which would be described as deflation.  So, what is the worry on inflation?  I would submit we are going to enter an unknown time of cause and effect that could subdue the system , not unlike the totally unpredicted economic happening called “stagflation” which happened most prominently during the 1970’s oil crises. 

Keynesian economists (for those unfamiliar, is a mainstream school of economic thought, that besides monetarism, is a fundamental part of U.S. economic deployment), had entirely missed seeing this “stagflation”.  It was unheard of in any vocabulary of theirs.

What could be this new or revisited economic issue, that could usher in a new wave of inflation, even though there is no end in site to banks holding up the money supply and not flooding America’s financial markets?

What pray tell?

There are a two telltales worth considering. 

1) domestically and internationally, people aren’t buying our instruments, read: the money the U.S. treasury is printing is not  as viable or wanted as an investment as it used to be by U.S. and international buyers.  Normally, in a credit poor situation like we have now, the U.S.Treasury distributes monies through the different Federal banks (which are really private banks, but that is another subject).  Well, you say, just printing up lots of money “should cause inflation?”  You are right.  “Well, we don’t have inflation?”   You are right again.  Let’s step back for a sec.  Just printing money and injecting it into the U.S. banking system should cause inflation, I submit, at some point.  First off, the healthy way the U.S. Treasury makes money is to sell the money or instruments on the domestic or world market, for say…  1.5% for a given maturity date.  What happens if these investors don’t want your money?  Well, you could pay more interest to entice them… that creates problems within itself, but lets keep going…

What if they still don’t buy?  What the heck, let’s just print more money. 

In fact, that is what is happening. 

Normally as the U.S. economy is expected/anticipated to run surpluses in foreign trade, at some friggin point; wealth would increase, tax revenues will go up and a hot economy is used to buy back these “instruments” used to fund a floundering economy in bad times.  

Well, guess what?  We have no anticipated trade surpluses.  We have no expected high GDP (gross domestic product)  numbers  on the coming forecasts.  If you were, say China, would you want to invest in American dollars, from a government that is only paying off the older loans (instruments) in the same way Bernie Madoff ran his Ponzi scheme?  Robbing Paul to pay Peter?  Sure, the instruments we’ve sold in the past are paid off with newly sold instruments, read: national debt.

However, a new incubus is being perceived by Treasury investors.  That being, the hot potato theory. 

What if a club, for example, China, South Korea, Taiwan, Arab Emirates, wants to buy safe U.S. Treasury notes/instruments.  What if they learn that they might be paid back with a dollar that could be inflated, IE…not as valuable as the dollars they lent to the U.S., never mind the interest  (the same worry, in fact, that U.S. banks have now, with their borrowers) . This worry segways us into point 2) below.

Anyways, we are printing up some money now without the benefit of it being properly underwritten as a “sold instrument”, again, that being by domestic or foreign buyers.  

2) A new Bretton Woods conference,  http://www.todayszaman.com/tz-web/yazarDetay.do?haberno=156987  .   

 The old Bretton Woods conference in 1944, among other things ,  discussed currency and foreign trade.  It helped to establish the dollar as the leading core currency as well as others,  in the rebuilding of a devastated world from the a(e)ffects of WWII.  It also, some would say, in a clandestine (not really) fashion, cemented the power and position that the U.S. would enjoy for the next 50-60 years (what choice was there … the cities of Europe and Asia were mostly decimated and in no position to do any rebuilding all on their own).

So a new Bretton Woods conference?  Hmhh, what might happen there?  Well the first conference somewhat dictated what new role the U.S. was going to play in the world economic future; the second one appears to be happening to potentially remove the rules or fundamentals from the 1st conference in what role the U.S. is going to play.  Europe and China appear to be the next big winners at the conference.  Where does that leave the U.S.?  Without a real respect for the U.S. dollar and the U.S. being overrun by the stronger and burgeoning industries of Asia as well as Europe, we lose a real wealth factor for the U.S .  The details of this are outside of this blog’s scope.   As pointed out by a friend of mine, it may be that JUST a new Bretton Woods happening, could be the catalyst for instant inflation/devaluation of the dollar and why wouldn’t it?  We’re being viewed as just plain weak.  No one wants to be tied to weakness, economically speaking that is.

The Fed (eral reserve system) continues to lend money at almost zero to the largest banks.  Again, much of it produced from nothing (printing press just turned).  Banks continue to hold on to their monies despite its abundant supply.  Hence, no inflation.  Technically, the dollar continues to be valuable because of this.  Banks aren’t lending for a number of reasons, but the main reason is that they don’t think borrowers will be able to pay back loans , because of job losses and other mortgage crises, based ,  convolutes  (bad word, I made it up) .  Also, at the point inflation or dare, hyper inflation, sets in, they risk being paid back with dollars that aren’t worth what they paid out…a deal for the lendee, indeed!   (history note: Weimar Republic [Germany, 1919-1932] mortgage holders, were paying off mortgages from pre 1919 loans, almost overnight, from the inflated deutschmark crises; they had wheelbarrows loads of inflated deutschmarks).

So this is what I coin as “an unknown time of cause and effect that could subdue us”, the U.S. as well as the world market. 

You look at the facts. 

You look at the circumstances we live in, now.

I think there are a few potential outcomes.  Without saying what I think will happen, I’ll tell you my gut feeling.  I see a great dam of value-less money being poured into the banking system. 

I see it philosophically as looking like a dam,  in which these unspent monies are overflowing the ledgers of the banks holding them .  As this dam potentially bursts it seams, for reasons we don’t know, I see the water, read: money, hitting holders hands, initially held as paper…maybe for a moment and then, turning into ash, only a remnant of what it  really was before the breach.   What the ultimate affect that these events pose to our economy, can only be described as ”the dogs of war”  (google Weimar Republic or South American monetary policies in the past) .   Another scenario might be that with Bretton Woods II occurring, and the continued attempts at increasing V or velocity of money, into the system, that unlike the money “bursting the seams”, it may just die on the vine as the domestic and world markets lose much of their interest in the good ‘ol greenback.  With absolutely no connection to any kind of gold standard, the downside to fiat money, is finally realized.

As an important side note to inflation and home buying, say, here in the Leavenworth area, you can probably see already how inflation could kill your plan on when to buy at the right price.  Many people I have looking at property (OK, four people) who are looking at property in our area are holding off due to their belief in prices decreasing and hence not wanting to be holding onto a piece of property that 6 months later, their next door neighbor just paid $50K less.  Understandable.  But if we get inflation or hyperinflation, your dollar could be worth a lot less going after property values that are not decreasing as much.  Example, a $250K piece of land that may go down to…$175K.  You would rather buy at $175K of course, so you wait, because you see property prices falling.  Suddenly, rabid inflation sets in and your June/2009 base adjusted rate dollar, for say June of 2008 dollar is only worth 70% of that dollar’s value.  The 2008 dollars you own, $250K for this example, are now only worth $175K, now, in June of 2009 (which is the same as if you waited to buy the property in a more discounted level).  Unfortunately, that will be the least of your problems.  When inflation is that rampant, owners of anything (other than dollars) tend to be very cautious now of accepting your dollars.  You may have a purchase and sale agreement stating X number of dollars for your property, but in the 6 weeks to closing, the dollar has lost even more value.  It wouldn’t surprise me that contracts will begin to have boiler plate language with COLA clauses in them.  What a dreadful situation, where you have an agreed upon price, but by the time of closing, the consumer price index has risen 5% and now you owe 5 percent more than the agreed price!  Do you have the cash?  Does your bank automatically finance the extra amount on your mortgage?  Does a new appraisal have to be done?  As stated in this blog elsewhere: does the bank walk away because it believes it will be paid back with devaluing dollars?  Does the bank, even on a fixed interest mortgage, have YOU agree to a COLA clause in your mortgage, should inflation take hold?  These are some of the many unknowns that can happen in an inflation captive economy. 

And please, before one more person tells me I’m not being optimistic, or what is it worth being so negative? Before one more person tells me I should be connnnfident,
because without connnfidence we can’t get this economy back up to
speed, please show me the beans, read: accounting,
as to why anyone should be optimistic or connnnnfident in any
president, this government, or any plan (as I said before, I would
submit that no president or congress, republican or democrat, liberal or conservative is capable of ”planning” this country’s hardship away,  except short of WAR and/or some type of neo-imperialism.

I understand the idea of confidence within banking and the
larger economic, world body. Short lesson: a banker has $1000 in his
pocket to lend, the banker has 5 clients that all want to borrow $1,000
each, so the banker goes to a bigger bank and gets a loan for $5,000 and
gives each client $1,000. By law, the banker is required to keep a 1-5
liquidity ratio (just for our example here), that is, for every 5
dollars loaned he needs to keep 1 dollar in reserve in his/her vault.
Banks, of course, never have all the money in the bank… if every borrower wanted it right now; this is called a “run on the bank” and banks, like in the 30’s were unable to pay account holders. They lost
their connnnnfidence, ok understood.

Herein lies the  ”must have ”  component of banking called confidence, an ethereal notion that things are OK and that my money is safe.  FDIC insurance, and the SIPC contribute to bank and investor confidence, of course. 

BUT, when the all important factor of the bank’s/investment entity’s, liquidity ratio, be it REAL collateral, like real estate, ahem…or cash…gets beyond say, 1-10 or 1-20, the ethereal notion of confidence unto an account holder or investor, becomes even more ethereal  and commensurately, an un-sellable notion .

What I’m saying here is that people are being asked to believe, to have confidence in what is becoming absurd.  The problem is that those pesky reports like the wholesale price index or housing starts or purchasing managers index or worse the liquidity ratios of the banks and investments they own, suddenly start to be made public…(leak out more like it).   As an example Bear Stearns reportedly was at 33 or 50-1 or worse when it collapsed.  Actually, as investors/account holders educate themselves they start to realize that these CDO things, which may have been represented as say 1-8, 1-10, 1-15 in liquidity ratios are, oh my god, and this is the worst part of this blog, potentially in the 1-80…1-110…. 1-140…,   know one really knows, liquidity ratios!

But Sam, you say, those sub prime homes are worth something.  The CDO’s couldn’t have represented that much ill-liquidity.  There must be value in the system somewhere?  An ill liquidity level of 1-140 is ridiculous, preposterous!

And you’d be right…that is, in a legally or should I say ethically, ran, world investment/ banking system.

Legally…?  Ethically…?

Here is the part where I believe the best experts we can really count on are right, no, not the ones in the SEC and Wall street, where, by the way Bernie Maddogg Ponzied 50 billion, AND was reported no less than 3 times since 1998, formally to the SEC, that he was…had to be… running a Ponzi scheme, by top ethical, Wall Street brokers.  But what is now being reported as a “revolving door” of SEC and Wall Street execs, coming in and out of government and back into private Wall Street; they didn’t want to get too pissy with each other, because today’s SEC audit agent might very well be welcomed into the open arms of say…Goldman Sachs tomorrow.  This my friends,  is the true story.

Back to the “best experts we can really count on”… these folks say categorically, there has been a coup d’état at the highest financial/banking levels.  Not a mismanagement, not just a flagrant disregard for protocols and requirements, but a coup d’état.  We have been taken to the cleaners.  Here is my own analogy of everything I’ve read on the coup.

They took a lesson from the drug dealers of the world.

They took, take your pick…CDO’s, derivatives, hedge funds…maybe everything from mutual funds to bonds AND not unlike the drug dealer, cut and recut them up with just a little bit of good stuff and sold and repackaged it as 100 % pure…or at least 75% pure, maybe 60%. 

You say, they can’t do that?   

You say, preposterous again!

And again, you’d be right…that is…if you’d known that Standard and Poor’s as well as other grading, supervisory, entities of banks/investment instruments hadn’t been hoodwinked, duped, fooled…or were they?…Some think that is part of the coup…?

Example: Standard and Poor, the yardstick and sentinel for banking and investments, handed AAA, AA and A ratings to many of the national and world wide investment entity’s, instruments.  Countries and banking systems- individuals, like…noble, conservative, Switzerland said “great, this CDO has a AAA rating, cool, I’ll buy a whole bunch of those, and make our investors a nice safe return.”  But Standard and Poor’s ratings were wrong, wrong, wrong .  They were duped, duped and double duped.  You can go ahead and google their explanations for how they were duped, usually citing the same reasons we were duped.  But they are not supposed to be duped.  Sure, one or two hedge funds might slip through, I’ll give them that.  But a few hundred, or more, I don’t know, maybe a thousand?

Everybody in the world couldn’t resist coming to the party.  Everyone else was doing it, so why shouldn’t I?

In the end, with this cut and recut product, underwritten with overpriced, sub prime, real estate and not to mention the unknown phantoms like the Bernie Maddogs (sic)  that we don’t even know about yet . 

So, as they say, the truth will set you free! 

 We can not sit idly around thinking things are going to be OK. From the
 crash in ‘29 to spring of ‘33, even with things falling down around
 people, the records show that many people were trying to be optimistic.
 This inaction led to worsening conditions for all Americans. If you are
 looking at a gangrene arm, and by god, you know you’ll loose that arm
 (whatever; your in a plane crash and there are no antibiotics around),
 just hoping the infection will get better is folly…maybe you rub some
 mud on it, maybe you let your dog lick it, maybe you go find some
 maggots to stem the tide of infection; regardless, that arm has got to
 come off. No amount of optimism, no amount of petty cure alls like
 maggots and dog licking are going to help (say, stimulus package(s) .
 You must identify and correctly assert yourself and the situation that
 is around you, and do the unthinkable.

 You procede with an amputaion and you live.

Optimism, in a given situation, is acceptable, if there is some empiricism behind such a position.    Again, I’m startled to hear about so many people saying a particular person, congress or government enitity will solve the problem. Statements like “he’s going to fix it”, “it will take a while for the stimulus package to kick in, but then we’ll see recovery”.

This isn’t 1982 with blasphemous interest rates we thought would go away.  This isn’t the Savings and Loan scam we can throw a few hundred billion at to go away, this isn’t a group of Arab oil companies bringing the country to it’s knees in 1974.  This is………..   

I don’t know.  

I’m just a country realtor, with a cheap 4 year college education that
took me 6 years, so what do I know. You may have another opinion and agree with the, what I will now refer to as, the optimystics(sic). However, if you want to have a meaningfull conversation as to the WHY you are optimistic  …then… 

That’s fine.  But, please, show me your beans.

Show me your beans that count another way.

No, the previous examples of the S&L bailout, early 80’s inflation and oil crises ultimately coming to an end do not constitute the means or explanations to the current end of this crises (revolution?).  The current crises is one of those 60-70 year or beyond events and will not be relegated to American history as a “hiccup” or “cycle”, that the aforementioned fall into.

In the next blog, I‘ll  discuss the real problem of the economy (as this wasn’t enough) and why the current crises is merely a symptom of what is really the underlying problem.  That which economic /poly sci professors always tell their students.

Stay tuned.

Epilogue

Economic/financial soup facts list, read: stick ‘em in your mouth and tell yourself what you think the ingredients taste like.

1) The country of Iceland is bankrupt, multi millionaires are fishing again, like their forefathers.  We aren’t talking dire straights, they are rupt!  Many Eastern European countries as well.  How many countries worldwide? Hard to tell.

2) Switzerland, long considered the most reliable and conservative, fail proof, country/banking system, has had 3 if not more, of their biggest banks become basically nationalized.  Swiss economists are already saying: “Switzerland [is] threatened with bankruptcy”.  Google it.

3) In all likelihood, the congress will probably spend all $9.7 trillion (not rupees) pledged to stimulate the economy (did you know already three trillion has been spent in the last 3 years?), “ The Federal Reserve so far is refusing to disclose loan recipients or reveal the collateral they are taking in return”?  http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=aGq2B3XeGKok Huh?  Collateral…read: liquidity…?  Refer to printing money, in the above blog.

4) Indy Mac, Freddie Mac, Fannie Mae, Washington Mutual, Lehman Bros, Behr-Stearns…oh (yawn), anybody with a neuron left knows about all these deaths.  Read this for the complete current list: http://ml-implode.com/ , if your a glutton for punishment.  I enjoy reading the list with the banks that have come back in “They’re back” list. 

5) Rates of unemployment may be much higher than the reported 8%.  For whatever reasons (it is obvious why), the government is not counting many unemployed.  http://www.huliq.com/3257/77232/actual-unemployment-rate-139  .  This is a typical google find.  You can find many respected sources who have come to the same conclusion.  One great thing about rampant unemployment is it helps keep inflation down (for the time being that is).  One other jewel of optimism in this blog.

6) Gold is at, what many believe to be, a conspiratorially low level.  I’m not saying you should go out and buy gold or any of the other precious metals, it’s just that historically, when markets have been hit like this (and the markets have never been hit like this since ‘29-’31, that gold has conversely went up).  Yes, gold has gone up, but if you ask any body even mildly fluent in market/commodity reaction, at least the people I have some faith in, gold is at a absurd, yes, absurd price level.  As is being circulated, if gold gets to say…even $1500 per ounce it will be its own catalyst, creating instant inflation.  No wonder why prices are probably being kept low.  I’d be curious if anybody understands how “they” might be pulling this great “gold charade” off?  One other note on gold, many experts believe we’ve been discarding much if not most of any of the gold supplies that we did retain (I.E…Fort Knox).  Not that it would have mattered any way- value wise, it is just interesting to note that these supplies of U.S. government gold and their levels, are NOT public information.  They are kept secret.

7) It is believed the two major, organized crime factions in Mexico are cooperating to take control of their mutual interests (mostly drugs). Effectively, this puts 100,000, well trained, crime troops on the ground (the legal Mexican government claims about 130,000 army troops). 7000 , yes-seven thousand,  people have been murdered in various  northern, Mexican, border towns (mostly border or northern towns) since the begining of 2008 to present! They are determined to keep drugs and contraband flowing into theU.S .  In Juarez Mexico alone, there has been (a lot) more than 2000 deaths since the start of 2008, see-  http://www.cnsnews.com/public/content/article.aspx?RsrcID=44513 .