Before the Fall

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“The United States can be likened to Rome before the fall of the empire,” says McPaper. “Its financial condition is ‘worse than advertised, …It has as ‘broken business model’. It faces deficits in its budgets, its balance of payments, its savings — and its leadership.”

Welcome to the Empire of Debt, folks. Addison and I sent a copy of the book to each Senator and Representative along with the following:

Open Letter To Senators and Congressmen

We also sent a copy of the book to Alan Greenspan and George Dubya Bush. Each had a hand scribbled post-it note beseeching the beleaguered public servants to — if nothing else — read the introduction.

Mr. Greenspan’s note also suggested he leave the copy behind for Ben “Printing Press” Bernanke when he vacates his office. Fat chance of even getting on their desks, eh?

In other news…

“Housing market cooling,” says an article on CNN.

We are watching the health of the U.S. housing market carefully. We take its temperature regularly. When the reading goes down the jig is up.

The Wall Street Journal reports on a survey of top brokerage firms. It found that declines in sales are widespread, said to be the result of higher mortgage rates and higher energy costs. Also, there is an increasing edginess among people holding much-appreciated property. They’ve heard the word “bubble” more than once. Many are eager to get out before it pops.

There are more houses for sale now than there were last year, and the typical one takes longer to change hands, according to the industry experts.

“There’s a newfound sense of urgency among sellers to get out while the getting is good,” said David D’Ausilio, operating partner of Keller Williams CT Realty in Monroe, Connecticut. He noted that the supply of homes there is up 14 percent from a year ago and thinks prices will fall five to 10 percent in his area during the next 12 months.

Greg Rand, another property professional consulted by the WSJ, said he was looking for a decline of about three percent in the White Plains, New York, area next year. Another expert in San Diego, a managing partner of Prudential Rand Realty in White Plains, told the paper he also expects prices there to fall about three percent next year. And Robert Griswold, owner of Griswold Real Estate Management in San Diego, said sellers were resorting to bribery similar to those in the auto industry. At a recent Rolling Stones concert, fliers were handed out offering a free car with every condo purchase.

“The market has definitely turned,” he said. “When you see that kind of advertising and promotion, they are clearly getting desperate.”

“The air is coming out of the balloons,” David Lereah, chief economist at the National Association of Realtors, told the paper.

But there is still air going in the balloons, too. In the third quarter of this year, real estate prices posted another record gain — up nearly 15%. The typical house in America can now be had for $215,900. This does not seem like much money to us here in London, where that amount of money would barely buy a parking place. But the typical American house is a dumpy plywood box in the middle of nowhere probably not worth $100,000 let alone $215,900.

Location, location, location. The typical house in Danville, Illinois, sells for only $72,800. In San Francisco, the price is 10 times higher. In these pages, we have wondered how we could take advantage of the property bubble without actually dying. As long as we live, we noted, we need a place to live in. But we don’t have to live in a house we own, nor in a house in the same area, nor in a house at all!

In a stock market bubble, the way to profit is simple. You sell shares. If you have no shares to sell, you either borrow them, or better yet, create a company whose shares you could lay off onto investors. A bubble is a time when people want to be separated from their money; you will be doing them a service.

In a property bubble, the formula is a little different. If you are a builder or a developer, of course, you sell, and pre-sell all you can. Get while the getting’s good. But if you are an ordinary homeowner, your choices are more limited. If you live in Danville, our suggestion is to stay put. You can check the walls for signs of bulge yourself, but from our vantage point, we see no signs of bubble pressure in the greater Danville metropolitan area. If you live in San Francisco, Miami, Washington, DC, or San Diego, on the other hand, a simple way to bank some profits is merely to sell your house and rent an equivalent space. Do the math carefully and you will most likely come out ahead of the game.

Better yet, move to Danville. The typical homeowner in San Francisco, assuming he has no mortgage, could walk into Danville’s biggest bank with a deposit of more than half a million dollars (We don’t know what people do for work or entertainment in Danville, but we assume it is a fair and agreeable place).

Another opportunity — more likely to be taken in desperation than in profit — came to us from the Arizona Republic newspaper. The paper reports that people from northern states are still coming down to the desert to spend the winter in R.V. parks. An R.V. may only get six miles per gallon, but driving it down from Chicago is still cheaper than heating a house in the Windy City all winter. It only costs $500 a month to stay in an R.V. park. Basic trailers cost as little as $4,000, the paper reports, though you can spend $1 million or more on a fancy motor home.

What people like most about the R.V. parks is the lifestyle, say campers. There are gyms, softball leagues, bridge clubs, libraries, and pools — everything you could ask for from a resort community.

Yesterday, we recalled the end of the big boom in farmland prices in the 1880s. Homesteaders loaded their family possessions onto covered wagons and left the prairie. Now we see how this bubble may end too — with hundreds of thousands of R.V.s parked in the desert sun. The smart owners will have sold their houses and got out when the getting was still good. The unlucky ones will have waited too long; they’ll live in their 21st-century covered wagons not because they want to, but because they have to.

• Several months ago, we mocked a fellow scribbler for buying Google. The stock had already risen from $80 to $200. Our target saw the stock rise, and rise, and rise and couldn’t resist. She bought near $200.

“What kind of investment strategy is that?” we wanted to know. The idea is to buy low and sell high. Buying high won’t work, we said. Of course, in our normal endearingly modest way, we added that we didn’t know. One of us was clearly an idiot, we allowed, only time would tell which of us it was.

Well, now time has told her tale. She wasn’t coy about it, nor ambivalent. No, dear reader, she said it clearly: we are the idiot.

The trouble was that we didn’t know what high was. Since then, Google has climbed to nearly $400. Which gives us another opportunity to make fools of ourselves. The trouble with new technology, we point out, is that there is always newer technology. Google may be a great company. But it is not worth $400. Sell.

• The feds announced this week that they would no longer report M3, the money supply figure. M3 has been rising recently at a 10% rate — three times as fast as the economy it is supposed to serve. This is what is known as “inflation” of the money supply. But there is so much conflicting and corrupt data; it is almost impossible to know what is really going on.

The government reports a “core” rate of inflation that has no real-world significance — it excludes the costs of transportation, housing and food!

And almost all the figures — including inflation — are distorted by the practice of adjusting prices for “quality enhancements.” As computers become more powerful, their price per unit of computing power goes down — even though people may spend more money on them.

So, the feds record a lower price, while the actual price paid has gone up. The more of these kinds of figures people have, the less they know.

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.

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