Read whole thingHOUSING PRICES WILL FALL BY 90% -- TEMPLETON
EXCERPTED:
Linger over this phrase: "the greatest financial crash in world history."
Gary North's REALITY CHECK
Issue 298 December 5, 2003
HOUSING PRICES WILL FALL BY 90% -- TEMPLETON
John Templeton was one of the great investors of the twentieth century. He began in 1937. He made billions of dollars for his clients. He created a family of mutual funds that consistently outperformed the stock market. Then, at age 80, he sold his companies for $440 million. That was in 1992.
He now does what very few extremely rich men ever do: he is giving away his fortune, to the tune of $40 million a year. The general rule is this: "Rich men know how to make money. They don't know how to give it away." This aphorism does not apply to Templeton.
In 1972, he created up the Templeton Prize for Progress in Religion. He gives away a million dollars each year to one winner. I have known two of them personally. Based on their achievements, they both deserved the money, and they both proved this by giving the award money away.
Templeton was the perfect investor for his era, which began in the Great Depression. He is very smart. He graduated at the top of his class at Yale University and won a Rhodes Scholarship to Oxford. He looked around him in 1937, and he saw enormous pessimism. He bought low, and later sold high. Here's how, according to his Web site:
When war began in Europe in 1939, he borrowed money to buy 100 shares in each of 104 companies selling at $1 a share or less, including 34
companies that were in bankruptcy. Only four turned out to be worthless, and he turned large profits on the others after holding each for an average four years.
He continued to do this. Here were the results:
Templeton launched his flagship fund, Templeton Growth, Ltd. in 1954. Each $100,000 invested then with distribution reinvested grew to total $55
million in 1999.
templeton.org
A SILVER LINING IS MOSTLY DARK CLOUD
He is now a bear. To say that he is a bear barely does him justice. He has looked at the economic fundamentals, and he sees a bad moon rising.
The economic problem of problems is debt. Americans, both as individuals and as taxpayers, are deep in debt. America is addicted to debt. Americans are betting their economic futures on the productivity of consumer debt. This is an unwise bet, says Templeton.
In a recent interview by Robert J. Flaherty of Equities magazine, Templeton went into detail about what he sees for the American economy in general and the two markets that have attracted most Americans' investment capital: stocks and real estate. Most Americans believe that the stock market will always go up. They also believe that real estate is a sure thing. Both assumptions are wrong, Templeton says.
As you read his opinions, bear in mind that he made it, and made it big, by riding the stock market boom from close to the bottom to 1992. He missed the 1995-2000 bubble, but he also missed the bear market that followed.
He was interviewed in 1999 and 2000 by the same publication, and both times he was bearish. If readers then had heeded his warning, they sold out close to the top. But, of course, most people didn't agree, and could not all have gotten out at the top if they had agreed.
He is still convinced that there is great downside risk to both the American stock market and the housing market. I agree with him. But not many other investors or investment analysts do agree with him. Here is his take on the stock market.
"The stock market is broken, and it will take some time, maybe years, to repair it. Mass media, especially TV today is so short-term that few in its audience grasp the lasting damage and corrective impact which will continue to linger from the greatest financial crash in world history."
Linger over this phrase: "the greatest financial crash in world history."
Here is a man who made it big personally and who made tons of money for those who heeded his advice. He is very rich. He is not driven by money, which is why he is giving it away. If he were to keep his opinions to himself and concentrate on public relations, how could he lose? "Rich
man gives away a fortune!" That's always good public relations. He would go down in history as a giant.
But here he is, saying things like this, predicting "the greatest financial crash in world history," as if he were some screwball newsletter writer looking to sell a subscription.
If he did not firmly believe his forecast, why would he go public? Why not just short the stock market privately and be done with it? I look at the money he could make by keeping quiet and shorting the market, and I
conclude: "This guy is serious."
"It would be unlikely that the bear market is over when the American stock market is only down about 30%, when in the biggest boom ever, it had been up 10 times over where it had been years earlier. . . . Following such a large increase, a 30% decrease is small."
WHEN YOUR CASTLE IS HEAVILY MORTGAGED
If the stock market is headed lower, how will real estate not follow suit? It didn't in 2000-2002, but this was a mild recession, not "the greatest financial crash in world history." Templeton thinks that large-scale bankruptcies lie ahead for home owners, meaning mortgage-
paying debtors.
"Every previous major bear market has been accompanied by a bear market in home prices. . . This time, home prices have gone up 20%, and this represents a very dangerous situation. When home prices do start down, they will fall remarkably far. In Japan, home prices are down to less than half what they were at the stock market peak."
The example of Japan seems applicable. The peak came in December, 1989. The Nikkei approached 40,000. Real estate prices, fueled by easy credit and a highly concentrated urban population, soared to astronomical
heights. Example: membership at a top-name Tokyo golf course cost over a million dollars, and each 18-hole round had a course fee of $4,000. This was why Japanese golfers bought up a golf course in Hawaii -- where prices were high by mainland standards -- and would charter a 747 for a
weekend.
But it was a bubble, and it did not last. Liquidity disappeared in the 1990's. People who had thought they were rich found themselves saddled with heavy mortgage payments. Their equity disappeared. They became net debtors.
The Japanese are heavy savers. Americans are not. The equity cushion in Americans' houses, at least those Americans under age 55, is minimal. I agree with Templeton: "A home price decline of as little as 20% would put a lot of people in bankruptcy."
Templeton's bugaboo is debt. He told Flaherty the following:
"Emphasize in your magazine how big the debt is. . . .
The total debt of America is now $31 trillion. That is three times the GNP of the U.S. That is unprecedented in a major nation. No nation has ever had such a big debt as America has, and it's bigger than it was at the peak of the stock market boom."
Bigger, indeed. The U.S. government is running an annual deficit now approaching $500 billion. The mild economic recovery should bring in increased revenues in fiscal 2004, but Congress has just passed a Medicare law that is going to cost -- minimum -- an extra $40 billion a
year, permanently, assuming that seniors will not sign up in numbers beyond what the statisticians have assumed. Always in the past, the statisticians have underestimated the costs of federal welfare programs. Like B'rer Rabbit dealing with the tar baby, the government's first punch is never its last. Meanwhile, the economic cost of our occupation of Iraq just keep getting higher, an estimated $2 billion a week. Templeton continies:
"Think of the dangers involved. Almost everyone has a home mortgage, and some are 89% of the value of the home (and yes, some are more). If home prices start down, there will be bankruptcies, and in bankruptcy, houses are sold at lower prices, pushing home prices down further."
How far down will this go? At this point, Templeton achieves what I did not expect any self-made multi-millionaire to do: he exceeds my pessimism.
"After home prices go down to one-tenth of the highest price homeowners paid, then buy."
That means a loss of 90%. He thinks that the U.S. housing market is worse than the NASDAQ in March, 2000.
In case anyone wonders, I rent. But I'm not waiting to buy a home at ten cents on the dollar. I'd settle for 60 cents.
IS TEMPLETON A RELIC OF ANOTHER ERA?
Templeton made it, and made it bigger than most, in an era of inflation, debt, and easy mortgage money. He knew how to make the system work for himself and his clients, and not just the American system. He is best known as the first major fund manager to go offshore, beginning in 1939,
after World War II had broken out.
It may be that he is warning people that they can do what our parents did, but not at today's prices and level of debt. He may be saying -- I think he is saying -- that what goes up must always come down. To do what he did, you must start at the bottom. He got into stocks in 1937, but he started his first fund in 1954, which was basically the beginning of the stock market boom, which peaked in 2000. He rode it all the way up, and then he warned people that the game was over -- right at the top.
What he is saying, loud and clear, is that there will be other smart men who will do as he did. But to achieve this, the markets must get back to where they were when he was starting out.
Getting from here to there means that the dreams of my generation and those behind me will be smashed on the shoals of de-leveraging, i.e., bankruptcy. Debt and monetary inflation created the present investment universe. To argue that the price of capital will fall back to those earlier levels is to argue that there are limits to monetary inflation.
Here is where I part company with Templeton. I believe that civil governments can do only a few things efficiently, but debasing the currency is one of the things they do well, after centuries of practice. In the social division of labor, government has a monopoly on currency
debasement. The Byzantine Empire kept its gold coins stable in gold content for over a millennium, 325 to 1453, with only one minor devaluation after 800 years. No government in history has ever matched that record, or wanted to.
Of course, if we get into what Greenspan calls "cascading cross-defaults," we could see Templeton's vision come true in a matter of weeks. In a system of fractional reserve banking, such a scenario is plausible. That's why you should have currency, including $1,000 in junk coins
(not silver), in reserve. But this probably won't help you much in a true lock-up of the banking system. The collapse of the division of labor will put you at too much risk. To bet on this scenario, you should be in the country with food in reserve. You should, in short, live as I do. But
few people will or can.
If you are going to pick a scenario to live with -- and you must -- then pick one that says that the central banks of this world can keep the digital printing presses going, and will. They can make credit available, and will.
This means that future Templetons will sell their companies at age 80 for $4 billion or $40 billion or $400 billion. It means that monopoly money will depreciate, just as it has. The dollar will unofficially go bust in
order to keep voters from officially going bust.
Eventually, though, there will be a day of reckoning. Ludwig von Mises predicted this back when Templeton was just starting out. There will be either a massive depression after the central bank ceases to inflate
(unlikely), or else what he called the crack-up boom, where mass inflation destroys the division of labor economy by creating monetary chaos and therefore bad economic information.
THE RACE TO INFLATE
We now learn that the bureaucrats in Europe are worrying about the appreciation of the euro. The dollar is falling, as I have predicted repeatedly. It is falling so rapidly that the Eurocrats are worried about the rising price of European goods for America, aka The Mouth.
What to do? According to Andrew Evans-Pritchard, Bill Clinton's thorn in the flesh, the Eurocrats are now talking about the age-old favorite policy, which never works for long, currency controls.
The European Commission is examining the legal basis for 1970s-style exchange controls to stop the euro surging to destructive levels.
A team working for Pedro Solbes, economics commissioner, claims Brussels may lawfully impose "quantitative restrictions" on capital inflows,
clearing the way for a crisis response if the dollar continues to fall.
The document, drafted last month on the orders of Mr Solbes's director-general, Klaus Regling, concludes: "Should extremely disturbing capital movements endanger the operation of economic and monetary union, Article 59 EC provides for the possibility to adopt restrictive measures for a period not exceeding six months."
In short, bureaucrats never learn. The Bible has a choice phrase for the inability of boneheads to learn from experience.
As a dog returneth to his vomit, so a fool
returneth to his folly (Proverbs 26:11).
These people think they can change just one thing. In this case, the thing they think they can change is price flexibility in the capital markets. Like someone suffering a fever, they plan to solve the problem for putting a legal ceiling on the temperature registered by the thermometer. In biological affairs, we recognize such an approach to
cause and effect as the product of the fever: delirium. But in monetary affairs, this is The Latest Thing. In fact, it's the same old stupidity.
If you plan to ride a bicycle, don't solder the handle bars to the frame. If you do, you will either fall over, run into something solid, or go over an embankment.
Similarly, don't try to put restrictions on capital flows in order to fix a price -- in this case, the price of the dollar vs. the euro. A price reflects supply and demand in a free market system. Buyers and sellers can
make deals that they think are mutually beneficial.
This freedom is what bureaucrats resent. But to abolish the movement of capital in the name of stabilizing the mutual price of two currencies will create black markets and a shortage of capital -- in this case, euros
for dollar-holders to buy in order to invest in Europe.
This is a European assault on Europe's future -- its capital markets -- in the name of overcoming a falling dollar/rising euro situation.
The document, drafted last month on the orders of Mr Solbes's director-general, Klaus Regling, concludes: "Should extremely disturbing capital movements endanger the operation of economic and monetary union, Article 59 EC provides for the possibility to adopt restrictive measures for a period not exceeding six months."
In short, the Eurocrats don't want holders of dollars to sell them for euros and then invest their newly purchased euros in Europe's capital markets. Why not? Nobody admits the truth. This proposed policy is one more revival of mercantilism -- state-directed economics -- which promotes the export of goods by altering the exchange rate of currencies.
Mercantilism promotes exports (a small segment of any nation that is larger than Hong Kong), either by debasing one's currency through monetary inflation or else by restricting foreigners' legal access to one's currency. The bureaucrats create a two-tier market: one for foreigners who want to buy your exported goods (good!), and the other for them to buy your domestic capital (bad!). Adam Smith refuted this view of state-run economics in 1776. Bureaucrats simply do not learn.
As a dog returneth to his vomit, so a fool
returneth to his folly.
Evans-Pritchard provides evidence that this is one more case of tampering in the name of exports.
Industry leaders in Germany and France say the euro has crossed the "pain threshold" and risks aborting the euro-zone's fragile recovery.
Which industry leaders? His article doesn't say, but after 350 years of mercantilism, we know: exporters.
Of course, this is not to say that there are not critics of these controls on capital. No, indeed. There are plenty of members of Team B, the inflationists. Don't put controls on the flow of capital, they say. Instead,
debase the euro. Do what China does. Inflate!
Strong factions within the French and German governments want the European Central Bank to counter the "easy credit" policy of the US
Federal Reserve with aggressive monetary expansion in Europe.
Faced with stubborn resistance from the anti-inflation hawks at the ECB, they are instead eyeing exchange rate policy as a means of imposing their will.
Here is what nobody in power recommends: stabilize the euro, allow the free flow of capital, and allow currency exchange rates to move in response to supply and demand: dollars vs. euros. In other words, allow economic liberty. To which the Eurocrats reply: "What? Are you mad, sir?"
It is widely assumed EU law guarantees the free movement of capital but, after combing through the treaties and court judgments, EU experts have concluded that this "absolute freedom" can be limited in an emergency.
"Among the actions that can be undertaken when a member state experiences serious balance of payments difficulties, Articles 119 and 120 EC provide for the possibility to reintroduce 'quantitative protective measures' against third countries."
CONCLUSION
Templeton predicts default through deflation. I predict default through inflation. In both cases, the game is the same: stick it to the creditor, good and hard. Stick it to the evil capitalist. Fact: there are more debtors who vote than creditors who vote.
The game of "choose our default" will go on. There will be time outs. The Eurocrats are talking about a time out of six months. Then what? They have no idea, other than this one: the free market cannot be trusted.
There is a race among central bankers to see which bank can debase its currency the most efficiently. This race began in 1914. There is no central bank that seeks to stabilize its money supply and allow its currency to appreciate against rival currencies. Currencies that appreciate are not appreciated by central bankers and exporters. |
