Economy propped up by cheap money
By William F. Hague
05/19/2005
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The Federal Reserve Board and Alan Greenspan ("Mr. Bubbles") can't hide inflation forever! Investors should be aware that the tenuous nature of our economy has been propped up by prolonged periods of "cheap money."
Before we go deeper into this concept, I feel a disclaimer is in order here. An interesting scenario has been brought to our attention by a client, who by the way, owns property here in paradise. It appears that there are some out there who only read the headlines without so much as a glance at the actual content of these weekly columns. Yes, believe it or not, it appears that someone actually thought that we are "bearish" on residential real estate because we are in the wealth management business. Are you kidding me?
There is a much bigger picture here than just Marco Island real estate.
Our position on the stock market has been equally as "bearish" as we have been on waterfront property here in paradise, only the stock market has not run up 200 percent in 12 months! If it had, I'm quite sure that more investors would feel the same way.
To this end, let's consider the facts: The stock market has been relatively flat for the last 12 months, flat with all-time record low interest rates, which is supposed to be a catalyst for market growth. To that I say, "What growth?"
Yet again, this is why we encourage investors to safeguard their investment portfolio with insured accounts that allow us to capture a portion of the small rallies, or upswings, while insuring us against any market losses. By locking in the annual "high-water" mark in the portfolio, this allows investors to participate in the upside of the markets, while avoiding any downside. Think back to where your portfolio was at the beginning of 2000. Imagine if you not only maintained those levels but were also able to continue to grow your money each year thereafter, even if at low single digit returns. Where would you be today? Now you're getting the picture.
Mystery solved. We're equal opportunity "bears," if you will.
Let's look even deeper. On the heels of the preposterous recent legislation limiting personal bankruptcies, all to protect the financial institutions from the pending "tidal wave" of bad credit as a result of their own cheap money policies, now we get the United Airlines "boondoggle."
Three-Mile Island?
Did my eyes deceive me or has the federal government approved a plan for United Airlines to pull the plug on their corporate pension plan? What's next? Are they going to take Social Security funds and use them to prop up the last remaining pillar of the economy real estate? Of course, I say this in jest. However fellow Islanders, time is running out on the greatest bubble of all time whether we like it or not.
Take a closer look. Nobody can argue the facts, real estate for sale is up nearly fourfold and consumption has slowed to a trickle. Maybe the ones who thought I was biased against Marco property simply missed the 180-day window last year when any price would do. I can tell you that, literally, every single home on my street has a for sale sign in the yard, and even as you exit the street, the first five homes to the left and nearly every other home to the right also have signs in the yard.
Seriously, with all of the for sale signs, I feel like I live on Three Mile Island back in March of 1979 after the worst nuclear disaster in U.S. history and nobody wanted to live there. Don't get me wrong, there's nothing wrong with a 300 or 400 percent profit on your Marco Island home, the problem is that there is a finite window of opportunity to do this, i.e. last year.
According to a senior economist in Washington, D.C., "...nationwide, residential real estate has captured 35 percent of private investments, the highest in 35 years, which has introduced unprecedented credit risk to our financial system."
Again folks, it's not just me anymore. Skyrocketing home and fuel prices, interest rates moving up, inflation creeping upon us, just to mention a few, should give us somewhat of a wake-up call.
Consider this quote from one of the founding fathers of our country, Thomas Jefferson: "If Americans ever allow banks to control the issue of our currency, first by inflation then by deflation, all the banks will deprive all people of property until their children wake up homeless."
In the wake of the inflationary worries, now comes a far more severe concern deflation. History has shown that post-bubble economies face overwhelming deflationary pressure. This contraction in credit, once its psychology takes hold, will change the rules of the asset game for at least a decade.
Housing ATM machine
Now for some good news. Special situations like South Florida and Marco Island, etc., may be somewhat insulated as opposed to the majority of the nation. But remember, " ... an outgoing tide lowers all ships."
It may mean that the speculators on Marco who were the last in with the third or forth purchase of the same property last year may have to get comfortable with their purchase for years to come. It also means that long-time homeowners on Marco who finally decided to get in at the very end may actually have to settle for and I can't believe I'm even saying this 100 percent return on their old Deltona homes rather than the 200 to 300 percent, or even in some cases, 400 percent profit that they have somehow been conditioned to think they are entitled to.
Here's further evidence that it's not just me anymore. Bill Fleckstein, president of Fleckstein Capital, a prominent hedge fund manager writes: "Fed Chairman Alan Greenspan has succeeded in creating a Japanese style syndrome here in America ... the big bubble in Japan back in the early 1990s occurred in the real estate market ... when Japanese real estate started to sink, it infected the country's entire financial system ... in which it has seen real estate values decline for 14 years."
He goes further to point out that " ... when our real estate bubble bursts and it will burst, though we don't know when we will be left with a financial system riddled with bad loans as well as consumers who have not only lost their personal housing ATM machines, but also owe more on their homes than they are worth."
The bottom line is this: If and I say if we are forced to deal with a dual-bubble burst (credit and housing), we could be more likely to endure a period like Japan has been experiencing or even, heaven forbid, like we went through in the 1930s.
Many investors have dropped their guards and no longer worry about how nasty the financial environment could get. The tremendous levels of leverage in the United States currently, lack of savings and massive deficits, could expose us to a Japanese-like experience, though probably much shorter.
As usual, have a plan, insure and safeguard your assets, and control your expectations.
Disagree? Let me know. My contact information is below.
William F. Hague is the president of W.F. Hague Investments, an independent investment services firm. William welcomes your questions and can be reached at W.F. Hague Investments, 606 Bald Eagle Drive, Suite 613, Marco Island, FL 34145, or by calling 389-1999. E-Mail can be sent to WFHague@earthlink.net. |
