Tuesday, November 27, 2007

After the Collapse

Clusterfuck Nation by Jim Kunstler, author of "The Long Emergency"
But I must say, at the risk once again of sounding extreme, that the structural and systemic sickness in the finance realm is now so severe that it is hard to imagine we will get through the month of December without some major trauma in the markets. In fact, I'd go so far as to predict a thousand-point drop (or more) in the Dow just in this week after Thanksgiving. Real wealth "out there" is evaporating like popsicles dropped on the floor of Hell's fifth circle. It is coming out of the system whether the Big Boyz or anybody else likes it or not, and its absence will assert itself.

At the risk of sounding even more extreme, I would be hard put to believe any reports that "consumer" spending in the days following Thanksgiving will match the hopes and wishes of economic officialdom. My own hunch is that average Americans are so maxed out on debt that they don't know whether to shit or go blind. Perhaps lot of them are willing to take a last step into fatal insolvency in order to put a plasma TV screen under the Christmas tree and appear as heroes to their families. If that's the case, it would only imply a greater bloodbath in credit card default thundering through the system in February and March, which would only deepen the carnage in collateralized debt instruments further up the food chain.

That stuff probably has a long way to unwind, even as the "train" of losses hits the immovable obstacle of reality and the "boxcars" of consequence fly off the rails. The slow-motion train wreck could sweep away an awful lot of familiar things in its path -- banks, companies, government-sponsored enterprises, whole industries, whole economies, nations, up to and including the prospects for civilized existence, if severe hardship leads to war, which it often does.

It's an extreme prediction.
Mr. kunstler is probably closer to the truth however than many of us would like to believe. When he says losses in world financial sectors due to derivatives are far worse then any report would indicate, I believe that to be the case and have suspected that for a while now.

Where he postulates that the real after effects could wipe out banks, industries and possibly lead to war, he is, unfortunately, probably accurate. If one simply glances backward at history it's not hard to see how it might play out. After the banking panic of 1907, which had global consequences, it was not long before the world entered the Great War, (WWI) and the damage done to Mexico's economy during the panic is believed to have been the catalyst for their civil war in 1910.
Where Mr. Kunstler mentions and impending "global contest for remaining fossil fuel resources", you can bet it won't be a friendly contest. You only have to remember what Japan did in 1941 when the US Navy blockaded much needed oils shipments from reaching Japanese ports. The Japanese got a little cranky and bombed one of our ports... Pearl Harbor.

War? Ya...

China, who's been engaged in an unparalleled military build up for most of a decade now, will probably want to see some return on that investment. I won't be surprised to read news reports of Chinese war ships parked in the arctic claiming resources up there for itself soon. Nor will I be surprised if I hear they are cruising the North sea oil fields leaning on Britain and Norway to 'share the love or else'.

Then there is Russia. The former Soviet Union lost some of its' military might in the early 1990s but not all. Russia has been enjoying an economic boom recently and as a result has a few extra rubbles to poor into upgrading its' military machine. They have taken to showing off some of this modern hardware just off the coast of Norway as recently as last week, with Russian fighter jets making multiple incursions into Norwegian airspace earlier in the year, just in case there are doubters here.

If America looks weak, it may be an invitation to the two remaining global military powers to make a grab for resources anywhere they choose with only each other to contend with.
As the global economy deteriorates look for increased crankiness around the globe and wars to follow as surely as testy drug addicts going through withdrawals.

Monday, November 26, 2007

I recently returned from the U.S.

I was on the road again recently to have a look around. I decided it was time to venture away from my desk here in Europe to have a closer view of what effects the U.S. housing market is having on American consumers. You know, a kind of view from the parking lot.

I started my journey in Boston on a month long tour of the East coast and found things quieter than I expected. On a previous visit to Boston I was greeted by blaring horns, a veritable wall of sound, as soon as I walked out of the airport. (It’s how Bostonians communicate) This time however I heard none of the customary car horn communication as I exited Logan airport, it was down right subdued...

I caught a shuttle to a nearby hotel and found it virtually empty. It was so quiet I felt like the last man on Earth in one of those science fiction flicks. I asked an employee if things were slow and was told confidentially that business was a little off. If that was a little off I wonder how a serious downturn looks.

I spent more than a week in Massachusetts and visited a number of local chain stores including Wal-Mart, they were quiet. I haven’t spent much time in Wal-Mart’s but they are big stores and you would expect to see a fair number of people in them... not this time, or any other time I visited.

I made a number of trips to Ace hardware as well for a little project I was working on. The lights were bright, the musak was playing and the shelves were nicely stocked, it took me a while to notice that I was the only one in the whole store besides the employees and this was the story on more than one occasion.

Traveling around Boston and other areas I passed through, I noticed a lot of empty retail spaces, and businesses like Best Buy, Staples etc. were not populated with customers. All looked normal except for an extreme lack of people spending money. It all looked very sleepy.

Traveling south to North Carolina in a 40 foot motor home I noticed there was not a lot of traffic, this was true all the way south on my journey. Maybe I shouldn’t be surprised with the economy slowing as it is and gas prices rising as they are, but I have been living in Europe for the past four years and things are not how I left them. This new reality is unsettling.


Down in North Carolina, things were quiet as well. As fate would have it, motor home maintenance brought me to Lowe's, (LOW: NYSE) a number of times, you know, the big hardware store. The situation was the similar down there - big store, no customers. There were a few but the parking lot is vast and so is the store and the best I can say is that it was quiet, very quiet.

I’d gone into a number of establishments around Wilmington and had been the only person there on every occasion. Even the Post Office was quiet on a Monday! Anyone who tries to tell me there is no recession is full of crap.

I had occasion to shop for some clothes at an Eddie Bauer store at the Mayfair Mall outside of Wilmington. Mayfair is an upscale area and home to the more affluent, the kind of people whose spending habits are said not to be affected by an economic slowdown.

The mall is new and laid out like a walking village, a pleasure for even me; a guy who hates shopping, to go to. Eddie Bauer however was empty save for two employees who seemed very happy to see me. With little else to do they acted as my personal shopping assistants. Maybe it's because I live in Europe where if you ask for assistance you are liable to be slapped in the back of the head and shown the door. But it seemed like a lot of help for a guy who just wanted to buy a shirt. Not to mention the steep discounts I found there.

Anyway, only two other people entered while I was there which was the better part of an hour. One wanted directions and the other was looking for a job. Sales were not brisk. This was consistent with most other stores in the mall.

My overall impression on this trip was, things have slowed dramatically and if they stay this slow Christmas will be bleak.


I will be hitting the road in the U.S. next year with my family, touring the bubble cities of America. I will be reporting what I see from my travels and keeping you informed on the meltdown from a more front line perspective. I will also be keeping a travel log and I'm currently planning a video blog of our year long journey across the States which I will link to from this blog. Keep me bookmarked or subscribe to my feed.


Thursday, November 22, 2007

The Coming Suburban Calamity

It is estimated that 2 two million homes will enter foreclosure next year. ‘So what’ you say. The United States is a country of 300 million people. Two million families is not a large percentage of the population. How much could it really affect the economy?

From my point of view it’s not so much the foreclosures as the psychological effect it has on property owners. Credit is drying up, builders are still completing projects and putting still more supply into a saturated market and two million more properties are set to hit the market in this near perfect storm.

All of this will have real effects, but it also is an undeniable sign that the housing party is over. That simple fact alone should scare the living crap out of any speculator who still holds property. It’s over and you are screwed! Let me count the ways…

Now here is another developing problem that is beginning to manifest; the effect a foreclosure property has on neighboring houses. Copper seeking looters, aluminum siding scavengers, drug dealers and gangs can all have a bad effect on an abandoned house and the surrounding neighborhood. If a home owner who is not in trouble finds his property value going negative due to the destruction of a neighboring property, he will have to decide if he can live with the increasing decline into chaos. If so, he may find very soon that the value of his property has gone to zero. This can be a problem for even those who own their houses outright. One look at a residential neighborhood that has degenerated into an abandoned no-mans’ land and most potential buyers will turn tail and run.

This is a problem that is already happening. Some formerly nice suburban areas in Ohio for instance are now behind a red line where real estate agents no longer tread, police presence is scarce and criminals have free reign. This situation is enough to persuade anyone to walk away from their investment, especially if they have little or no equity.

Crime scene: foreclosure

The Great Fall: How Suburbs De-gentrify to Ghettos

As foreclosures increase look for this problem to spread like an airborne virus. Each foreclosed house that sits abandoned for even a month attracts criminals of various sorts and soon looks like hell or worse. This has a direct effect on neighboring properties and can even affect a whole block of properties! Consider that there are typically 12 to 14 houses on any suburban street. One bad house can affect them all! I think it may be more accurate to take the 2 million potential foreclosures next year and multiply them by 14! In other words a possible 28 million abandoned or worthless properties.

As the effects of looting and crime drive owners away, the cancer will spread to even more properties until it reaches some sort of impedance. But tens of millions of properties could be abandoned or rendered unsellable before it all ends.


Now is not the time to buy, but if you must...

Many savvy people have become 'Bubble Sitters', those who sold near the top and are now renting, waiting for the market to bottom before jumping back in. Many are settling in for a long wait.

For those who simply want to be property owners I can tell you, now is not the time to buy! Some people in the U.S. find themselves in the position where they, for what ever reason, need to buy. If you must buy property, here is some common sense advice from Down-Under.
As a former real estate investor myself I can tell you it really is this simple.

By Neil Jenman
Take the 'property doubling every seven years' statistic, the one that's supposedly chiselled in stone. It's garbage. To prove it all you need is a ten dollar calculator.

Take the city of Sydney – the Mecca of property investing. (In Australia)
In 1890, the average Sydney home price was $1,446 (£723). If property really does double every seven years then, in 2009, the average Sydney home will be worth $189,530,112.00. (There must be one helluva boom coming in the next 14 months).

Most inexperienced investors do not realise that investing in property – the right way – is relatively simple. The respected financial expert Noel Whittaker says something like this when it comes to smart property investing, "All you have to do is buy a well located property from a seller who urgently needs to sell and is prepared to accept a discount for a quick sale."

I have a very close friend of Italian descent. His name, of course, is Tony. He has the best definition I have ever heard for investing the right way in property.
Tony says, "I never invest in a property unless I know there are plenty of people who would line-up to buy it from me for more than I paid for it as soon as I have bought it."
In other words, Tony only buys high-demand property. He never buys from a Selling Machine company.

I have seen plenty of people make plenty of money by doing what people like my friend Tony do – they stay away from Selling Machines, they learn about the property market by doing their own time-consuming research (which, when you work it out is probably worth hundreds of dollars an hour to them) and then they buy a good property in a good area at a good price.

Monday, November 19, 2007

Cutting in on Bernanke's racket

This story came across my desk this morning and though I don’t venture often into discussions about currencies, I have to comment on this one.

As part of a nationwide investigation, FBI agents raided three Coeur d'Alene business locations on Thursday, seizing records and dies used to make the so-called silver "Liberty Dollar" sold throughout the United States by anti-government patriot groups.

I’ve never heard of NORFED – (the National Organization for the Repeal of the Federal Reserve Act & Internal Revenue Code) before today nor have I heard of Mr. von NotHaus and his liberty dollar.

At first glance NORFED looked like one of those survivalist ‘anti-government’ patriot groups to me. After reading on I changed my mind.

Minting silver commemoratives or ‘coins’ if you will, and printing redemption notes for same silver commemoritives or ‘coins’ seems like a good start after what our own government and the Federal Reserve have done to our money.

Since 2001 that $1.bill In your wallet has lost nearly 40% of its value due to the Federal Reserve under Greenspan printing and circulating ever more of them whenever they got the itch. (By the way, Bernanke has the plates now and he’s not afraid to use them). If you do the same, the boys running the printing racket will pay you a visit. They don’t need to break your kneecaps. They have guns and cages to put you in and will inflict more permanent harm on you than lesser organizations might.

Crossing Mr. Bernanke’s business in this way is called ‘counterfeiting’ and only his boys are allowed to do it. That is, print and place into circulation any form of credit note redeemable by the bearer. It should be noted that it is expressly forbidden by the US constitution for our government or anyone else to do the same. Who’s going to call Bernanke on it though? Not me, he has a large group of enforcers – the SS (Secret Service) and others with various acronyms who have guns.

As an investor in currencies as well as gold and silver, I find Mr. von Nothaus’ idea intriguing. – Paper certificates like money backed by a tangible asset: silver, the price of which is dictated by broad market forces, not by an elite group of wealthy men who tell us a piece of paper they print with green ink on it is worth $100.

If you hold certificates valued at $100. in silver, you at least have a benchmark to measure them by instead of a man in an expensive suit puffing out his chest to project his authority as he declares the same about his greenback notes backed by… well, nothing!

When NORFED gets their offices, records and precious metals back from Bernanke’s boys I think I am going to pick up a few of his Liberty commemoratives as an investment. It looks like they could outperform the U.S. dollar, of course a can of mixed nut can do that right now. Don’t believe me? Just check the price of mixed nuts!

Friday, November 16, 2007

Will foreigners save Hawaiian real estate?

More from Peter Slate at Haiku Properties.

From: "Peter Slate" <SA7@PeterSlate.com>
Date: November 14, 2007 1:07:05 PM HST
To: <
Subject: Maui - 10 / 2007

Thanks for your comments and feedback.

Instead of analyzing the October sales figures, I’ve attached the Real Estate Association of Maui’s sales summary. Particularly interesting are the sales figures on page 4, which show the total number of sales month to month, and year to year, dating back to 2002. By looking at these figures, you’ll see there were many more sales, month to month, and year to year in 2003, 2004 and 2005 than in 2006 and 2007. I’ve often wondered about the mental tug of war between buyers and sellers, and now I get to see the transition in action. Considering the large number of new developments that have come on line in the last three years, combined with the growing number of people listing their properties, its no surprise Maui’s real estate market is anxious. Listed in Maui County, today, any buyer has the choice of 1086 homes, 1333 condos and 519 pieces of vacant land. There are 153 homes (14 %) in escrow, 116 condos (9 %) in escrow and 50 pieces of land (9.7%). These escrow numbers are sobering, no question.

More rate cuts are expected when the Fed meets on 11 December. Should this happen, it will total three rate cuts in four months. Sound familiar ? Remember April of 2002 ? Given that real estate movement lags rate cuts anywhere between three to six months, we anticipate buyers to return soon (Dec/ Jan) based on the half point September rate cut. Interestingly enough, I recently spoke with a Canadian couple this weekend who bought on Maui a year ago. They wanted to know the current state of market. After a short explanation, the wife, head in hands, said “Oh s…t, now is the time we should have bought!’ With a weak dollar, “very motivated” sellers, and excessive inventory on the market, foreign money could very well turn this market this winter. Now is the time to do your due diligence and position yourself to buy. Looking forward the next six months, we could see one of the great buying opportunities for years to come.

Please note, if you’d like to opt out of this letter, simply reply to this mail telling me so.

Thank you,

John Papazian R(B) Peter Slate R(S)
Haiku Properties Haiku Properties
808 878 6800 808 276 4017

I detect a bit of wishful thinking from Peter on this e-newsletter. The hope that foreigners, on the strength of their currencies over the dollar will come in and save Hawaii real estate is probably a nice warm dream. Careful not to wet the bed...

While it is true, Canadians, for instance, find their currency reaching parity against the U.S. dollar. Good on them...
Some Canadian cities are still experiencing rising real estate values. The secret is out though Peter, American real estate is doomed and getting doomeder. O.K., I made that word up.
Anyway most savvy Canadians won't run outside while it's raining knives. Sure, I know they talk funny but that doesn't mean they're stupid.

While foreigners are thrilled about their currencies' nominal rise against the Greenback, it will most likely manifest as consumer spending. People still like shiny stuff. It's a D.N.A. thing...

I just came back from a month long trip to the East coast of the U.S. There were angry passengers on my way back to Europe when many could find no room left in the overheads to put any of their four or more bags. Judging from the conversations, I was the only American on the flight.

Maybe foreigners will save Christmas, hopefully before the realization that that their own currencies are merely fiat and of no more real value than ours. I doubt however that they will save our real estate market. keep in mind that the R/E bubble and the free-for-all credit that made it possible is a global phenomenon and many foreigners would have to liberate equity in their own homes, many of those homes falling in value as I write this.

Canada is behind the curve and some crazies still think that real estate prices never go down. But no one is immune. $400-trillion tied to failing credit derivatives tells me that's so. The U.S. is a $14-trillion economy; you do the math... $400 trillion, that's a lot of clams.

Also your wishful thought that dropping interest rates will spur sales is just that, wishful. Global financers are skittish, they are seeing derivative write-downs (re-pricing downward of massive investments) every day now. Liquidity is getting pinched off. It doesn't matter how low the borrowing rate goes if no one will loan the money.

Look for the real financial fits to come from institutions, not at the consumer level. As banks and brokerages begin to show cracks, interbank relations will break down, that's when the real hurt will begin and contagion will spread from there rapidly.
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