patrick.net

I've never really been a huge fan but I've caught myself watching Glen Beck the last few nights as he's had Peter Schiff as his guest. Glen gives him plenty of free reign and it's nice to be able to hear Peter fully develop his concepts. While it's worth watching I fear Peter (like myself) is much better at identifying problems and disturbing trends than forming solutions.

(In spite of all the negative news, AFAIK the "bear funds" haven't done as well as you'd think)

Does anyone here (and I KNOW Peter has fans @ Patrick) have his performance numbers? I'd be curious to see them?

Interestingly, Emigrantdirect.com has held their savings account rate at 5.05% APY while thy have lowered there flexible term CD to 4.55% APY.

back to the Fed cut - after I've digested the news overnight, there seems to be another explanation. It's possible that the Fed sees a recession as a done deal already, and this cut is to mitigate the damage down the road. As we all know, the change in the Fed rate will not show for at least 6 months, with full effect not apparent for up to 18 months.

All the economic data available as of today sends mixed messages about the direction of the economy, but it may well be true that the Fed thinks otherwise. For instance, as we've discussed, nearly every single national housing downturn has coincided with a broad recession.

All in all, it makes me wonder if the stock market is correct in being so cheerful about the Fed rate cut. Perhaps it should be thinking, "boy, what does the Fed know that I don't know. Maybe things are worse than we all thought?"

skibum,

That's why I was having difficulty understanding so many of Zephyr's points. This isn't your garden variety rate cut. Conventional wisdom may not be much of a guide. What the St. "should" be asking (not counting MISH etc.) is WHY are we so frantically cutting rates!? That's what prompted my question about Peter Schiff's performance numbers.

I own a fund run by a "bear among bears" (Steve Lehman) and while I've kept the position it really hasn't panned out all that well. What's the answer here? I'm open!

"I find it very interesting that people can think that lowering the cost of a fundamental element of their cost of living is bad for them."

Because, Zepher, not everyone is a goddamm debtor. Lowering the cost of that "fundamental element" only allows Joe Howmuchamonth to run up asset prices and actually increase costs to savers. It also lowers the rate of return savers can get.

I would like to see house prices fall to point that I can buy what I want without having to join the bandwagon of fools who do not mind enslaving themselves to a 50 year mortgage if the payments are right. I would hate to see the current idiocy of low/no down payments, bailouts, and rate cuts cause houses to be affordable only for dual income couples who devote the major share of that dual income to house payments over a very long period. That is the trend if we have a growing part of the population that thinks large debt is a "fundamental element" of the cost of living.

Zephyr Says:
I find it very interesting that people can think that lowering the cost of a fundamental element of their cost of living is bad for them.

Ah, yes, I forgot to respond to this until headset brought it up.

When asset prices drop like a rock, then we can talk about really lowering the cost of living, and you won't find us complaining about that. An irresponsible rate-cut that prevents a slide in asset prices, while simultaneously debasing the currency to which I entrust my savings is nothing to cheer about.

I am sure you know this, so what is really interesting is that so many of your posts seem to put rather thin positive spins on this.

SP

@Headset,

Hate the debt,

not the debtor

o.k? :)

In conventional terms and under "normal" circumstances the points Zephyr makes are usually true. I don't have any problem with that.

What I question is whether these are conventional times or if there is ANYTHING normal about them? Sure we've done plenty of rate reductions over the years to thwart off recessions ( just not when we're at or near full employement and at an already reasonable cost of money!)

The comments I've heard this morning from the REIC on CNBC is that they are *not satisfied! Angelo wants ANOTHER 50 bps. and Schumer wants a TEN % raise in Fannie/Freddie lending capacity! Diana Olick?

"It's never enough, is it?" No Diana, it's not, nor IS there enough.

Since StuckInBA is sharing the love, thought I would give some back. His crystal ball was spot on in calling the end of $50 a barrel oil on this blog.
Regarding Zephyr, keep in mind that in previous threads he has stated that the fed funds rate was above its "natural" setting and needed to come down. That's why he is so calm and the rest of us are running around like madmen. He is also doubling his investments every 3 years (hey, if I was doing that, I wouldn't be worried either...) My WellsFargo puts finally went negative yesterday.
The CA city chart is up on DataQuick. Check out your favorite burg.
Mill Valley up 2.44%
Novato up 16.97%

Somebody predicted here that DOW was going to 12000 by the end of this month. Now, it looks like it is going to 14000.

@DinOR,

The Fed was trying to wean the junkie (US economy) off the junk (easy credit). It found out this summer that the withdrawl was too harsh, man. So the Fed gave a little fix yesterday to ease the pain. Now they're realizing when you give that fix, the junkie's just going to beg for more. It's called enabling.

DinOR,

Its the mindset I hate, not any person. It is bad enough that we think of a 30 year mortgage as "standard", without adding any more callousness about incurring new forms of long term debt. Higher car and house prices enabled by debt are not my idea of a good thing.

Jimbo,

I'm sorry about that, I'm 1/8-1/4 troll :-/

"Coming down" cold turkey is a real bummer man!

You're right, you're exactly right! This is the role BB has been forced into. Junkie Nursemaid! Where's the bathroom again?

@Headset,

I sure HOPE there is a major revolt against the "30 to Life" program. I see so many couples older than my wife and I signing up for massive mortgages and they're older than we are! We fully intend to have this modest place paid off by the time Mrs. DinOR leaves the workforce over the next 3-5 years. The sooner, the better.

Did anyone check out lunarpark's link to the article Bay Area foreclosure activity skyrockets. There is one county that stands out above the rest (some might call it "special"). Here's a hint: starts with Ess and ends with Eff.

Bernanke and the governors of the Fed are public officials, but the rest of it is a private entity. Must it act in the best interest of the country?

I'm with Jimbo on diversifying my holdings over several currencies. I am about 35-40% foreign investments, mostly European and some distressed Japanese real estate. They have done very well.

EBGuy,

SF has a very small sample size, we'll have to watch trends in the city. Sonoma's looking grim. Every other house up there seems to be for sale right now.

Here's the thing. So commodities and housing are the traditional hedge against inflation, but to some extent both are already very expensive. I'm with some other readers who were wondering whether it's worth bailing now when it will be expensive.

Generally you want to buy into things before they get expensive, but if you're diversifying now, haven't you already missed the boat? I'd hate to buy gold now and then watch as the dollar value of gold declines while the dollar slowly gains value over the next decade.

I guess it comes down to whether you think the dollar will lose substantially more value (buy gold) or whether you think the dollar will start to regain value (stay with the dollar).

I have no idea.

The Decision Strategist,

At this point I'd settle for "under valued". Never mind potential for upside, just not... over valued.

Hmm, the nuclear option...

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/07/bcnchina107a.xml

SFWoman,
Keep us apprised of the situation in Sonoma; I do miss Athena's(?) first person reports on that region.
I am not in doubt that the Bay Area is burning down, but I hold that the price(TIC)-to-rent ratio is the metric to watch in the City. Once that goes, the rest will start to fall. ... And about the only way that is going to fall is if rents go down, which could happen for two reasons: the rest of the Bay Area has burnt to the ground (real estate falling, not actual burning) or enough new condo-to-rental inventory hits the market. Or a recession. At this point SF seems to have an inventory problem (as in, not enough).

Yes the women are beautiful in central europe. Our great ally during WW2, Communist Russia, raped about 300,000 women leading to about 100,00 births. The Germans and central europeans were very concerned that they would get f-ed before WW2. It wasnt until after.... We choose our allies in an interesting way......

Here is an interesting view of the current financial situation in US: http://www.moneyandmarkets.com/Event/p225-75893.html

EBGuy :

hold that the price(TIC)-to-rent ratio is the metric to watch in the City. Once that goes, the rest will start to fall.

Not sure I understand your point. TIC = Tenants in Common ? Are you comparing condo PITI to rent ?

I think this chart is interesting because all the Federal Funds rate cuts in the early 90s did not stop real estate (particularly California real estate) from imploding...

http://www.federalreserve.gov/fomc/fundsrate.htm

Are you comparing condo PITI to rent ?
No, much worse than that. TIC PITI to rent. You have to understand that SF city govt has done everything in their means to stop the conversion of rental stock to desirable forms of ownership likes condos (or coops) so, with the advent of fractional TIC loans, TICs have emerged as the bottom rung in the ownership ladder.
And for some reason I have become the waterboy for why SF is special on this blog. I guess I am just trying to understand the world around me a bit better :-) I have a hard time envisioning a scenario where SF doesn't eventually sink like the rest of the country (and Bay Area), but they will manage to keep their heads above water longer than the rest. According to Socketsite, their inventory is still lower than last year. Now isn't that special.

"TICs have emerged as the bottom rung in the ownership ladder"

That has got to be the worst thing I have ever seen. Take a house for $400K and sell quarters for 25% above cost. I cant imagine anyone
will want to even walk into this TIC pest as prices decline, unless its a
half way house. Realtor marketing has gone nuts... they need their meds.

I'm glad I signed up for a 13 mo. CD at 5.5% last month. Too bad it's only the FDIC max. 100K. I should have converted two of my bank money-market accounts over to CDs too.

EBGuy - Or jobs move out, as they have...

One of the biggest hits to home prices in early 90s was when Bank of America left San Francisco. No one saw that coming. Lots of people started to sober up!

I don't see what is wrong with TICs, with the individual mortgages on them they just seem like the poor man's coop to me.

I think the marginal areas of SF will be the first to crack.:
http://www.socketsite.com/archives/2007/09/perhaps_its_now_priced_to_rent_841_webster_returns_1.html

Bought January 2005 for $650,000
according to propertyshark lots of permits taken out and work done on the house
'failed to sell at $989,000 despite four months on the market'
now availible to rent at $4950

Anybody want to rent a house next to the projects that looked like a good idea in 2005?

Of course BofA was later purchased by NationsBank so the HQ was going to move out of SF anyway.

I don’t see what is wrong with TICs, with the individual mortgages on them they just seem like the poor man’s coop to me.
Not a bad deal in SF, and then you can get into the condo conversion lottery. Berkeley used to be okay (well at least the two and three unit projects). After some "reform", now you have to pay a 12.5% affordable housing fee when you convert (and do a lottery if a certain threshold of units apply for conversion). Not so nice! Of course, there are also occupancy restrictions to prevent specUvestor condos. Here is another interesting two unit TIC property in the East Bay. Not a flip as they bought for $205,000 in 1997. They refied in March 2007, though, and took out $825,000, presumably, to do some work to get the house ready for sale... and of course, have some fun money (why wait til the homes are sold)! They are trying to sell for $999,000 after some aborted attempts above the magical $1 million mark. Judging from the current Craigslist ad, they may not be pushing the TIC angle so much these days. Oh, and did I mention, variable interest loan...

Regarding COOP and CONDO, what are the pros and the cons of each?

I'm waiting for that watershed moment to get a beautiful coop/condo that was built in the early 1900's. I can't stand the new constructions. Utterly soulless.

Gotta' love Socketsite! They describe the above mentioned property as:

"Priced to Rent!"

(Damn! Why didn't I... think of that!) It's a perfect play on Peter P's "Priced to SIT!" which of course was based on Realtwhore's (TM) "Priced to SELL!". See how twisted things have become?

The Oregonian revealed today that "The Wyatt" in the "Pearl District" has failed miserably (selling only 53 units) and will now be 100% rentals! Yeah! (And this was supposed to be the "Pinnacle" of the Pearl District?) Oh wait a minute they already have a loft called "The Pinnacle"!

So, no, the inability to secure financing has not been a factor.

Decision Strategist, DinOR:

I gave up trying to outguess the market. Two words: asset allocation.

If you have a decent asset allocation, over time as you rebalance you will naturally reduce positions that have run past where they should be and buy positions that have yet to catch up. I can't tell you how many times I thought I knew more than the market, but didn't. You watch something plunge, think you'll pick it up cheap, only to watch it plunge some more. For example, the way Bill Miller bought home builders last year for Legg Mason. Or, you watch something run up, think it's overpriced and due to correct, only to watch it continue running past any point of return. In my case, that's oil's trip above $30/bbl. I should have just held my nose and bought, and let asset allocation worry about whether I'd paid too much.

DJM,

What DJM said.

I particularly appreciated the "should have just held my nose" part. If I have a fault (and there are many) it's selling early. I'm o.k with that.

I understand Bill Miller's position though, the money keeps pouring into the fund and well... he has to buy SOMETHING!

Thanks for the kind words StuckinBA.

Actually even within the commodity class, there are some bargains to be had. Oil price hit new high, but uranium took a big hit and has not recovered to 2006 peak. Oil and uranium should move in tandem, here is your arbitrage opportunity. US will have to build large scale nuclear power plants, the later we wait, the more we need to pay.

Yen, for example, has not appreciated much against USD and is the only currency among the developed markets that is still under-valued. Here is your opportunity to take a small bet. Japan has aggressively adjusted its export policy to focus on Europe lately, to mitigate its dependence on the US consumer market.

For the believers of gold as a hedge, gold is still very cheap if you look at the price adjusted for 30 years of inflation. In 1974, when the Bretton Woods standard came to an end, gold was 183 an ounce. I used DOL official inflation number to compute the CPI index, using 1974 as 100. 2007 CPI index with 1974 as base is 431. So today's gold price adjusted for 1974 price is 725/4.31 = 168. Today's adjusted gold price is actually lower than the gold price when the US just abandoned the gold standard.

If you look at 1980's average gold price, it was 594. Using 1980 as the base, 100, today's CPI index is 258. Therefore, today's gold price expressed in 1980 term is only 281, half of the average 1980 price, not the peak. It took Volcker 18% Fed rate to curb the rise of gold price and keep it dormant for 20 years. Do I see the Fed raising rate to 9% any time soon? Hell no.

The above brief analysis is only for people who are comfortable to deal with the huge swings of commodity price, and believe in precious metal and commodity as the ultimate hedge against inflation or stagflation.

OO,

Great analysis. Should I buy mining stocks or metals themselves?

OO said:
Yen, for example, has not appreciated much against USD and is the only currency among the developed markets that is still under-valued.

Do you have any thoughts on the 'currency war' theory - that China may try to force the Yen up against the USD in order to make Japanese imports less competitive?

[impressive case for gold in your post, btw. I was wondering if it was too late to hedge with some GLD, but your analysis gave me some food for thought.]