Friday, March 18, 2016

The Great Depression, We Have Arrived!

I was reading about Janet Yellen the other day and unfortunately didn’t note the article. It referred to our present economic place in time as that akin to 1937. I’ve read from several sources that the Great Recession of 2007 ended years back and that people are afraid we might sink into a new recession. I’m of the opinion that we have never left the last recession.

There’s an election coming up and a person by the name of Donald Trump is upsetting Congress to no end. They are worried that this guy is not into smoke and mirrors and all their hard work sweeping the mess under the rug will be exposed. They are claiming he is unqualified to be President. The only requirements I know of; are to be over the age of 35 and be a US citizen. Whereas the minimum requirements to qualify for a job to clean toilets on a school campus might be greater than those needed to run for the political office of President--go figure.

When will this house of cards fall down? With interest rates at zero, the only investments that make sense are real estate rentals, credit card loans, and student loans.

On the books, a 6 % return on rental real estate looks good, but if you have ever been a landlord, you would demand 15 %. Until the reality sets in as to how a renter can destroy rental property, housing prices will stay artificially high. There is a place a few blocks down from us with three story condos, maybe about 400 of them. Asking rental is about $2,500 for a two bedroom. Detached houses in this area are renting for about $2,200, I can’t quite figure that out, on a cash flow basis for the condos. The loud parties, music and crying babies, I don’t see anyone moving into them.

Student loans are still a big draw, but most now recognize them as sucker loans. I expect this institutional program to be ripped from ear to ear with fraud. You can probably register for Cocaine University and get 40K a year from the government if you can sober up enough to fill out the forms correctly.

Credit card debt is a real walk in the dark. During our working years most people are a good risk on credit cards. What happens when you get to be 75 years old and a card holder with great credit? I’ve heard of people 30 years old being told they have a terminal condition and go and rack up 200K in bills. only to be told later, they were misdiagnosed and weren't going to die any time soon. 75 going on 80, go ahead max it out on all 10 cards, they can’t garnish your wages.

We need to realize that zero percent interest rates is an upside down process. Low rates imply there is very little risk (how does that reasoning work?). We see all of these companies moving out of the US and at the same time the unemployment figures get better? The newspapers report, what they are fed. I get a little irate with people that quote print without reading between the lines.

The stock market is the key; will it collapse before the election or after it? At some point Congress is going to have to acknowledge the Great Depression we are in. FDR did it after the election in 1933. Only then did Congress begin to march to a different drum beat.

That will be the turning point, where we move from Wall Street for our earnings, to Main Street for our paychecks and the construction of badly needed infrastructure. It sound rather innocuous, but when Wall Street's hypothecation hits a brick wall, we are talking about a financial Train Wreck. If you have no savings it will be painless. Otherwise your massive heart attack is only one bank statement away.


Dan Mac said...

"If you have no savings it will be painless. Otherwise your massive heart attack is only one bank statement away."

That closing statement alone nearly gave me a massive heart attack Jim.

What to do with savings? The only tangible hard asset I am qualified to assess would be RE. I wouldn't know counterfeit PMs from real.

I think I recall, in the early days of this blog, discussions anticipating the day when USTs would reset to juicier yields and having an "opportunity" once again to produce compounded income. Boy did that not happen...

Jim in San Marcos said...

Hi Dan Mac

In the 1930's people lost about 90 percent of their wealth that was held in banks and the stock market.

Right now real estate is way overpriced in California. Buy now and you could lose 50% if the housing values dropped. If inflation takes off, you may do real good. Since many are unemployed, the most visible taxes that are available to governments are on real estate.

I like precious metals. Especially Canadian Maple Leafs. The neat thing about a one ounce silver maple leaf is that it has a currency value of $5 so if our government wanted to call in our precious metals, you have the right to a higher price than what the government would offer for bulk silver plus foreign currency might be exempt. With the holograms on each coin now, they are almost impossible to counterfeit. Platinum Maple leafs are a real deal right now.

With interest rates at this ridiculous low rate, it is hard to figure what the final results will be. All we can be sure of, is that our economy is being forced to consume, invest in real estate and take more risk in the stock market. Once interest rates return to normal, investment would seek new and different enterprises and people would once again save money. Of course that would kick the chair out from underneath the real estate market as well as the stock market.

The banks are safe, but your retirement funds are the investment vehicle that will take the hit and that's pretty much what I was referring to when I said "bank statement." Investment funds are not FDIC insured in most cases. And even the private insurance does not cover losses created by a drop in value of the underling stock price.

What you need to realize is this is just my opinion, someone else may connect the dots completely different. What happens next is an open book.

AIM said...

I don't see interest rates rising for a long, long time. ZIRP and NIRP were created by, and are for, the governments namely because they'd never be able to service their national debts if rates went up (and ZIRP, NIRP & QE is also a pathetic attempt to boost asset values for the rich in order to create a "wealth effect" which will prompt the people to increase their spending and boost the GDP... which is one of many unrealistic, unworkable, Ph.D./Academia based BS theory). Also, if interest rates went up the USD would get stronger and all of the commodity-based/emerging markets wouldn't be able to repay their debts, which are all denominated in USD. Many bank failures would result and commodity prices would drop even lower. Then you'd have a vicious dwindling spiral. A stronger USD will also inhibit US exports, deepening the recession/depression. The clueless Fed Reserve really has painted themselves into a corner, have lost all credibility, and only have more QE, more ZIRP and NIRP, and helicopter money as their tools, which will only cause our economic descent to go even deeper. Nowhere in history is there a time when a recession/depression was covered over by QE, NIRP, ZIRP, welfare, media false promo, etc. Capitalism died... the US Govt has been managing our economy since WWII. We don't know how long this can go on, or how bad the collapse will be when the facade is blown off. I think all hell is about to break loose on many levels because the wheels are finally starting to come off the bus. Accurate predictions of what future conditions will be like so that we can prepare for them is the only hope of being able to stay afloat in the upcoming future.

Anonymous said...

it's about time, so we are here, good, i have prepared.
when was the last time California real estate wasn't overpriced? and when it was, did you try to buy it?
I'm ready Jim, but i also bought a property last week, bc it was returning 15%.
I'm ready but have a feeling, nothing will happen.

Jim in San Marcos said...

Hi Anon

Glad to hear it. Any time you can buy rental real estate with a 15% return, you have a good deal.

From hindsight, I wish that I had bought a few more rentals 30 years ago.