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Thursday, Oct. 30, 2014

Crisis, Panic and Investment

Posted Sunday, August 28, 2011, at 12:37 PM

 

 

For approximately the past two years, investors have been having trouble falling a sleep at night. Opportunity flashes from every direction and bullets are fired from around every corner. Everywhere you look is an inviting opportunity to lose everything you have worked so hard to save. Lets take a brief recap.

For every 10-year period you can pick, excluding the past 10 or so, it was safe to say that over the long term the U.S. stock market would raise on average ten percent per year. That means on some years the market would rise 36 percent, other years it would rise one percent, yet others it would drop 25 percent. But over the long term, the average return over a 10-year period would be about 10 percent per year. The smart money was in stocks.

In the year 2000, the Internet bubble burst and in very short order the stock market fell from 13,000 to a bit over 6,000. Within two years, the market struggled up to about the 10,00 range. "Experts" predicted that we were entering a Japan style cyclical bear market. Since then the stock market has fluctuated violently but has been unable to stay consistently above 12,000.

From the year 2000 onward, our friendly feds have been artificially depressing interest rates and placing tremendous pressure on banks to grant mortgages to people who may otherwise be unqualified. Before long, every Tom, Dick, and Harry correctly concluded that it was foolish to pay rent when mortgage payments were virtually the same or even a little less than rent. A few years later, the zero percent down and 110 percent financing led to the burst of the real estate bubble.

For the first eight of the past 10 years, gold and silver have steadily, but silently, marched upward. For the past two years precious metals have entered the public consciousness as they continued to press upward. As investors are faced with the looming collapse of the Euro and the Dollar, as the stock market has given everyone the jitters, as interest rates have been below the rate of inflation, more and more investors have moved into Gold and Silver as safe havens.

History is repeating itself. At some time in the relatively near future, there will be a bubble burst in the precious metals market. My personal opinion is that we have definitively moved from the first stage of a bull market in precious metals into the second stage and are heading toward the third and final stage.

The three stages of a bull market are generally accepted as: 1. Price rise in relation to currency devaluation. 2. Investment demand. 3. A greed driven popular speculative mania. Without getting into boring details, it appears safe to say that Gold and Silver are now definitively in the investment demand stage. Maw and Paw Kettle are just beginning to show interest and are thinking about chasing the gold and silver bull while still being fixated on the most recent bubble that burst. Sadly, Maw and Paw Kettle always get gored when the bull they chase turns.

While, in my opinion, I believe that there is still time for people to invest in gold and silver, it is becoming increasingly risky and those lacking vigilance will hold onto their gold and silver through the final mania and are likely to lose their investment.

I am not an investment counselor and anyone who follows my opinion, does so solely at their own risk.

Will Rogers stated that investing is easy. All you have to do is to buy low and sell high. That said, another quintessential saying is that bulls make money, bears make money, but pigs are taken to slaughter every time.

I believe that the next good investment for the long term is real estate. Here's why.

For the past several years, there have been more bankruptcies and home foreclosures than there were in the Great Depression. "Every one" is down on real estate. That bubble has already burst. Yet, the Federal Government continues to hold mortgage interest rates at levels well below the market rate. This is a situation that cannot last forever. Moreover, like gold, it is very difficult to make more land so the supply is fairly stable. The value of the dollar continues to fall. This is a situation that cannot last. The value of land must rise in relation to a falling dollar.

In sum, because of the negative feelings about real estate, it is my opinion that it is selling below its true market value. I believe that interest rates for mortgages are artificially low and cannot remain there too much longer. Real estate is currently in a "buyer's market." Moreover, I am convinced that the U.S. dollar is in the process of undergoing a shocking devaluation, which makes the value of stuff rise in comparison to the falling value of the dollar.

If all of this were true, that would mean that land is presently under valued. Financing can be locked in at rates below market value. Supply is great and buyers can be choosy and successfully demand concessions from sellers. I am convinced that the dollar is going to continue to decline meaning that land prices will eventually raise even if demand is flat or negative.

The downside of real estate is that it is taxed. Vacant land always suffers more than inhabited land. Moreover, being a landlord may be a good job, it is a terrible hobby. If you are not ready to put a single mother of six out in the cold between Thanksgiving and Christmas, being a landlord is probably not for you. You could hire a property manager, but I sold my rental properties.

The up side is that as more people lose their homes, there are more renters in the market place and home prices may continue to fall as the number of empty homes rise. With a falling currency value, real estate will likely become an appreciating asset that also produces a stream of income. This can be extremely attractive to people who have the head, heart, and stomach of a landlord.

While these are not good days for taking on additional debt, for the person who is financially secure, an unusual opportunity may be presenting itself for those who invest in land.



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