Livinglies’s Weblog

The reality of inflation is that it is robbing nearly everyone blind and is going to get much worse before it gets better.

http://www.forbes.com/2008/04/08/inflation-milk-bread-ent-fin-cx_ml_0408grocerprices.html?partner=weekly_newsletter

• This is the period I was talking about where merchants and consumers alike get caught in the middle. Some merchants can take advantage of inflation but most are stuck with being the “bad guy” — it is always the messenger that gets shot. This is like a triple barraled cannon. 
• So consumers are paying more and more but they don’t even know that the merchants are doing everything they can to soften the pinch on consumers. In fact, they think the opposite is true and they blame merchants for using inflation as an excuse of increasing their margins when in fact the merchants are making far less money. 
• This can ONLY mean that future price increase, at least double what we have seen are in order and as you can see from the front page of the Wall Street Journal, the effects of inflation are causing social unrest and violence. So to your question about home values: the bottom lines is that VALUES (measured in today’s dollar will probably continue down for a while). PRICES will continue up. 
• When it costs $20 to buy a loaf of bread it is inconceivable that the price of a house won’t eventually reflect these changes even if the correspondence is uneven and fluctuating. 
• Using models that appear to be valid now this can be figured as follows in an example I made up: 
• Note the difference between value and price. 
• VALUE is first based upon the price you could get today. It is therefore the same as price. 
• VALUE changes with market conditions. Increased demand and diminished housing inventories causes demand to rise in proportion to supply and VALUE goes up. 
• PRICE represents the measurement of VALUE. 
• PRICE changes occur as a result of two things: (1) changes in VALUE and (2) changes in the value of the currency being used to purchase the asset. So if inflation and devaluation of the dollar were not a factor, then VALUE and PRICE would always be the same. 
• And usually the difference, while present, does not figure prominently in the negotiated price for a house. 
• That is all changing now because the dollar is slipping every other day and prices of everything are going up at rates reaching nearly 100% in some cases and the rate is expected to increase exponentially. 
• So NOW the inflation and devaluation of the dollar must be taken into account when projecting the future price of an asset (in this case a home). In a flat market with inflation, the home would be no more desirable than it was before. But because of the fall of the purchasing power of the dollar through inflation and devaluation, the PRICE would still go up. Example. $200,000 house is still worth the same after 3 years. BUT the price still goes up by the amount of inflation. 
• Stated inflation through reporting of the CPI is now like EPA mileage — completely out of touch with reality. And reality is what people deal with, not government statistics. 
• EXAMPLE: Today’s home VALUE: $200,000 
• Today’s home Price $200,000. 
• 1 year from Now: 
• home VALUE: $160,000 - $180,000 in today’s dollars as of April 14, 2008 (assumes 20% decline in home VALUES, which might be excessive) home 
• PRICE: $184,000-$207,000 as of April 14, 2009 purchasing power of your dollars, assuming 15% inflation 
• 2 years from now: 
• home VALUE: $180,000 - $200,000 in today’s dollars as of April 14, 2008 (assumes 10% increase in home VALUES, which might be excessive) 
• home PRICE: $234,000-$260,000 as of April 14, 2010 purchasing power of your dollars, assuming 15% inflation 
• 3 years from now: 
• home VALUE: $190,000 - $210,000 in today’s dollars as of April 14, 2008 (assumes 5% increase in home VALUES, which might be excessive) 
• home PRICE: $275,000-$304,000 as of April 14, 2011 purchasing power of your dollars, assuming 15% inflation 

Of course this might look good on paper, but the only way it will have any meaning to you is if you sell the real estate for the “inflated” price, pay off your mortgage, and downsize to something much smaller. The reason is that the price of everything has gone up along with your house. 

There was an interesting study published in the Economist (March 15, 2008 pp 83-85), a conservative news magazine read around the world, that disclosed an incredibly close correlation between the “rule of law” and the health of the economy. It turns out that laws, rules and enforcement create a culture of integrity, civility and good faith. The epiphany is that those societies that follow morality, as we commonly know it around the world, have the strongest economies and greatest purchasing power. 

It’s true. Go read it yourself and research it all you want. Von Mises and Rothbard,  largely ignored but highly respected economists, came up with the same conclusion decades ago from a slightly different approach. (They are ignored because they sought truth rather than power. They believe the premise of modern economists is essentially skewed. History, particularly economic history proceeds from the motivation of people in public office or personal lives to change their current situation to something better. Reporting history relies on people who seek to be seen in the best light and thus their reports, whether of facts or indexes like the GDP, CPI etc., are skewed to mislead the reader. The theories used to explain economic history are therefore always based upon measurements of inaccurate reports. The policies based on those theories work only by happenstance — i.e., if consensus or conventional wisdom is created around the theory and policy, not the other way around).

The corollary is more disturbing and quite obvious in the context of today’s news stories of a collapsing economy.  Stray from morality as a matter of policy and practice and you undermine your economy, your society, your ability to achieve, and you gut the basis of your own happiness and contentment, as well as the prospects of future generations. 

All politics and all economics is about income distribution in some way or another. When we are out of touch with our own Godliness, we become out of balance in our society and our economy. By having no rule of law, secular or otherwise, govern the actions of those with power to do what they wanted, we have undermined our foundation, cut our societal fabric and diminished our moral high ground at the same time as losing our purchasing power in world commerce.

While Americans have pursued the dollar with religious zeal, other countries have been pursuing happiness, morality, civility, and integrity - albeit with the usual human imperfections.  The resulting changes in the purchasing power of the U.S. dollar and the relative strength of the U.S. in the marketplace of ideas and commerce can thus be explained. 

The fundamentalist in any major religion has a point: that societies, especially U.S. dominated societies, have lost their way. There is a growing sense of senselessness and lack of meaning in such societies. 

American men are dropping out of the work force and discarding goals and plans for their future, American children are not being educated nor are they taught to think critically, make moral judgments, build character, know their personal and world history and geography, please themselves and the world with their talent in the arts, or acknowledge the obligation and rewards of doing good deeds. 

Of course fundamentalists of all sects violate their own standards when they create inequality between women and men, when they impose a rule of a leader in lieu of a rule of laws, and so forth. But even from the most obvious perversity of fact and good sense, we can gleam some truth about ourselves, our society and where we are heading.

Today’s Torah reading talks about removing the ashes from the alter, an almost janitorial task. Yet the ancient Rabbi’s rushed to perform this task, competing for who would be first. Yes for fun but also to Honor the higher sense, the higher power we have the capacity to follow, if we are willing. My lesson in this world has been worship the riches and become poor regardless of how much money you have. Worship goodness and you become rich regardless of how much money you have.

Competition is fine if we follow our best instincts, our higher calling which all of us know we have inside. When we step onto the track and enter the secular race, make your goal the altar of your own Godliness. 

“There is much in life that people value, yet is utterly meaningless. There is equally much in life that people do not value - that is very meaningful and good. Do not judge by wealth. Do not judge by what others think. Judge by what you honestly believe to be good. And do it, no matter how belittling and ‘dishonorable’ it might seem to others. In the end, that’s what is truly worthy of praise.”

Whether we look to leadership to inspire us, or we simply change our minds and take the high road in our lives regardless of what others do, we rebuild our American experiment, we strengthen our society and reassert ourselves in the marketplace of ideas, morality and commerce. 

If we want to finish the American experiment, rejoin England and the European Union and give up our role as leaders, we are certainly on the right track. 

It won’t be long before the currency of choice becomes the Euro, a currency of consensus from countries actively seeking to do good things for their citizens. 

The U.S. dollar, including those bills in your pocket and those numbers in your bank and securities accounts, are being undermined by you and what you allow in your little corner of the marketplace. 

Only you (all of us in our own worlds) can turn it around. But it takes real faith rather than faking it or just giving lip service to it.

• Several people have emailed me regarding what to do with their investments. I am not Warren Buffett and I don’t have a crystal ball so what I say here should be checked against other knowledgeable analyses. Keep in mind that most people are full of s–t. Everyone thinks they are a genius in an up market. In a down market, everyone still thinks they are a genius, like gamblers because they count their successes and don’t count their losses. Most economists, securities analysts (I used to be one), institutional traders (I used to be one), fund managers (I used to be one) etc are ill-trained, poorly educated, not well-rounded, and basically go with the herd. They sound good but they don’t know a thing about real economic behavior. Account representatives are even worse. Their job is to get you to do something without concern to wether you make or lose money (if you find one that doesn’t fit the mold, hold onto him or her for dear life).
• First any investment in money market, CD, US Treasury, or other strictly dollar denominated assets including actual cash or deposits on hand should be converted to non-cash assets or non-dollar denominated assets. There are several internet banks and other companies that will allow you to keep accounts in dual currencies or more. My assumption is that the dollar is in for a crash. My theory is that if I am right, then you will make a lot of money. If I am wrong, there is little to suppose that the Euro or Canadian dollar or the Yen or Yuan will do badly. Either way you are probably pretty well protected.
• Precious metals are always an inflation hedge but you are depending, again, on perception of value as opposed to real value. It is not likely that Gold ever again be “money.” hence it will always be a commodity and thus subject to the rules and trends of the commodity trading marketplace. The same holds true for corn, oil, and other commodities. yes they are likely to increase in value (and they present an inflation hedge as well) but you probably should not venture into commodities now unless you are already a successful commodity trader. Pick an ETF or other fund and let someone else make the trading decisions.
• Stocks are not necessarily bad particularly if the company does not depend upon US consumer spending, and if the company does not hold or depend upon receiving US dollars. If it is getting Euros in payment for goods and services or other currencies around the world that are not pegged (i.e. a currency whose value is derived from whatever the value of the U.S. dollar is — BE CAREFUL),  then if it is a good company it will do well in the intermediate term even if it gets hit with the usual over-selling that occurs when an economy fails. 
• Don’t stop looking at fundamentals just because it is in another currency. It is true that you “make money” if the dollar dives and the foreign stock dives less, but that is not a very safe strategy. Find even financial institutions that are oversold because of the general fear of bank failures. Avoid Citi, BOA, Lehman, and all of the other major national banking groups. They are all at risk. Think about the firms that figured out the crash months or years ago, like Goldman Sachs and see how they are doing now. 
• Bonds are not necessarily bad either for the same reason, and the same with CD equivalents etc. As long as principal interest, dividends etc are paid in Euros or some other currency not tied to the dollar, you should do OK, if you pick right on the company or mutual fund.
• Keep in mind that most people are unwilling to accept the coming crash and that they may be right and that I may be wrong.
• Why Euros? Because it is the ONLY currency of consensus. 2 dozen countries are involved in the Euro, thus giving you immediate diversification of risk. 
• Real estate: Avoid bargain locations — they might never come back, avoid locations that might be affected by flooding from rising sea levels, use leverage if you can afford the staying power, and stay in for the long haul (3-5 years minimum). This is a non-cash asset whose value will rise proportionately to the decline in the value of the dollar. If the dollar does not decline, and you have avoided problematic locations, you will still be OK. 
• Jewelry: For short term trading and turnovers in the marketplace there are probably some profits to be made. I don’t recommend it. There are a lot of people who know more at a glance than you would with an electron microscope and a handbook.
• Lending Money: Tie the interest payments and the principal to the real rate of inflation and use an index like oil rather than the CPI which at this point has been rearranged so many times the tires are worn out. 
• Borrowing Money: Avoid borrowing at ridiculously high rates (in case I am wrong) and avoid if possible, the imposition of indexing on inflation. If indexing is going to occur, argue for the CPI, which the government will keep at the lowest possible levels in order to keep social security and other payment increases to a minimum. A reasonable loan will put you in the position of tremendous leverage and profit if I am right and still give you ordinary returns on investment if I am wrong.

It is as though everyone has their head stuck in the ground, which is the most polite way of putting it.

Look at the figures coming out — even PRIME borrowers are going delinquent. Lenders are struggling to regain capital requirements for lending, The Federal Reserve is essentially having no effect on the downslide, retail spending is at a forty (40) year low, and the U.S. dollar has never been worth less than it is now. Housing prices are trending lower for at least another 15% drop and inflation is on the way up each month. Real unemployment and underemployment is at an all time high, and regardless of employment status at least 2/3 of the country’s citizens can’t make it on their current standard of living. All of these indicators are still trending down in a reverse hockey stick if you want to graph it.

My point is not just that the sky is falling, my point is that this crisis must be treated as seriously as it presents itself.

Extreme measures must be put in place NOW to mitigate or prevent tens of millions of American citizens from being displaced from their homes, jobs, and way of life.

The entire foreclosure scheme must be frozen. All debt must be restructured to a level that borrowers can pay with money left over to buy consumer goods. That includes subprime, prime and all other debt. Failing loans must be restored to a status that provides relief to financial insitutions seeking to comply with capital requirements for lending. The holders of CDOs must be given some of the relief to restore some measure of confidence in the U.S. financial markets, and the players who sold these securities should be given immunity if necessary in exhange for their complete cooperation in achieving these objectives.

This issue is not “who gets the bailout”, the issue is how do we get all the players back in equilibrium. The issue is NOT who is to blame. The issue is who is needed to fix the situation. The answer is everyone.  

Fundamentally there are a number of obvious regulatory, monetary, legislative and enforcement issues that need to be visited and corrected. But let’s get serious. These corrections will fix nothing in the current crisis. The “stimulus package” represents a tiny fraction of a tiny percent of the crisis we are in. We need bold actions now not by candidates who will hold public office in the future but by those with the power and authority to do it. We need leadership by people of courage who are willing to take risks to stem the incoming tide of inflation, foreclosures, bankruptcies, delinquencies, bank failures, business failures and the further decline of the U.S. dollar.