Let it Be: Solving the Slump in the US Real Estate Market

09/08/10 Baltimore, Maryland – Let it be, let it be, let it be, let it be…
Simple words of wisdom – let it be

The Dow lost 107 points on its first day of trading after Labor Day. Gold rose to within $3 of its all-time high.

What do you make of it, dear reader?

Watch the bonds… We could be seeing the first crack in the bond market. But it seems too early to us. It seems more likely that the bond market will stretch this out…bringing more and more hapless investors on board before finally sinking.

Everything takes longer than you expect. Yes, we expect a bond market crash. But it’s not like Mr. Market to give us what we expect when we expect it. It’s too simple. Too logical. Too obvious. Instead, he toys with us…he leads us down the primrose path…he plays out some line before reeling us in.

How do you like that fellow? What a nasty piece of work! Or, is Mr. Market just nature’s way of offering instruction? When he delivers a lesson, you don’t forget it!

The longer you invest, the older you get. You may get wiser too. Frankly, we’d rather be younger and stupider, if we had the choice. But we don’t. So we’ll take what we can get.

What we make of it is that the long slog through the correction is continuing. We can expect lower stock prices. And we can expect that the price of money will go up; meaning, you’ll be able to buy more assets and other stuff with less money.

Gold is the best money. Gold is going up.

But wait a minute… We know what you’re thinking… You’re thinking that The Daily Reckoning has been rather silent on gold for the last few months… In fact, didn’t we say we thought it most likely that gold would cool its heels until this downward thrust in stocks, banks, houses and other assets is completed?

Yes, we did say something like that. And we still can’t think of any good reason why it shouldn’t be so. But so far, it ain’t so. Gold is going up. It seems ready to set new records. So we won’t quibble with it.

We’re a bit agnostic about gold now. We think you should own a lot of it. But it’s not under-priced. Don’t expect to make a lot of money as it reverts to the mean; it’s already at the mean.

Most likely gold will become much, much more expensive…but that is only because the real value of other currencies will collapse. So better to hold gold than dollars – which is what we’ve been saying all along. And what other people seem to be thinking too.

Still, we wouldn’t speculate too heavily on gold. Not just yet. We still have this river to cross. You want to be fairly light and buoyant – free of debt…free of risky positions…free of overhead – when the time comes to swim across. A lot of your friends and neighbors will wash up. You don’t want that to happen to you.

Speaking of crossing that river…we finally read something intelligent on the subject in – would you believe it – The New York Times. We thought the Times had given up saying anything intelligent. When it signed Thomas Friedman to give opinions on politics and Paul Krugman to give opinions on economics, we figured the Times was finished as a serious journal.

But there it was in yesterday’s paper:

“To revive housing market, some say let is crash,” is the headline.

The reporter gives an unusually clear picture of the situation:

The unexpectedly deep plunge in US home sales this summer will probably require the US government to choose between future homeowners and current ones, a predicament officials had been eager to avoid.

Present homeowners want to boost the value of their main asset. Future homeowners would like to buy their next asset on the cheap.

But the feds are always caught in the middle. And they almost always take the part of the present. If they hadn’t stepped back in the fall of 2008, future investors might have gotten much better deals on their stocks. Future bankers would have found the debris of the last bubble cleared away by now. Future businessmen would have found the landscape freer of debt, with future consumers much more ready to buy things.

But then, the future doesn’t vote or give campaign contributions. No Michigan politician represents future auto companies. They represent the Big Three. Nor do they carry the hopes and desires of future autoworkers with them into the House every day. Uh uh… Instead, their mobile phones have the phone numbers of the present autoworker union chiefs.

Government is fundamentally a reactionary institution…always looking out for the here and now. But let’s not get distracted…

How do you solve a slump in the US real estate market? Easy. You let Fannie and Freddie get what they’ve got coming. You let it happen. Prices collapse. Better yet, raise interest rates and kick Fannie and Freddie on the way down. Then, houses are cheap…people are ready to buy again…and a whole new cycle can begin.

How do you stop a bear market in stocks? You don’t. You let it happen…and look forward to the bargains you’ll find at the bottom.

How do you revive an economy that is in recession? You push it into depression. The bad debt gets flushed out. Businesses that aren’t competitive…or that have too much debt or too many fixed costs (GM, for example) go broke. Their assets are bought up at pennies on the dollar. New automakers take their places. Banks go bust too – and depositors decide to be more careful next time.

The present suffers, but the future benefits.

What’s the cure for a depression? A depression, of course! Let it be…let it be…let it be…let it be. Simple words of wisdom…let it be….eeee!

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010. 

 

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• August 31, 2011 -- Why to Buy Gold in a Deflationary Economy

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