The Money Pit

Our editor has bought he and his family another home in France…actually, he purchased a grand and imposing 18th century chateau. Although it sounds romantic, the estate is not all that it’s cracked up to be.

A real alternative: Investing in a chateau in Normandy

The financial media is full of bores and quacks – just like Congress. But all the hacks share a common and vulgar hustle: They all promise you more money. There is something unbalanced about it. Only half a man’s life is passed in trying to make money, and not necessarily the better half. The other half is spent trying to get rid of it. The following little letter is designed to help.

Last week, we drove out to a small town in Normandy. There, we spent two hours in a grim office signing papers. From that day forward, we would be responsible for the town’s most remarkable building – the former seat of the local marquis… an 18th century chateau. The place had been on the market for more than a year. Since no buyers who knew anything about it could be found, nor any who hailed from anyplace within 4,000 miles of it, your editor became its "chatelain."

It was a moving occasion. The seller had owned the place for many, many years. There were so many family memories attached to it, she said. The poor woman had a small tear in her eye at the end; we barely noticed her winking at the notary when the deal was done.

There is something timeless and dignified about owning a magnificent pile of stones. It makes you think of the next generation…of eternity – that is, of blowing your brains out.

A man buys a house to live in. He keeps an apartment as a convenience. He has a beach house for fun. But he buys a chateau to inflict pain – either on himself or his family.

Buying a Chateau: How to Lose a Fortune, Guaranteed

We bought our first one ten years ago. It was an ideal investment, we discovered. Unlike stocks, or real estate, or gold – a chateau in France is a sure thing. Your stocks might go up, or down. Real estate, too. And gold…who knows what the gold price will be a year from now? But a chateau – a huge, old stone house – is much more reliable. It is practically guaranteed; there is almost no way you can win. You see, dear reader, the correct translation of the word "chateau" is actually "money pit." There are more enjoyable ways to part with a fortune. There are quicker ways too. But none is surer.

But even the vast expense does not fully describe the suffering that a chateau causes. Writing checks is one thing. But you cannot simply write a check. You must write it to someone. And therein lies a punishment suitable for a serial killer. Each check requires a payee as well as a payer. And the payee of your chateau checks will be the local artisans, roofers, electricians, merchants, plumbers, cabinet makers, tax officers, half-wits and miscreants. None will present himself readily. None will present his bill clearly. Not a single one will complete the transaction without innumerable meetings, compromises, delays, mishaps, threats and misunderstandings. The process will not "stretch out" over years…for that suggests movement and flexibility. No, it is more like a long stay in a federal penitentiary, punctuated only by tedious visits from an incompetent lawyer – who bills by the hour.

Our first chateau fix-up project stretched out over nearly 10 years. It is still not complete. Not that there hasn’t been any progress. When we arrived, the chateau was broken down, but at least we were in pretty good shape to tackle it. Now the chateau is in good condition, but we are broken down. And is it any wonder? We spent nearly every weekend and holiday for the last 10 years in a cold, dirty, drafty, smoky, uncomfortable place – our own chateau. We scraped the lead paint off the walls; we laid up stone walls in the icy rain; we choked in front of open fireplaces….trying desperately to get warm, we stood so close to the flames that our buttons melted, while our backs were still cold. We climbed up to the top of chimneys, 50 feet above the ground – this is a chateau, remember – to clear out the crows’ nests. We slept amid the mould and mildews and contracted strange and wondrous diseases that haven’t been seen since the 19th century, and excited the curiosity of medical school students. And we felt lucky; we survived.

Buying a Chateau: Why Did We Buy This, Again?

But what is the purpose? Why make such sacrifices? Because, once you get the place fixed up you can throw a big party, invite your friends and enemies, and show off. Just don’t forget to do it in the summer. In the winter, the place will still be drafty, cold, and dangerously unhealthy. Even if you had a nuclear reactor next door, you will never be able to get the place warm. All the energy in the world is not enough to warm up these places in January. Which is why your nose will always run…you will have a lingering cough from October to May…and your friends – if they ever do come to your celebration – will look on you with pity and ask if they can call an ambulance.

All of that, though, is the good part. The bad part is that after buying this pile of rocks…and spending a fortune fixing the place up so that you will have something to leave to your children…the children themselves will want nothing to do with it. By then, they’ve spent hundreds of weekends shivering in front of an open fire, too…being asked by Dad to help with this or that. Whatever scales Dad still has over his eyes dropped from theirs years ago. They can barely wait to get rid of the place so they can return to a tidy apartment in Paris with a bistro next door. When you tell them that you intend to leave it them in your will, they will scarcely be able to wait; they are likely to club you with a fireplace poker right on the spot, and have the place up for sale before the sun sets.

To make matters worse, even after enduring the torture of buying and renovating a chateau (every one of them is apparently in urgent need of repair), the owner hardly gets the respect he thinks he deserves. The French look at him in awe; how could anyone be that stupid, they ask themselves. They’ve spent years trying to offload their own piles so they could buy a trouble free place on the Cote d’Azur. Americans, meanwhile, look at him in shock; why would he want to do such a thing, they wonder. Even his fellow chateau owners give the man no more admiration than he would get from a Paris waiter. In fact, they regard him as pathetically "petit." For no matter how much you spend, your place will always be small in comparison with others in the area. Here we enter into the strange realm of middle-aged male psychology…and the real reason we get involved with chateaux in the first place. For no matter how big yours is – viewed from whatever angle – it is never big enough. There is always someone fifteen minutes away with a bigger one. And when he gets drunk and flirts with your wife at cocktail parties, your sense of jealousy and inadequacy gets the better of you.

Which is why, of course, you buy your second chateau. It is a bigger money pit than the first. It requires even more meetings, more checks, more decisions, more drafty weekends, and more resentment from the family. But at the end of it you end up with a bigger place – and then you get drunk and flirt with his wife!

Bill Bonner
for The Daily Reckoning

January 14, 2005 — Paris, France

P.S. Your editor has become a farmer. Not that he set out to be one. But when he purchased his place in Normandy, he found himself in possession of 17 cows. Being as ignorant of cows as of economics, he sent his trusty friend, Pierre, to survey the situation.

"How are they?" he asked.

"Appalling," replied Pierre.

"What do you mean…what’s wrong with them?"

"A good herd of cattle comes from careful selections," Pierre explained. "Over time, you end up with a quality herd. For some reason, it looks like they selected the wrong ones. I think one of the cows only has three legs."

"Hmmm…that’s too bad. I was hoping to make some money on the farm."

"What?"

"I was hoping to make money on the farm."

"That’s what I thought you said. But you’ll never make any money on that farm."

"Why not? I thought the European Union gave farmers all sorts of subsidies."

"They do. But this farm doesn’t get any. They just never properly registered. And it’s practically impossible to register now. No, that farm doesn’t make money; it loses it. Probably lots of it."

"Well, let’s get rid of the farmhand and stop farming."

"You can’t do that. First, the farmhand has a contract. You can’t just fire him. He’s probably been there forever. It would cost a fortune to get rid of him. You’ll probably have to run him over with the tractor, or something. And second, you can’t not farm the place. You have to farm the place."

"Why?"

"It’s part of the subsidy system."

"But we don’t get any subsidies."

"Doesn’t matter. If you don’t farm the place, they’ll let someone else farm it."

"Well, so what? Well, then it’s no longer yours."

"Oh, maybe that would be a blessing."

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

Once again, we stopped dead in our tracks this morning and marveled at….

…well, we don’t know what to call it – the exquisite, pernicious system that makes fools of us all.

Some of our brightest economists are convinced that the trade deficit is nothing to worry about. Foreigners WANT to give us money, they say. Because we are so great. Could anything be wrong with that?

(Of course, there are nasty men who want to give little girls candy too…)

Apple sold so many iPod’s last year that its earnings rose 400%. Andy Kessler says that’s what makes us so great – we think up these great ideas…and the poor schleps overseas have to sweat to make them. And then, guess what – we actually make more profit on them than they do.

Maybe Mr. Kessler has not seen the latest details on America’s trade deficit. Over the last 12 months, exports of "high tech products" actually FELL 21%. About the only area we are making progress is in exporting "scrap and waste" – up 135%. America, in other words, has become the world’s leading exporter of trash.

But wait, Mr. Kessler would protest that though the United States may not actually manufacture or export high tech products, it earns a handsome royalty by inventing, creating and designing the products that are made elsewhere. Apple doesn’t actually have to assemble the iPods in America in order to make money on them, he would point out.

How nice for Steve Jobs. And how nice for you, if you can dream up another iPod product and get Asians to make it for you. But the latest trade numbers show that even with iPod revenues flowing like gin into Apple’s coffers, the tide of cash is still running out of the United States and into foreign hands. Even with all the trash the U.S. is shipping overseas, at the current rate, 2005 might see a new record deficit of $700 billion or more. Yes, it comes back. But only as the foreigners buy our assets and lend us money on our houses.

And here is the profane elegance of it, dear reader. Recycling the foreigners’ earnings into U.S. assets misleads the public as well as economists.

"The willingness of China to put its money into Treasury securities has served to both prevent the needed changes in currency values and to hold down American interest rates and thus encourage more American consumption and bigger trade deficits," explains Floyd Norris in the International Herald Tribune. Get it? The nice Chinese people lend us money so we won’t have to cut back on our spending. Interest rates in the United States stay lower than they might otherwise be…which boosts up asset prices higher than they might otherwise be…and helps hold down consumer prices lower than they might otherwise be. This makes American economists think that everything is fine. And it makes American consumers think they might as well continue spending. The spending increases China’s profits…and gives them more money to lend – thus reinforcing all the illusions that Art Laffer and Andy Kessler take as fact.

Not that we have anything against the Chinese. We would suggest that they do a better credit check on their customers, but how can you fault a people who work 12 hours a day and save 40% of their income? Good luck to them!

But that is what is so delightfully absurd about the world economy, circa 2005: While Americans buy things they don’t need with money they don’t have, the Chinese are building factories in order to produce products with slim profit margins for fat people who can’t afford to pay for them. The whole thing is bound to turn out badly. But it should be entertaining.

More news, from our team at The Rude Awakening:

———————

Eric Fry, reporting from the center of the financial universe…

"For the record, the editors of the Rude Awakening also love the upside of stripping. Indeed, we love the upside of almost every vice…almost as much as we rue the inevitable downside. Unfortunately, the downside of debt-financed consumption may be fast approaching."

———————

Bill Bonner, back in Paris:

*** You’ve heard people say, "Everything happens so much faster now." Maybe, but what we’re noticing is that the bear market that started in 2000 is taking forever. You’d think stocks would have crashed down to decent price levels by now. But no…they’re still at record highs. The P/E ratio for the S&P is still over 20. Dividend yields are still below 2%.

Why the delay?

It is because the Fed has more power to prevent nature from taking its course, we believe. Rather than allow the market to fall, the Feds intervened in 2001 – with the biggest boost of money and credit the world had ever seen. It is as if they had seen a flood coming. Rather than let is come through and clean out a lot of mess, they built a dam to hold the water back. And for the last three years…the mess has been growing…like water building up behind a dam. More IPOs. More loans. More derivatives. More mortgages. More borrowing. More debt. More money thrown away on gadgets and geegaws.

When the dollar fell, it was as if the dam had sprung a leak. Excellent, people said. Now, the pressure on the dam will be relieved. All will be well. But the falling dollar seems to have done nothing. This week’s trade figures show that there is more water than ever behind the barrage. What a sight it will be when the dam finally gives way!

*** A twist on the trade deficit, from Byron King in Pittsburgh:

"There ought to be a category for ‘imputed exports’ representing all of the net-value of U.S. intellectual property that gets pirated, like software and videos, etc. Every soukh in the world has knock-off versions of ‘The Aviator’ and ‘MS Word,’ etc. for sale at a few bucks per clip."

*** Two readers wrote in with differing views of Oliver Stone’s Alexander:

"Ordinarily, I enjoy reading your perspectives.

"However, although you and the critics did not like Alexander, I did not find the movie boring. A bit longish, yes. But I liked it. Alexander as a personality is intrinsically interesting. How can anyone who conquered the entire known world over 300 years before Christ be un-interesting?

"The material regarding homosexuality among Alexander’s troops was hardly boring – it stirred up a firestorm of reaction. And his relationship with his mother and his choice of a wife – my God, if you find THAT boring, well I guess you need something other than an action adventure movie wrapped around a fascinating historical narrative, psychological study, and social commentary to whet your whistle. Or whatever….

"I found the movie intense, compelling and thought provoking. Anyone who left the movie bored after some incredibly intense scenes that left 50% of the rest of the country outraged at the homosexuality portrayed…well, I think you must have slept through most of the movie. The best parts anyway.

"BTW, I am not gay. But the layering of relationships was fascinating."

*** An alternative view:

"Bill, you’re slipping. Your critique of Alexander did not go far enough.

"How boring was it? Halfway through the movie I turned to my fellow moviegoer and asked if we should go. He quickly nodded yes. When he looked to his left to get by the person next to him, she was asleep. I looked to my right and so was the guy next to me. We woke the woman.

"With regards to the liberty line, as I watched the film I could not help think that the guy who gave us Platoon, an anti-war film if ever there was one, had been at best brainwashed by the neocons into becoming some war propagandist or at worst that the neocons had figured out how to take possession of Oliver Stone’s soul with the spirit of Leni Riefenstahl."