Bob the Plumber

A delightful portrait of the most interesting of people – a property speculator, experienced tech-trader, card-counter, and craps dealer. But most fascinating of all…he’s just a normal guy!

While speaking in Vegas last week at The Money Show, I remembered to call Bob The Plumber. I met Bob when I refurbished my house in Florida about three years ago. Since that time, I have referred him to many of my friends and family. Why not? Bob is a talented plumber and – with a 10% friends and family discount – his hourly rate is only $65. The only problem with Bob is that he likes to talk. So whatever discount I get is eaten by the many extra minutes that Bob spends on the job. But a good plumber is hard to find and much harder to let go off. Bob is very smart. He is mathematically inclined and frustrated in his profession as a plumber. Instead of plumbing he would rather gamble at a casino (he is a card counter) or day trade stocks. Since trading (not day trading) is something I have grown fond of myself, the conversations I have with Bob are quite interesting. The conversations are usually about new systems and strategies that Bob is using.

Being polite, I NEVER roll my eyes when talking with him about his joys of trading. You might be thinking – when does Bob trade stocks or practice counting cards? After all plumbers like him are busy all the time. Well, Bob is an after-the-market-closes plumber. He starts his plumbing day at 4 p.m. and works until 2 in the morning. Some nights he finishes by midnight. Oh, yes, there are weekends as well. Bob’s schedule is just fine by me since I am also engrossed by the market during the day.

You might think that Bob can’t be busy working the late shift…you’d be wrong. More often than not, plumbing problems occur when you least expect them, so Bob is always busy. So, I asked Bob why he bothers with cards and stocks when plumbing is a respectable, moneymaking profession? And, Bob – being about 5 feet tall with small hands and fingers – has the ideal plumber’s build. Bob confessed that after 30 years of plumbing he has very little to show for it.

Housing Market Crash: Bob the Barometer

A house that is almost paid off, some small savings (despite the 30 years spent piping other people’s sewage) and a yearning to use his mind for solving complex issues like stock trading and beating the House. Plus, as Bob says, he is so good at counting cards (illegal in casinos and worth a swift ejection if caught) that he can make more in a couple of hours of gambling than he can in a week of work…on a good night. You see, after paying taxes, workman’s comp, and keeping his truck tuned, Bob really does not make very much money after tax. He is looking for the easy way out. Bob is a great barometer for the norm.

When I first met Bob he had just finished losing his ass day trading the Internet bubble. His solution was to recoup his losses by working more hours in his day/night job. But, Bob has ambition. So just after he finished my plumbing project, he left town for a three-month stint at a Dealer’s school in Las Vegas. He Drove. He lived overnight in Vegas at a campground patrolled by a retired cop from Michigan. I asked him how he could stand the heat in the campground. He replied that he was doing double shifts at the dealers school and that it was nicely air-conditioned. He got home at 10 p.m. – when it was cool – and left at 7 a.m. when it was even cooler. Oh to have a plumber’s fortitude and drive! Bob returned from Las Vegas a new man. He had been offered a job upon his return. He had even made a down payment on a house.

While in Vegas he had scouted out a couple of places that were suitable for his family. He had found that the housing market was booming and homes outside the Strip were selling for just over $120,000…for a decent 3-bedroom, 2- bath, newly constructed home…with a view of the desert and the mountains. It was early 2003 and Bob had sworn off day trading following the 50% swoon in technology stocks. Just before Bob left for Vegas, he came by my house to do a little work on a new project. He told me that his house in Vegas, which he had yet to inhabit, was already up more than 20%…in just a few months! And it was still going up every day. Encouraged by the profits, he bought another house – a speculation – in the same neighborhood. Why not? Everybody was doing it. He even asked me if I thought rates were going to move higher so he could catch the bottom and lock-in the low rates. Viva Las Vegas! Last week, in Vegas, I called Bob and asked him to join me for breakfast, lunch or dinner. He said he probably couldn’t make it – because of his busy schedule – but he would try. In the mornings, from 6 a.m. to 2 p.m., he is day trading stocks at a local brokerage house and day trading school. After that, he is at casino school until 10 p.m., learning how to be a craps dealer. "But I thought you were dealing Blackjack, Bob?" I asked.

"I was, but I am more employable if I can deal two types of game."

Housing Market Crash: This Time It’s Different

He promised that he would try and skip out of class early and meet me for lunch. And he promised me a ride to the airport. Bob came through and we met for lunch. He was very excited about the stock market. He was making a lot of money using this new system that worked solely by using standard deviations and trading in the first ten minutes of the day. I pretended to care. I was actually upset. "Bob, I thought you gave up day trading after getting killed in the tech- bubble." I prodded.

"This time it’s different."

I asked him how he was making ends meet, considering he was going to school full-time and not plumbing. He answered that, apart from day trading, both his houses had appreciated by more than 40% each, and that he had decided to take out a home equity loan to meet the bills. After all, Bob reasoned, home prices in Vegas have never crashed and the number of California-plates was increasing daily. (The funny thing about the Californian tide in Las Vegas is that it’s just a massive tax-evasion scheme. Californians buy houses in Las Vegas, they get a cell phone with a Vegas area code and then they head back to California to live and work. All the while, their primary residence – and the destination for their paychecks – is in Vegas, because, in Las Vegas, paychecks are banked without paying state- taxes.)

So Bob, what if the housing market crashes? According to Bob, that will never happen. Is the second house empty? No, apparently it is being rented to a fellow member of his day trading group…month by month, of course. After lunch, and as I was paying the check, Bob went to get his car. As I waited, he swung round the front of the hotel, and pulled up in a brand-spanking new Mercedes Benz Convertible. He then sped me to McCarran Airport for my flight back to reality…and sanity.

Regards,

Karim Rahemtulla
May 20, 2004

P.S. Today we’ll be convening in Ottawa for the Supper Club. If you’d like to know more about this first-rate venture capital club, please email Vickie Beard atvbeard@supperclubinvestors.com

The fix is in.

Alan "Bubbles" Greenspan has been officially appointed to another term as head of the Fed. If he survives to serve his term, he will be the longest-serving chairman the Fed has ever had.

Readers need not worry about an interest rate shock before the November elections. If it comes, it will come from Mr. Market, not Mr. Greenspan…or over Mr. Greenspan’s dead body.

Maybe Mr. Greenspan will be the one whose mug ends up on Mt. Rushmore. He is already the most famous public employee since Pontius Pilate. Surely a man who has done as much damage as the Fed chairman deserves some sort of monument.

Of course, the prevailing view of the man is positive, almost psychophantic (our own word…don’t bother to tell us it is misspelled).

"Alan Greenspan has done a superb job as chairman of the Board of Governors of the Federal Reserve System," said George W. Bush as if he would know, "and I have great confidence in his economic stewardship."

Translation: the little schmuck can be counted on not to raise rates before the election.

The New York Times:

"Greenspan has arguably been Bush’s most powerful ally, reducing interest rates to their lowest levels since 1958 and keeping them low long after the economy began to grow rapidly last summer.

"Defying long tradition, Greenspan’s policies of rock- bottom interest rates greatly softened the economic downturn of 2001 and a success (sic) of economic shocks since then. Even though corporations drastically cut back on both investment and hiring until late last year, cheap money from the Fed kicked off a boom in housing and home- refinancing that pumped billions into the U.S. economy and kept consumers spending."

There you have it: the U.S. economy, 2004, as interpreted by the New York Times.

Is that all there is to it?

An economy has to breathe, dear reader. It breathes in…expanding its lungs with new credit, new jobs, new industries. Then, it has to breathe out the mistakes…the used up air and the bad ideas. Expansion…contraction. Boom…bust. Bull market…bear market. That’s how it works!

By the end of the 20th century, the U.S. economy had breathed in so much of the heady air of the New Era, it was practically giddy. It had to exhale. But the out-gush of the respiratory cycle is no fun. Debts have to be paid. Errors have to be reckoned with. Voters get irritable. Politicians are kicked out.

So the genius of modern Keynesian economics is to try to avoid exhalation…by bringing in tanks of oxygen just when the lungs begin to contract. So instead of breathing out, the lump takes a another deep toke on the credit hookah…and goes into another dreamlike hallucination, where his house goes up in price, his stocks rise, and his debts never have to paid off, ever.

Now, he’s deeper in debt than ever. And his lungs are ready to burst. Thank you, Mr. Greenspan.

And now…over to New York for more news:

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Eric Fry, from Downtown Manhattan…

– Pity the poor lumpeninvestoriat…the stock market’s two- day snap-back rally withered on the vine yesterday. For a brief moment Wednesday morning the stock market rewarded the lumps’ unflinching optimism, as the Dow rallied 130 points. But the early rally succumbed to a late-day sell off that pulled the Dow to a 30-point loss by the closing bell.

– The blue chip index finished the day at 9,937, only 31 points above Monday’s closing price. The Nasdaq plummeted 1.7% from its intraday highs to finish the session with a meager 1-point gain at 1,898. The American stock market’s abrupt about-face contrasted sharply with the dramatic two- day gains achieved in several overseas markets. Japan’s Nikkei Index, for example, logged a gain of 4.4% on Tuesday and Wednesday, its biggest two-day advance in nearly a year.

– Meanwhile, bond investors continue to shiver in the chilly microclimate of rising interest rates, as the billowing thunderclouds of inflation gather overhead. The 10-year Treasury note fell yet again, pushing its yield up to 4.77%. We admire the bond market’s powers of perception. It sees the same thing we see – a strengthening inflationary trend. This new millennial edition of inflation is showing up very visibly in almost every aspect of American life…except the consumer price index.

– Notwithstanding the government’s benign rendering of the inflation trend, prices are going up…especially the prices on the things everyone uses. Yesterday, the oil price touched a new 13-year high, while the gasoline price jumped nearly 5% to its 14th record high in the last 18 days. Of course, a record-high gasoline price is not the same thing as inflation, but it’s close…and it is certainly not a reason to BUY bonds.

– Not surprisingly, rising interest rates are already taking a toll on the housing market, as mortgage applications tumbled 12% last week.

– Incredibly, homebuilders continue building homes as if long-term interest rates were 2.77%. "Our sales are as steady and solid as ever right now," says Ara Hovnanian, CEO of the homebuilding company that bears his name. "As long as it’s not a rapid rise [in interest rates], I’m not overly concerned."

– Neither are we…overly concerned, that is. We are merely scared to death. At best, rising rates will not stimulate home buying. Nor will rising rates help to perpetuate the "cash-out" refinancing booms that have been helping to fuel consumer spending for the last several years. At worst, rising rates will bring the housing market and consumer spending to a screeching halt. Rising rates may also cause a bit of a problem for our richly valued stock market – the bullish outlook of CNBC’s Larry Kudlow notwithstanding.

– "Larry Kudlow said that the market has already priced in Fed tightening," observes Dan Denning, editor of Strategic Investment, "and that, from here on out, the market will be driven by earnings news, which is mostly positive. Is this reality? Maybe a bull’s reality. In my reality, there are other pressures on stocks. There’s $40 oil, the war in Iraq, and a new low in America’s global image.

– "There’s the growing sense that home builders and mortgage lenders are a lot more susceptible to rising interest rates than the bulls wanted to believe – perhaps catastrophically so – and that the orderly deleveraging of the financial economy is one bad news day away from being completely DISorderly. And in the background, there’s the looming realization that the Japanese central bankers and Chinese central planners who, together, own nearly $1 trillion in reserves and almost half the U.S. Treasury market, control the state of the American dollar.

– "Debt is the big problem," Denning explained to your New York editor during a face-to-face meeting in Baltimore Tuesday. "There’s too much of it in America, and we have become much too reliant on foreigners to provide the capital we need. The big problem is that one day, and maybe that day is very soon, foreign central banks will retreat from the U.S. Treasury market. If so, the dollar will plummet and interest rates will skyrocket…see you in three months."

– Dan departed yesterday for Asia to catch a first-hand glimpse of this multinational economic juggernaut. While we here in the States promise to keep the home fires burning, Dan promises to dispatch frequent missives that recount his adventures and observations.

– If you would like to hear what our esteemed, and somewhat quirky, colleague has to say, in his blog and including his take on the Chinese war effort, see here:

Chinese secret plan to undermine America

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Meanwhile, Bill Bonner, back in France…

*** It is a holiday in France, Ascension Day, marking the elevation of Christ to Heaven. Hardly anyone remembers what the day is meant to commemorate, but that doesn’t keep the whole country from coming to a dead stop.

After a tiring trip to Las Vegas and Nicaragua, your editor spent only a few hours in Paris, and then got behind the wheel of his wife’s car and drove the family out to the country.

He pauses to mention that he almost missed his plane in Houston. When you travel back and forth, it is easy to get confused. He lost track of time somewhere along the way and believed he was in a different time zone. Realizing his mistake at the last moment, he ran like O.J. and arrived at the gate a minute before departure-time to find the attendant alone, tapping her foot.

"Mr. Bonner, I presume?"

"Yes…so nice of you to hold the airplane for me."

*** The market greeted the news of Greenspan’s appointment as might have been expected. Gold rose $7. Bonds and the dollar fell.

Stocks rose too…but only modestly. Stocks have been going down for the last 3 months…from a high of 10,737 on February 11th to a close of 9,937 – exactly 800 points lower – yesterday. It is time for a bounce. So far, the stock market has shown little inclination to rebound. A bad sign.

*** It is a lovely day out here in Poitou. This is the kind of spring day that lifts spirits and casts out jetlag. The sun is bright. The grass is green. Trees, bushes, shrubs, weeds – everything is in bloom. The air itself is alive with the odors of plants mating. It is almost too much…too intoxicating…too stimulating…too exhilarating. Your editor takes a deep breath and calms himself down. Who cares about stocks on a day such as this, he asks himself.

*** Our unpaid correspondent, from Pittsburgh, is thinking overtime – this time of the legacy of Geo. W. Bush:

He begins by quoting our own words:

"But the more damage a president does, the more the voters love him. Bush has not yet equaled America’s biggest catastrophes – Lincoln’s war between the states, or Wilson’s entry into WWI – but if he keeps going at the present pace, he might still get his mug on Mount Rushmore."

"Yours is a very interesting thought," writes Byron King, "and I would expect no less from so gifted a seer.