The Failed Intervention: A Morality Play in Three Parts

CAST OF CHARACTERS:

A.W. (a.k.a. Renter #1)
T.D. (Renter #2)
K.I. (Renter #3)
L.S. (Unwitting Speculator #1)
C.D. (Unwitting Speculator #2)
M.N. (Real Estate Investor)
A.P. (30-Year Fixed Rate New Homeowner)
Chorus: Café patrons and waitresses

TIME and SCENE: Mid spring 2005 A.D., our great nation is in the throes of a tenacious housing bubble. Whole cities have been tantalized, wooed and seduced by this Siren song of easy wealth; entire populations rendered giddy by profits… on paper. Nearly every conversation heard around the dinner table… across the bar… in a cab… is focused on one subject: the housing market.

The scene opens in Café Hon, a locally famous Baltimore eatery in the trendy suburb (sic) of Hampden, where big hair and gaudy make-up are curiously in vogue and admired. Seven colleagues from the Daily Reckoning’s HQ are seated around a Formica-topped table.

Lacking an additional 30-yr fixed mortgage holder, the table less-than-fairly represents the breakdown of mortgages nationwide: roughly 60% fixed rate, 40% ARM… 25% of all new mortgage originations in 2004 were real estate investors.

LS (Unwitting Speculator #1) is closing on a house the following day. Mere hours stand between her and the single biggest financial transaction of her young life. Can those stalwart pessimists (Renters #1, #2 and #3) lash her to the mast in time to save her from the Siren’s tantalizing tune? We shall see, dear reader… below…

ACT I – A MORTGAGE BROKER’S WET DREAM

Renter #1 : Hey, LS… I’m going to ask you one question. Your answer will determine how much I speak for the rest of this meal. Is your loan… an adjustable-rate mortgage?

Unwitting Speculator #1 : Not at all. It’s interest only.

[A gasp is heard. Ominous Lon Chaney-style horror music rises from the background.]

Renter #1 (face wincing): Why… why?! [Screams of horror coming from the kitchen.]

Unwitting Speculator #1 : What?! I was tired of throwing away money on rent every month. I wanted to invest in something real… and build equity. Besides, we’re going to sell in five years, anyway. So we’re cool.

[Somebody snickers.]

Renter #2 : That doesn’t make sense. You are still throwing away money. The only difference now is you pay a finance company instead of a landlord.

Renter #3 : And what if you can’t sell in five years… doesn’t that make you nervous?

Unwitting Speculator #1 : [muffled unintelligible remarks… something about the location of the house…a leafy street…children on bikes…speed humps… shiny happy people… yada, yada…]

Renter #3 : Answer the question. What if you can’t sell?

Unwitting Speculator #1 : Well… I am a little nervous. (nervous laughter) We’re risking a huge amount of money… more money than I’ve ever known. But hey, you only live once!

Unwitting Speculator #2 : Oh come on LS, don’t listen to them. I have an interest only mortgage, too. [More gasps of horror. Another burst of Lon Chaney music.] These guys are all gloom and doomers. Remember, they work for the Daily Reckoning.

[Renters’ heads snap in unison to glare at Unwitting Speculator #2]

Renter #1 : And…what about you, AREN’T YOU nervous?

Unwitting Speculator #2 : Nope. I try to take life one day at a time. I don’t look that far ahead. I’m doing okay right now… and besides, in 5 years, I hope to be married.

[Unwitting Speculator #2 holds up both hands with her fingers crossed. Smiles.]

All (in unison): Awwww.

Unwitting Speculator #1 : Don’t you know it’s bad luck to cross your fingers with BOTH hands?

ACT II – UNSEEMLY PROFITS

Real Estate Investor : What about you Addison, why do you rent?

Renter #1 : Well, we live down by the water… in the neighborhood we want to live in… and to tell you the truth, I just don’t understand the market anymore. Let me give you an example.

When we lived in the same neighborhood before moving to Paris back in 2000, the house across the street went on the market for $97,000. The price was so high, everyone thought the owners were nuts. It was a different time. A friend finally bought the place for $87k, gutted it and started renting to college students.

We moved to Paris for four years. Last year, when we were moving back, we looked for a place to buy in Fell’s Point… low and behold, we saw the same property on the market. Guess how much?

All (in unison): How much… tell us!

Renter #1 : $357,000. [Renter #1 moves his hands to his hips in disgust. Nods around the table.] A four-fold increase in just as many years!? Tell me, what market – any market – can sustain that kind of growth?

Real Estate Investor : Hey, a lot of people I know would say that’s still cheap. Besides, it sounds like you were a damn fool to move to Paris. You should have held on for the ride. Still, I think you’re right. The market is getting frothy… that’s why I just sold my Baltimore properties.

[Puzzled looks of intrigue.]

Renter #1 : Yeah, that’s probably a good move. You bought in nice and early, and now you’ve sold near the top. Then you put the proceeds into a resort property in West Virginia… everyone knows that’s an undervalued market.

[Fiddle-heavy blue grass music wafts from the kitchen. More nods of agreement around the table.]

Real Estate Investor : Yup. The price is up already. We only put ten percent down, but by the time of closing we had accumulated enough equity, the bank said they weren’t going to require mortgage insurance. We’d already amassed an additional 10% of equity!

30-Year Fixed : Hell yeah! We made over $30,000 on our house before we’d even slept there!

Unwitting Speculator #2 : Yeah… same here… my house is way up already, so I have a good margin of safety. And when I get married…

All (in unison): Awwww.

Renter #1 : Hey, 30-year fixed, I know you’ve already made money on your house, but what do you see in the future?

30-Year Fixed : I have a response, but first I’d like to make a comment…

There are some neighborhoods that will always hold value. [muffled remarks… something about the location of the house…a leafy street…children on bikes…speed humps… shiny happy people… yada, yada…]

Renter #1 (with much enthusiasm): Au Contraire! (after all, that is THE motto of the Daily Reckoning…)

Baltimore is a case study of good neighborhoods gone bad. Look at Druid Hill… beautiful row homes. Back in the ’20s F. Scott Fitzgerald and Gertrude Stein held garden parties and entertained European royalty up there. Now look at it. Hell might offer better refuge for a family of four.

On the other hand, in the ’70s respectable folk wouldn’t let their children go down to Fell’s Point unchaperoned. It was a haven to bikers, ne’er-do-wells and urchins of the night. Today, they’re building spec homes on the water that start at a million plus…

Renter #3 : Too bad the harbor smells so bad…

All (sighing): Yeah…

[Pregnant pause. A moment of quiet reflection.]

Chorus : At this point, it’s not clear what conclusion, if any, can be drawn from the play.

When will the housing bubble burst?

Is it a bubble at all?

Or… will prices keep rising for five years, handing the interest-onlys the last laugh; leaving the renters, humbled once again with egg on their faces… and feeling like chumps? Well, dear reader, this is what makes a market.

Still, the renters bumble on…

ACT III – THE INTERVENTION

Unwitting Speculator #1 (jolted with excitement turning to Renter #1): Oh, that reminds me, can I have the day off tomorrow? I’m closing on my house. [Turns to the table.] Should I wear a suit?

30-year Fixed : Nah…you don’t have to wear a suit for those yahoos.

[Snickers]

Renter #1 : Sure, you can have a day off. But I forbid you to use one of these.

[Renter #1 holds up a pen. Renter #2 and Renter #3 smile at each other.]

Renter #3 (smugly): Ahhh… No pens, no signing.

Renter #2 (smug and grinning): Yeah… no pens.

30-year Fixed (Gesticulating expansively, raises his voice): Ah, don’t listen to THEM… (mutters to himself) for crissakes.

[Check arrives. Curtain falls.]

Regards,
Your playful playwrights at The Daily Reckoning

DISCLAIMER: Any and all events in this dramatic reenactment are purely non-fictional. Any resemblance to real life is intentional; not at all coincidental. Some liberty may have been taken with the facts, but we swear it was in good faith. We may have been embellished a tad for dramatic effect. (Good luck, Lisa!)

AUTEUR’S NOTE: It goes without saying, if this reality play had been written in 1999, the object of desire would have been tech stocks instead of houses.

P.S. It might also be worth pointing out: The oppressive nature of material goods in Western society is not immediately obvious. But the oppression exists nonetheless.

After reading Mark Skousen’s essay on the BOOK OF THE WEEK written in 1937 (directly below) about the joys of NOT working and NOT consuming… your editors squabbled over who would get to read our comp’ed copy first. Tom Dyson won out… he’s now experiencing an existential crisis and considering veganism. Beware!

— Daily Reckoning Book Of The Week —

The Importance of Living
by Lin Yutang

After reading Mark Skousen’s essay of April 12, the editorial staff of The Daily Reckoning have been clamoring over the one copy of Lin Yutang’s book we have here in the office.

“The noble art of leaving things undone,” reads the subhead on the front cover. Superb!

THIS WEEK in THE DAILY RECKONING: A debut essay by Richard Maybury, of the acclaimed Early Warning Report, an interesting contrarian trade by Dr. Sjuggerud and some excellent fare by Bill, Richie and the MoGu…

GLOBALIZATION AND ITS DISCONTENTS 04/22/05
By Bill Bonner

“Globalization is nothing more than the extension of the division of labor across international boundaries. However, in modern America, globalization means the rest of the world sends you things you don’t have to pay for…”

SMALL STOCKS, BIG TROUBLE 04/21/05
By Steve Sjuggerud

“Everybody loves small stocks. Investors feel that’s where the money is – and that you can’t lose with small stocks…which is exactly why the timing is perfect to bet against them. Steve Sjuggerud explores…”

THE HOAX OF DEMOCRACY IN IRAQ 04/20/05
By Richard Maybury

“Iraq’s recent election is seen as a success in the eyes of most Americans. Richard Maybury wonders if forcing our love of democracy on Iraqis was the right thing to do – or if it will further separate an already divided land…”

THE GREAT WEALTH DECEPTION 04/19/05
By Kurt Richebächer

“The U.S.’s economic recovery since 2001, despite what others may say, is practically non-existent. Dr. Richebächer wonders if this quest for an economic rebound has been abandoned – or simply delayed…”

BUMBLING BABY BOOMERS 04/18/05
By The Mogambo Guru

“Although the Social Security crisis has caused countless debates and much serious thinking, the Mogambo Guru points out that this is by no means the country’s biggest problem – if it’s truly

FLOTSAM AND JETSAM: In China alone, electricity demand is 150% higher right now than it was when China started to boom in 1980. Worldwide, electricity demand is expected to explode by another 85% before the year 2020… faster than demand for any other kind of energy.

The following was inspired by a night spent in a 54th floor hotel room overlooking Shanghai’s “Time’s Square”… when the lights REALLY DID go out!

WHAT IF THE LIGHTS WENT OUT?
By Addison Wiggin

What would you do if the lights over your head right now suddenly went out?

You might fumble for the switch. But what if you knew the lights would never go on again?

What if you knew your microwave and coffee maker had just stopped working forever…that you could never send another e-mail…that the entire Internet had gone permanently “offline”…or that you’d never be able to “power up” your computer again?

If you were suddenly “unplugged” from the global electrical grid…what would you do? What could you do? What could America do with zero electric power?

How about China, India, or any other growing economy – West or East?

Of course, it would be a disaster.

During a power storm, when the lights go out, we’re sure they’ll come back on. Because they always have. We’re sure the lights will come on when we flick the wall switch. We’re sure the TV will work when we plug it in. Because power has always been there. And that’s the way it is.

But what if it…wasn’t? Maybe you can’t imagine it. And if you were living right now in China, you wouldn’t have to imagine it. Because the threat of no power is already becoming very real…

Outside the Forbidden City of Beijing, the lamplights burn at half strength…or not at all. In Taizhou, the great industrial city of the booming Zhejiang province, children do homework by candlelight. In Shanghai, 500 factories are ordered by law to operate only in off-peak hours…and count themselves lucky to stay open at all!

These are real news events, happening already.

Last year, over 6,400 factories in China had to SHUT DOWN because they didn’t have enough electricity to run their machinery.

Another 10,000 manufacturers had to ration power. Even companies like Sony and Volkswagen had to cut back production in their Chinese plants.

And It’s Not Just in China. . .

In Manhattan, the skyline is dark…elevators freeze between floors…hospital machines give their last blip…and in the press rooms, computer terminals go black…in California, the world’s fifth-largest economy, this happens over and over again…

Maybe 29 hours in the dark sounds like nothing to you. But when it happened in 2003, New York alone lost about $1.05 billion…or around $36 million per hour. Workers couldn’t work. Tourists couldn’t shop. Markets and restaurants couldn’t keep food cold. Even the marquees on Broadway and the neon in Times Square went black. And it wasn’t just New York. In Michigan, where a few of America’s cars are still made, losses from the same power outage piled up to $691 million.

Municipal electric water pumps stopped flowing. Sewers clogged, and streets were flooded. Over 400 flights were canceled. Candles caused fires. Calls to 911 doubled.

And that was just one day without power. Imagine a week. A month.

The Great Northeast Blackout of 2003…the rolling California blackouts and brownouts that cost former Governor Gray Davis his job…soaring electricity prices…even faster-growing electricity demand…

It’s bad enough when it happens in the United States. But at least we have the capacity to bounce back already on hand. What about when you’re a growing economy with thin margins for error? For instance, last year, China racked up over 175,000 local blackouts!

Imagine how much that cost.

See, the thing is…you can’t store electricity. You have to use it as you make it. And if you stop making it, the lights go out. It’s that simple. Downed power lines and aging power stations are one thing. They appear temporary.

But what happens when you just run out of resources to feed the grid?

Of course, it’s plain bananas to think any of the world’s biggest economies would tolerate a future with zero electrical power. It’s impossible. And simply not the way this is going to work.

What we’ll do instead is keep the lights on at almost any cost…even if that’s two and three times the expense of electricity today. And the investment that will require will be unprecedented in the history of the energy market…

Regards,

Addison Wiggin
The Daily Reckoning

April 24, 2005

[Ed. Note: Get yourself into position before it happens and you could find yourself inadvertently doubling or tripling your money… before the rest of the investing world wakes up to the full scope of this ever-rising demand!