Recently by Bill Bonner: Give Collapse a Chance
Cash is still king.
Cash is king because non-cash is a commoner and a loser its losing its value. An article in the Financial Times, for example, tells that:
US inflation expectations at lowest point in year.
In other words, forget inflation. Forget price increases. Its cash cash cash.
Cash on the barrel cash in hand cash and carry. You got cash? You da king!
People expect cash to be more valuable. And if were right it will be more valuable.
Stocks, for example, fell yesterday. The Dow dropped 179 points.
And gold. It lost $34.
Another article in yesterdays financial press told us that its a great real estate market if youre rich.
Why? Because the rich have cash. Theyre the kings, queens and jokers too. And now they can use cash to buy other assets at a discount. They get more for their money. When inflation subsides so do prices. And nowhere have they ebbed more than in the real estate market.
A friend sent us an investment opportunity a 12-unit apartment building in Florida, a block from the beach. What does something like that go for? Well, in the glory days of the bubble in real estate, it might have sold for $3 million. Today, its available for $750,000 with owner financing at 5%.
Lets see if you can get $800 per unit per month whoa this could be a good deal. Because you can probably cover the cost of operating and maintenance and still get better than a 5% yield. If that is true, over time, you get the building for free.
But the problem with real estate is that every deal is different. Every toilet backs up in its own unique way and every roof leaks in a different spot. If you dont know what youre doing dont do your homework and cant manage a property, including collecting the rent from people who dont have much money, you probably wont do very well.
Here at The Daily Reckoning we prefer the public markets, where the tenants dont give you hard-luck stories and the paint doesnt peel. But what we see in the public markets is a lot worse than what we see in the real estate market. Where can you get a yield of 5% outside of housing?
All over the investment world except for US government debt yields will probably go up. Cash in king. But cash is probably going to become even more powerful. In real estate, for example, the bad news is not yet fully priced-in. People assume that prices will hit a bottom and then begin going back up again. They figure they just need to buy at the right time and all will be well. But as we keep pointing out, markets are more like cats than like dogs. They play with their prey killing them slowly while having some fun at it.
Real estate has already been whacked hard. Its down 30% to 50% depending on where you look. But is that all there is? Is that the end of it? We dont think so. The trends that worked so happily together to boost real estate to bubble levels have now become surly and uncooperative.
- Household income is going down, for example. It is almost back to 1990 levels, erasing 20 years of gains. Who wants to move up the real estate ladder when his income is going down?
- And the rate of new household formation is going down. Instead of setting up new households of their own, the young and not so young are moving back in with mom and dad. The unemployment rate for young people is 20% near Great Depression levels.
- Population pressure is easing. The rate of immigration, for example, is also going down. There are reports of illegal immigrants returning home in such numbers that there are now more leaving than coming. Besides, with so few jobs opening up, who wants to go to all the trouble to sneak into the country?
- Most important, the Great Correction is far from over. Were expecting a long period of stagnation, de-leveraging and depression. Prices dont go up in a credit contraction. They go down. What weve seen so far is probably just the beginning of a long trend that will probably take prices down another 50%.
But wait, we know what youre thinking. At todays levels, houses in America are not over-priced. Theyre about in line with the very long term trend. Theyre about where they should be. And at todays ultra-low interest rates mortgages are below 4% housing is a good deal.
Maybe so. But Mr. Market doesnt care. Just as he didnt mind pushing up prices to dizzying heights he also doesnt mind pushing them down to dreary lows. Hes an equal-opportunity deceiver. First, he made people think that housing always goes up. Now, hell make them think that it always goes down. And when hes finished, youll be able to buy a house for about half todays price.
Of course, then you wont want to. Because you will have learned an important lesson that you can pass on to your children: Dont buy a house. Rent. Its cheaper. Then, perhaps house prices will begin to rise again.
In the meantime and perhaps for a long time cash is king.
Reprinted with permission from the Daily Reckoning.
Bill Bonner is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and The New Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007). His latest book is Dice Have No Memory. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning.