An Utterly Serious Warning

[ecosophia]

There's an old Wall Street legend that came to mind today...

"In 1929, at the height of an economic boom in America, Joseph Kennedy Sr. (father of JFK) was working as a stockbroker on Wall Street. As the story goes, Joseph was walking around when he decided to sit down for a shoeshine. While polishing his shoes, the young worker gave Joseph some of his favorite stock picks. When Joseph heard the shoeshine boy giving out stock tips, he figured the party was about to end, and it was time to get out of the market. Joseph proceeded to exit his positions in the market and bought short positions that bet on the market going down. Shortly after that, the stock market entered a free fall." (Source)

The reason this came to mind is that I get therapeutic massage regularly these days, and my massage therapist mentioned today that she is getting into real estate investing. She's an extremely capable massage therapist -- but then I'm sure the shoeshine boy who did old Joe Kennedy's shoes was good at his trade, too. The rule remains the same: when people who have no previous background in investing start piling into some investment vehicle, a speculative bubble is in full swing, and will collapse catastrophically in the not too distant future.

I watched this same thing happen in real estate about a year before the 2008 real estate bust hit. When that arrived, everyone I knew who'd gone piling into real estate ended up in the bankruptcy courts. I also watched it in the stock market about a year and a half before the 2000-2001 internet bust hit, and a lot of people who'd put everything they had into interrnet stocks lost it all.

So, dear readers, if you find you're suddenly thinking about putting a lot of money into real estate investment, may I offer a piece of advice? You'd be better off shredding it all and flushing it down the toilet. Don't let yourself get suckered, because the market will sucker punch you.

Oh, and while you're at it, get ready for a whopping economic crisis, possibly as soon as this fall. The Dow Jones just hit an all time record, btw, and speculative investments are soaring while the productive economy lurches further and further into dysfunction. We're probably going to be in for a world of hurt within a year or so. Brace yourselves...

Comments

[(Anonymous)]

I don't really like making predictions on markets, because of the massive amount of state interference I've seen over the past 20 years or so.

The real estate market is definitely a bubble. That shoeshine boy indicator is almost the definition of one. Usually paired with sketchy credit used to buy whatever. However, there are parts of the real estate market that are actively crashing, commercial real estate comes to mind. No tenants and interest rates that have gone higher than they planned for. I zoom out and I just see a picture of utter imbalance. Too much real estate where it's not needed and too little where it is. State interference. And you can bet (and this is about the only prediction I'll make) that the state will interfere when the bubble pops. They did last time.

The stock market? There's several scenarios I'd point out. One of them is Venezuela/Zimbabwe. Just take a look at a historical chart and sit and think about it. The other would be the Dow historical through the 70s. Up and down and up and down between 1000 and 500, going essentially nowhere (didn't the BeeGees sing about that?) as cars (and a bunch of other things) quadrupled in price. In any case, you don't trade constant dollar prices, you only trade what's on the ticker and nothing else.

Predictions are dicey things

[degringolade]

I agree with your distaste about making "predictions". I gave up on them years ago. Now I just kinda try and compute the odds. And even then I hedge as much as possible.

Right now, I would guess that we have around a 30% chance of a "bad moon a-risin'". This particular SWAG (Scientific Wild Ass Guess) value has been rising of late, but now I am trying to analyze whether this is a valid analysis or I am letting the silliness of the political world get to me.

Who knows for sure. I think that the best you can do is better calibrate your expectations to the reality unfolding.

Just leave yourself an out in case you misjudge.

[(Anonymous)]

Might I suggest another place to pay attention to instead of Venezuela/Zimbabwe. While hyper-inflation may occur eventually, the first thing that will happen is hyper-deflation. How does that make sense, you might ask? Look at Crete and it's collapse 10 or so year ago.

The economy imploded, and the first thing that happened was the banks closed over a holiday. And then the holiday got extended. And then extended indefinitely. Of course the really connected were able to move their money out of the country right before, but the rest of the people got stuck with having all electronic forms of money frozen, and the only way they could get money was it being rationed to them via ATMs. Suddenly, it didn't matter how much money you had in your bank account, cause the banks wouldn't let you access it but $50 a week.

The bank fraudsters are going to do everything they can to keep things together, and this will be one of the first things that happens if it looks like total collapse. Just stop the plebes from accessing their money. It is for this reason, that a financial guru I pay attention to suggests keeping a hidden shoebox of cash, because if the banks close, it doesn't matter if you were a millionaire or not, if you don't have any money on hand for your daily needs.

[(Anonymous)]

There's something like a 100:1 ratio of total money to available physical paper cash, last time I checked. Been that way for a while. Like with everything else financial, doesn't matter, as long as everyone isn't trying to find the exits at the same time.