englishman26
11-14-2007, 01:14 AM
Today we are going to have an interview with Mr. John Rubino, author of How to Profit from the Coming Real Estate Bust: Money-Making Strategies for the End of the Housing Bubble and owner of the website Dollar Collapse. You may think that a title such as the above is almost stating the obvious in today’s market but you will be surprised that John published his book in 2003. We are happy to have Mr. Rubino on the site today to provide insight into the current economy.
In your book, you talk about the housing market having a global impact. What implications does a global housing market have on our nation’s economy?
Today everything is connected. For the past decade American consumers have been borrowing against their homes to buy foreign cars and TVs and clothes and toys. So China and India have boomed, while we’ve gone ever deeper into debt. In other words, the rest of the world’s prosperity has been a direct result of Americans’ living beyond our means.
Now we can’t borrow against our homes any more because, after a long stretch of unrealistic price increases (as readers of your “Real Homes of Genius” series are aware), prices are falling off a cliff. U.S. banks are stuck with hundreds of billions in debt that will never be repaid and have pulled way back on their lending. American consumers are maxing out their credit cards to pay their mortgages, and as this source of funds runs out they’re defaulting on their mortgages and/or declaring bankruptcy.
This affects the global economy in two ways. First, American consumers will buy far less stuff from overseas, so we’ll see the massive trade surpluses of China and Japan melt away, along with many jobs and much tax revenue.
Second, because our trading partners have accumulated trillions of U.S. dollars—which is what we give them in return for all the nice stuff they sell us—they lose when the dollar falls. They understand this and are desperately trying to swap those dollars for stronger currencies and real assets, which is pushing the dollar down even further. This process is gathering steam and will culminate in a “death spiral” for the dollar and most other paper currencies. It’s going to get very very ugly on a global scale.
You published your book in 2003, during the height of the housing boom. Why did you decide to publish the book during this time?
Like so much of life, the book happened through a series of coincidences. My agent was having lunch with someone from a major publishing house who mentioned that he wished he had a book in the pipeline on how to profit from the ongoing real estate boom. My agent asked me if I’d be interested in doing such a book and I replied that the other side of the story—the coming bust—was a lot more interesting. To her credit, she got it right away and we put together a proposal that the far-seeing folks at Rodale bought, on the condition that I get them a manuscript right away, since they feared that the bubble could burst at any time. So I banged out the book in three months and they brought it out a few months later. As it turned out we were waaayyy early. The bubble kept expanding for two more years, and home prices and consumer debt have reached surreal levels. Which is why the bust now under way will be so huge and long-lived.
Early this year in May, the Fed Chairman Ben Bernanke stated that the subprime collapse would be contained and spillover was highly unlikely. Clearly this isn’t the case. Why do you think the Fed got it wrong and what are the long-term implications of a housing market with little or no subprime?
At history’s big turning points the people in charge are always clueless. Generally they’re just too close to the trees to see the forest—and of course their paychecks depend on the status quo, which colors their perception just a bit.
This time around, the financial mainstream bought into some amazingly wrongheaded ideas, like “debt doesn’t matter,” “the government can be trusted to maintain the value of the dollar,” and “in any event, the value of the dollar really isn’t important.” Ben Bernanke still seems to believe that last one, based on his recent Congressional testimony when he answered one of Ron Paul’s brilliant questions with the opinion that if someone lives in the U.S. and buys domestically produced goods with dollars, a falling dollar shouldn’t matter much. It looks like we’ll have to replace this whole generation of public officials and bank executives before rationality returns to the markets.
As for a market with no subprime, one of the drivers of this bubble was banks’ willingness—with government encouragement—to lend to anyone with a pulse. This created a lot of new demand for low-end houses, which allowed existing homeowners to sell for a good price and move up to mid-range houses, which allowed those owners to step up to McMansions, etc. Take away subprime demand and the whole thing grinds to a halt. People can’t buy because they can’t sell.
Many of the things you talk about in your book have come true; the housing decline, the issues in the credit markets, and a declining dollar. One of your chapters focuses on the two pink gargantuan elephants in the room that no one seems to be talking about, Freddie Mac and Fannie Mae. In light of what is happening, what impact will the current housing market have on these two giants?
Good timing. Just last week Fannie Mae announced a huge loss due to the declining value of it mortgage portfolio. Fannie and Freddie never should have existed in the first place, since the government has no business in the housing market. Now we’re seeing the inevitable result: They’ve issued guarantees on literally trillions of dollars of mortgage-backed bonds, and they don’t have the capital to make good on those claims. One or both will be bankrupt within a couple of years. And because they’ve historically been the main buyer of mortgages that banks originated—which gave the banks cash to make more loans—banks will pull back even further on their mortgage lending. The result: Home prices in yesterday’s hottest markets will keep falling for years. Yesterday’s million dollar Orange County bungalow will go for $200,000 or so in 2010.
What do you say to those that say that talking about the housing market in a negative light creates a self-fulfilling prophecy?
It’s flattering to think that you and I have the power to affect a $20 trillion industry. But the reality is that prices got too high, debt burdens got to heavy, and lending standards got too loose. By 2004 a crash had become unavoidable, and now there’s nothing the press can do about it one way or the other.
It has always been the case that bulls make money, bears make money, and hogs get slaughtered. Many readers on this site are concerned about preserving their wealth. What recommendations would you have for someone looking to prosper through this market downturn?
First, sell your house for whatever you can get. It’s going a lot lower, especially if you live in one of yesterday’s hot markets. Use the proceeds to pay off variable rate debt. Avoid any investment that depends on a stable dollar. Long term bonds, because they pay you the same number of dollars each year, will decline in value as the dollar falls. Bank and brokerage houses, because they’re owed massive amounts of dollars, will get creamed. They’re nowhere near their bottoms, despite the last few weeks’ carnage. If you’re financially experienced, consider shorting the market by buying put options on the big stock indexes like the SPY or QQQQ. And of course buy gold and silver. As forms of money that can’t be printed in infinite quantities by desperate governments, they’ll rise in value as the dollar tanks.
Foreign stocks and bonds are the real question mark. Since they’re denominated in currencies that are going up against the dollar at the moment, they’ve been doing well in dollar terms. But I’m worried that 1) when the U.S. stock market tanks, it will pull down the world’s other markets, and 2) foreign countries can’t tolerate the impact a rising currency will have on their economies, so they’ll start pushing down the value of their currencies. This is called “competitive devaluation” and it will devastate the value of most paper currencies. So…foreign stock and bond funds are, at best, short-term trading plays rather than long term investments.
You also talk about the dollar’s decline and it is clear that in the past few years, the dollar has depreciated compared to other major currencies. How can a worker paid in US dollars, protect their purchasing power throughout the next few years?
A currency crisis makes everything uncertain, including most jobs. So besides investing to avoid dollar exposure as I discuss above, Americans should be paying off debt and building up their families’ balance sheets. Live smaller now, prepare for hard times, and if they don’t happen you’ll at least have the peace of mind that comes from not owing anyone anything.
There has been an argument that we are now entering a gold, oil, and commodities bubble. With gold over $800 an ounce, oil near $100 a barrel and the price of other commodities soaring it seems like another bubble. Is this argument valid or is there an economically fundamental reason for these record high prices?
Bubbles are more than just rising prices. They’re also characterized by:
1) Time-tested business practices being replaced with “innovations” that look like scams to reasonable eyes. In the housing bubble, for instance, zero-down, adjustable rate mortgages replaced the old 20% down 30-year fixed.
2) Regular people making fortunes doing things that experts normally find difficult. Daytraders in the 1990s and condo flippers in 2005, for instance.
In gold and oil we see neither of those things. In fact, most people still have no idea what gold is or why it’s going up, and their understanding of oil ends at the gas pump. When the person cutting your hair starts telling you about the emerging oil Brazilian oil company or Tanzanian gold miner you’ve got to buy, then it’s a bubble.
In the short run though, we could easily see a nasty correction in commodities. If the U.S. banking system implodes, which it might when Fannie, Citi, Merrill and all the rest finally come clean about their derivatives losses, we could see fear of inflation replaced by fear of a 1930s style deflationary crash. That would be bad for gold and oil. But then the world’s governments will panic and shift their printing presses into high gear, and the tidal wave of paper will cause chaos, which might be good for commodities. Welcome to the 21st century!
In your book, you talk about the housing market having a global impact. What implications does a global housing market have on our nation’s economy?
Today everything is connected. For the past decade American consumers have been borrowing against their homes to buy foreign cars and TVs and clothes and toys. So China and India have boomed, while we’ve gone ever deeper into debt. In other words, the rest of the world’s prosperity has been a direct result of Americans’ living beyond our means.
Now we can’t borrow against our homes any more because, after a long stretch of unrealistic price increases (as readers of your “Real Homes of Genius” series are aware), prices are falling off a cliff. U.S. banks are stuck with hundreds of billions in debt that will never be repaid and have pulled way back on their lending. American consumers are maxing out their credit cards to pay their mortgages, and as this source of funds runs out they’re defaulting on their mortgages and/or declaring bankruptcy.
This affects the global economy in two ways. First, American consumers will buy far less stuff from overseas, so we’ll see the massive trade surpluses of China and Japan melt away, along with many jobs and much tax revenue.
Second, because our trading partners have accumulated trillions of U.S. dollars—which is what we give them in return for all the nice stuff they sell us—they lose when the dollar falls. They understand this and are desperately trying to swap those dollars for stronger currencies and real assets, which is pushing the dollar down even further. This process is gathering steam and will culminate in a “death spiral” for the dollar and most other paper currencies. It’s going to get very very ugly on a global scale.
You published your book in 2003, during the height of the housing boom. Why did you decide to publish the book during this time?
Like so much of life, the book happened through a series of coincidences. My agent was having lunch with someone from a major publishing house who mentioned that he wished he had a book in the pipeline on how to profit from the ongoing real estate boom. My agent asked me if I’d be interested in doing such a book and I replied that the other side of the story—the coming bust—was a lot more interesting. To her credit, she got it right away and we put together a proposal that the far-seeing folks at Rodale bought, on the condition that I get them a manuscript right away, since they feared that the bubble could burst at any time. So I banged out the book in three months and they brought it out a few months later. As it turned out we were waaayyy early. The bubble kept expanding for two more years, and home prices and consumer debt have reached surreal levels. Which is why the bust now under way will be so huge and long-lived.
Early this year in May, the Fed Chairman Ben Bernanke stated that the subprime collapse would be contained and spillover was highly unlikely. Clearly this isn’t the case. Why do you think the Fed got it wrong and what are the long-term implications of a housing market with little or no subprime?
At history’s big turning points the people in charge are always clueless. Generally they’re just too close to the trees to see the forest—and of course their paychecks depend on the status quo, which colors their perception just a bit.
This time around, the financial mainstream bought into some amazingly wrongheaded ideas, like “debt doesn’t matter,” “the government can be trusted to maintain the value of the dollar,” and “in any event, the value of the dollar really isn’t important.” Ben Bernanke still seems to believe that last one, based on his recent Congressional testimony when he answered one of Ron Paul’s brilliant questions with the opinion that if someone lives in the U.S. and buys domestically produced goods with dollars, a falling dollar shouldn’t matter much. It looks like we’ll have to replace this whole generation of public officials and bank executives before rationality returns to the markets.
As for a market with no subprime, one of the drivers of this bubble was banks’ willingness—with government encouragement—to lend to anyone with a pulse. This created a lot of new demand for low-end houses, which allowed existing homeowners to sell for a good price and move up to mid-range houses, which allowed those owners to step up to McMansions, etc. Take away subprime demand and the whole thing grinds to a halt. People can’t buy because they can’t sell.
Many of the things you talk about in your book have come true; the housing decline, the issues in the credit markets, and a declining dollar. One of your chapters focuses on the two pink gargantuan elephants in the room that no one seems to be talking about, Freddie Mac and Fannie Mae. In light of what is happening, what impact will the current housing market have on these two giants?
Good timing. Just last week Fannie Mae announced a huge loss due to the declining value of it mortgage portfolio. Fannie and Freddie never should have existed in the first place, since the government has no business in the housing market. Now we’re seeing the inevitable result: They’ve issued guarantees on literally trillions of dollars of mortgage-backed bonds, and they don’t have the capital to make good on those claims. One or both will be bankrupt within a couple of years. And because they’ve historically been the main buyer of mortgages that banks originated—which gave the banks cash to make more loans—banks will pull back even further on their mortgage lending. The result: Home prices in yesterday’s hottest markets will keep falling for years. Yesterday’s million dollar Orange County bungalow will go for $200,000 or so in 2010.
What do you say to those that say that talking about the housing market in a negative light creates a self-fulfilling prophecy?
It’s flattering to think that you and I have the power to affect a $20 trillion industry. But the reality is that prices got too high, debt burdens got to heavy, and lending standards got too loose. By 2004 a crash had become unavoidable, and now there’s nothing the press can do about it one way or the other.
It has always been the case that bulls make money, bears make money, and hogs get slaughtered. Many readers on this site are concerned about preserving their wealth. What recommendations would you have for someone looking to prosper through this market downturn?
First, sell your house for whatever you can get. It’s going a lot lower, especially if you live in one of yesterday’s hot markets. Use the proceeds to pay off variable rate debt. Avoid any investment that depends on a stable dollar. Long term bonds, because they pay you the same number of dollars each year, will decline in value as the dollar falls. Bank and brokerage houses, because they’re owed massive amounts of dollars, will get creamed. They’re nowhere near their bottoms, despite the last few weeks’ carnage. If you’re financially experienced, consider shorting the market by buying put options on the big stock indexes like the SPY or QQQQ. And of course buy gold and silver. As forms of money that can’t be printed in infinite quantities by desperate governments, they’ll rise in value as the dollar tanks.
Foreign stocks and bonds are the real question mark. Since they’re denominated in currencies that are going up against the dollar at the moment, they’ve been doing well in dollar terms. But I’m worried that 1) when the U.S. stock market tanks, it will pull down the world’s other markets, and 2) foreign countries can’t tolerate the impact a rising currency will have on their economies, so they’ll start pushing down the value of their currencies. This is called “competitive devaluation” and it will devastate the value of most paper currencies. So…foreign stock and bond funds are, at best, short-term trading plays rather than long term investments.
You also talk about the dollar’s decline and it is clear that in the past few years, the dollar has depreciated compared to other major currencies. How can a worker paid in US dollars, protect their purchasing power throughout the next few years?
A currency crisis makes everything uncertain, including most jobs. So besides investing to avoid dollar exposure as I discuss above, Americans should be paying off debt and building up their families’ balance sheets. Live smaller now, prepare for hard times, and if they don’t happen you’ll at least have the peace of mind that comes from not owing anyone anything.
There has been an argument that we are now entering a gold, oil, and commodities bubble. With gold over $800 an ounce, oil near $100 a barrel and the price of other commodities soaring it seems like another bubble. Is this argument valid or is there an economically fundamental reason for these record high prices?
Bubbles are more than just rising prices. They’re also characterized by:
1) Time-tested business practices being replaced with “innovations” that look like scams to reasonable eyes. In the housing bubble, for instance, zero-down, adjustable rate mortgages replaced the old 20% down 30-year fixed.
2) Regular people making fortunes doing things that experts normally find difficult. Daytraders in the 1990s and condo flippers in 2005, for instance.
In gold and oil we see neither of those things. In fact, most people still have no idea what gold is or why it’s going up, and their understanding of oil ends at the gas pump. When the person cutting your hair starts telling you about the emerging oil Brazilian oil company or Tanzanian gold miner you’ve got to buy, then it’s a bubble.
In the short run though, we could easily see a nasty correction in commodities. If the U.S. banking system implodes, which it might when Fannie, Citi, Merrill and all the rest finally come clean about their derivatives losses, we could see fear of inflation replaced by fear of a 1930s style deflationary crash. That would be bad for gold and oil. But then the world’s governments will panic and shift their printing presses into high gear, and the tidal wave of paper will cause chaos, which might be good for commodities. Welcome to the 21st century!