Lessons from a Bike Ride
by Tom on January 23, 2009
in Guest post, Market Musings
Tom here – I subscribe to a lot of different newsletters and this is one that I typically find to be way more “alarmist” than I think is justified. However, today I thought they had some very good insights into what’s happening in the markets. Their policy says that you can republish it, so I’m doing so in it’s entirety…..
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Why Washington should take a bike ride
Several months ago, I decided it was time to get off my duff and improve my fitness level. But by doing what? Running? Too boring as far as I’m concerned. Rowing? Not really practical for me. But biking? That was right up my alley. I figured it was relatively easy to get started. I certainly enjoyed doing it as a kid. And I could cover a lot more distance than I’d ever do on my own two feet, something that dealt with the boredom objection. So I started to ride. Why am I telling you this? Because what began as an occasional hobby has turned into something else entirely. Indeed, I’ve dedicated a heck of a lot of time, money, and training to getting myself ready for the longest ride of my life this spring. Along the way, I’ve also learned (or relearned) quite a few lessons — lessons that dovetail quite nicely with what’s happening in the financial markets. And I’d like to share three of them with you today. Lesson #1: There’s no such The ride I’m doing this April is no Tour de France. But it won’t be easy, either. It’s a full “metric century” — 100 kilometers, or roughly 62 miles. I spent some time on MapQuest figuring out just how far that is from my front door, and I was a little intimidated by the results. But with the proper training and the right attitude, I realized it wasn’t an insurmountable goal. As long as I was willing to dedicate myself to the task, and put the required time and effort into it, I figured I could pull it off. And that brings me to my first investment lesson — one that investors, regulators, policymakers, and others have seemingly forgotten. There’s no such thing as a free lunch. Just think back to the wake of the dot-com bust. Rather than let the economy experience a cleansing recession to make up for the mal-investment in technology, the Federal Reserve shifted into overdrive. It slashed interest rates to the bone — screwing savers and making money essentially free to spur spending. The Fed believed its “free” money approach to the economy was best. It believed it could have a free lunch — an exuberant bubble in stocks and tech spending with no corresponding painful bust. But that wasn’t the case. Instead, the Fed’s policies helped cause the biggest housing bubble (and subsequent pop) in U.S. history. Or how about all the financial engineering foisted on the markets by Wall Street firms in recent years? They sliced, diced, and re-sliced countless subprime mortgages, corporate takeover loans, and commercial real estate debts. They packaged, bought, and sold hundreds of billions of dollars in debts and derivatives. Investors bought it hook, line and sinker, too. They figured they could get the free lunch of higher yields and lower risk — even though that makes no economic or market sense. Today, those very same securities are causing hundreds of billions of dollars in losses around the world, and contributing to the largest bank failures in history. Now, Washington would STILL have you believe that it can provide a “free lunch” solution. It’ll dole out gigantic heapings of economic stimulus, while racking up the biggest, most out-of-control budget deficits we’ve ever seen! Then to fund those deficits, it’ll just borrow enormous amounts of money. $1 trillion? $1.5 trillion? $2 trillion? More? Nobody knows for sure how many bills, notes, and bonds the Treasury is going to sell. Nobody knows just how big this mountain of debt that we’re burying our children, grandchildren, and great-grandchildren under will get. And as I mentioned in my January 9, Money and Markets column, almost nobody in Washington seems to care.
It would be madness for me to take the “free lunch” approach to my bike ride — to show up at the starting line having done no training … with no water bottles attached to my frame … and no helmet on my head. Yet Washington and Wall Street have yet to learn the simple lesson that there’s no free lunch. I hope that changes. And I suspect that by the time this recession is over, it will have done so. Lesson #2: Some assistance is fine. Like many longer rides, this one will feature “SAG” wagons. They’re vehicles that offer assistance to riders who bust a chain, blow a tire, or otherwise need some assistance along the way. The idea isn’t to just let unprepared bikers who get a little winded hop on board, ride to the finish line, and say they completed the race. The idea is to offer limited assistance — help get them back on their bikes and let them finish the race on their own, if they can. But Washington doesn’t seem to understand the difference between offering some assistance to those who deserve it — and bailing out anyone and everyone, including those who should fail. With the exception of Lehman Brothers, the Treasury Department and the Fed have been dropping money out of helicopters to virtually all comers in an effort to kick the can down the road. Fannie Mae. Freddie Mac. AIG. Citigroup. General Motors. Chrysler. The student loan market. The mortgage lenders. The commercial real estate industry. They’re all getting liquidity handouts, capital injections, or other forms of direct and indirect support. States, municipalities, insurers, and auto suppliers are also lining up for their share of the bailout pie. In a publicity-grabbing event, the adult entertainment industry even suggested recently that Uncle Sam throw $5 billion in TARP money its way. The request is absurd on its face. You want to believe the government will say “No.” But these days, you never know! Just like with the SAG wagons, limited aid to borrowers buried under excessive mortgage debt makes sense … Boosting FDIC funding so the agency can take over more failed banks, making insured depositors whole in the process, makes sense … Even targeted and timely stimulus — if done right — can prove worthwhile. But these days, we’re going far beyond that. We’re just printing money out of thin air … borrowing trillions more … and propping up failed industries and institutions. It seems like the politicians and policymakers in Washington want everyone to cross the finish line, whether they deserve to or not. That doesn’t make a single ounce of sense to me. And I doubt it does to you, either. Lesson #3: If you really want to achieve your goals, you When I first decided to get into cycling, I didn’t just put the most expensive bike I could find on my charge card and head out the door. I started out gradually. I used my old, beat-up mountain bike — and I saved my money in the meantime to buy something better in case I ended up sticking with biking. I also spent time researching how to be a safe rider. Turns out you have to learn the right hand signals. You need to understand how to safely navigate in traffic. You also should learn proper maintenance tips to keep your bike in proper working order — and how to change out an inner tube in case you’re miles from home and you run over a nail! Bottom line: I studied. I saved up. I invested time and money in order to achieve my goal. That should make it all the more rewarding when I cross the finish line. But the policymakers and businessmen in Washington, on Wall Street, and throughout corporate America want us to believe that we can skip all this hard work … Want to own a home? They told us: “No problem! You don’t need to spend any time learning about interest rates or mortgages. You don’t need to bother saving any money. We’ll approve you for a 100% loan for $500,000 in a few minutes. And forget about paying for any principal — that’s so old-fashioned! Just get an interest-only loan.” Want to buy that big-ticket item? “Don’t worry about delaying your gratification by coming up with a budget and sticking to it so you can pay cash. Just borrow the money! Put it on your credit card. Or better yet, your house.” Want to invest millions of dollars in pools of risky debt? “Don’t worry about doing any research or due diligence. The ratings agencies say it’s AAA. Just buy it!”
Want to retire comfortably in your golden years? “Don’t worry about saving as much as possible, squirreling away your pennies, nickels, and dimes. Just sit back and watch as your stocks and your house go up in value!” But the truth should be abundantly clear by now. If you want to reach a personal or financial goal, there is no shortcut for hard work, saving, and investing toward that end. I’ve spent the past several months learning and relearning these three lessons — and I think I’m a better person for it. Hopefully our policymakers … and mainstream investors … will take them to heart, too. I believe we’ll all be better off if that happens. Until next time, Mike
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The Big Picture – The Pharaohs did it. Jefferson did it. Both Roosevelts and even Ike did it.
by Tom on November 5, 2008
in Guest post, Market Musings
Mending the economy and nurturing a devastated financial system are long-term issues (opportunities), but almost immediately there will be a call for an additional stimulus package to be introduced. The Democrat-controlled Congress will opt for extension of unemployment benefits and expansion of the food stamp program at the least, but most observers feel an infrastructure-rebuild program will be front and center.
An infrastructure repair plan? You mean we aren’t just going to give the government’s money away but instead we’re going to fast track government spending where we’d get something for our money?
I like the idea, what do you think?
Let’s take the soon to be unemployed automotive workers and put them to work rebuilding America!
Reverse Offer – a Guest Post
by Tom on October 20, 2008
in Education, Guest post, Realtor Thoughts
This comes from Todd Waller of Real Estate One in Ann Arbor Michigan. I’ve known Todd for quite a while and have come to appreciate his new and fresh outlook on selling real estate in difficult times. I hope you’ll enjoy it!
Is Your Agent Creatively Aggressive in Selling Your Home?
Michigan has been in the throws of a buyer’s market for at least 3, if not nearly 4 years. As a result, Michigan real estate agents have had to adapt quickly to a rapidly changing marketplace.
Creatively Aggressive is my term for how some agents are representing their clients’ interests in this tough market. In the examples given, the focus is on protecting the client’s interests and maintaining the fiduciary responsibility between client and agent.
Here’s an example of an agent being creatively aggressive :
The Reverse Offer
The seller has a property on the market, competitively priced, aggressively marketed, and the number of showings has been steady, but no one has put pen to paper to purchase the property. When a buyer shows interest in the property and returns at least one more time to see the property, it’s time to make a reverse offer.
The reverse offer is simply an offer from the seller to the buyer to begin the purchase conversation. Obviously the buyer is interested enough to see the property multiple times. That indicates that the price, location and value combination are making the property “sticky” in the purchaser’s mind.
What the reverse offer looks like is different from property to property, so consult with your Realtor(R) before an offer is put together. You may want to submit a reverse offer with a price lower than your list price, or you may want to submit an offer with a higher price and seller concessions.
What About the Buyer?
This option can also be utilized by a purchaser in a buyer’s market. The effectiveness varies, but I have found that it is totally dependent upon the seller’s willingness to try something unconventional. When my purchasers have indicated that they would be happy to purchase either home A, B, or C, I have asked the listing agents of those homes to submit an offer to my clients. I simply state that there are multiple homes they are interested in, it’s a buyer’s market and we are acknowledging and embracing this fact.
For my buyers, it’s an opportunity to not be tied to one contract to purchase and gauge a seller’s willingness. For my sellers, it’s an opportunity to end some of the suspense, and show purchasers that we are serious about moving the ball forward.
What have you seen used as a creatively aggressive way to sell homes? I’ve heard rumors of using eBay, selling the handmade, scale doll house, with the actual house thrown in for free (Great Marketing idea!), free cars…. What have you seen and what works, I suppose, are two different questions!
Todd Waller or call him at 734-564-7465
Words….
by Tom on October 7, 2008
in Education, Guest post, Market Musings, Realtor Thoughts
A friend of mine, who I talk with often but have never met, Jeff Brown (aka BawldGuy) has a way with words. I’ve learned a lot from our interactions and his outlook and view on the markets has stimulated and challenged my views of things as well. It’s been a lot of fun.
This morning, I was talking to several of the bankers in my office (kind of reconnecting after being out of the office yesterday) and the majority of them were talking about how they or their clients were losing their shirts big time in the market. Then I read Jeff’s post about Words and I thought it was worth reprinting here in it’s entirety. So read what Jeff has to say (below) and then come back up here, click on Contact Jeff and talk to him. He’s definitely worth the time!
Here it is:
I feel so much for those who’ve been watchin’ the retirement plans they have at work slide downward as if they’re on Teflon. Millions of Americans have worked honestly and hard building up their 401(k)/IRA’s. Seeing years, often many years of disciplined effort, shrink significantly in real time is a body blow to the spirit. I know, I’ve been there. I empathize with you.
So many of us, usually when we’ve been kicked in the groin financially, have vowed passionately if not also with righteous indignation, to take control of our own futures. By future, we meant our retirement. That word means so many different things to us, but one factor is shared by us all — the older we get the more valuable the stability and reliability of our retirement becomes.
BawldGuy Axiom: Words mean things. For example: The physics of economics will not be mocked.
What do the words ‘Take control of my retirement’ mean to you? Think about it honestly.
401(k)’s have been dealt tremendous pain in the last few months. Let’s quantify what those words mean, exactly.
If a taxpayer had $1.5 Million in their 401(k), and in the latest downturn has lost $300,000 — his retirement income (at 7%) has lost nearly $2,000 a month forever. They’ll never have that money. If they live 20 years after retiring, that’s well over $400,000 they never had to spend. Family visits not undertaken. Vacations not enjoyed. Cruises never booked. And on, and on.
For average folk out there, even if they’re 50 they don’t yet have $100,000 in their company’s plan. Yet to them, the recent slide in their plan’s value seems catastrophic. In reality, it didn’t change anything except in their own mind. Let’s take a page out of the book of silver linings, OK?
Stop kiddin’ yourself that you’ve taken control of your future. If you’ve not invested in real estate, yet your retirement plan has been sliding into the black abyss of mutual fund hell, you’ve only taken control of your newly extended working life. Did your plan include workin’ ’till you were 75? Don’t answer. It’s a rhetorical question. Grandpa worked ’till he was over 80, but then he considered getting paid for what he did nothing short of folly. Unless that describes you, today can be a watershed turning point in a massively positive way.
Take control of your future with strength of purpose. Stop throwing your money away in 401(k)’s. With the exception of an employer matching you dollar for dollar, it makes no sense, considering the alternatives available.
Received a call today that warmed my heart. Client did take most of his cash out of his company’s plan. Paid the taxes and the penalty. In his own words, he’s up $10,000 net so far. That’s taking control. Even if all he accomplished had been to avoid a loss, it would’ve been a win.
Though real estate is surely one of the alternatives, and in fact was one of his, it isn’t the only one by any stretch — nor was it the only option taken by him. He took control of his own future — his retirement — by slowing down the talking and increasing the walking.
Don’t allow recent events to defeat your spirit.
Rather, allow them to renew your resolve to grab your future by the throat! Take control of your retirement — become more involved. For most, in my experience, the extent of their involvement is the occasional perusal of their periodic 401(k) statement.
How’s that workin’ out for ya so far? Exactly. I’ve been there. I’ve lost too. I’ve felt the pain of a defeated spirit. Then someone who cared, asked me if I was gonna take charge of my future, or pout. That was in another life, but I’ll never forget the power of putting those words into action. At some point in our lives, we’re all given the opportunity to Walk our Talk.
Take control. Make recent events the inspiration for pivoting away from so much Talk, and towards much more Walk.
Towards that end, let’s get together. Scratch out a quick note to me, and we’ll figure out what makes sense for your newly turbo charged future. Let’s give these black clouds some silver linings — with the aid of your own Purposeful Plan. Have a good one.
What Now?
by Tom on July 17, 2008
in Guest Posts, Guest post, Realtor Thoughts
Here’s another guest post by Mike Farmer from http://bonzai.squarespace.com/. Mike is a Realtor in Savannah Georgia and he gave me permission to copy a different article that he wrote, so I’m going to copy this one as well (with implicit permission – I hope that’s okay Mike). I think it speaks very eloquently about the situation that we’re in and the questions a lot of people are asking:
What’s going to happen?
Are we all going to die? (click on that question for more insight into it…..)
So, read what Mike has to say and let’s talk about it. As the next few weeks and months go on, I’ll share more of my thoughts about what the new reality is like and what’s going to happen from here:
Testing the mettle of real estate professionals or what now, Slick Rick?
Americans can’t take bad news for too long — we begin to rebel against it, in our on way. We hardly ever take to the streets, moods merely change and a collective determination sets in. We can be a moody country, falling into periodic blue periods where a cloud of gloom affects our outlook — but it’s not in us to be gloomy for too long. In us also, at times, is a frenzied optimism, whether it’s certain technologies, cult personalities, sports, political, homes/investments or virtual optimism over the internet. Our fortunes tend to change with our moods, and sometimes it’s hard to tell which comes first.
Our current pessimism will make us sick before too long and our weariness will be replaced with a determination to make things happen again. Sometimes an election can change the public mood, sometimes ideas and inventions from outside politics emerge and inspire us to see things differently, from trains to automobiles to science to economics to the internet.
We’ve become somewhat jaded because progress has been so fast and we’ve seen so much. Right when real estate seemed to be the movement to great wealth, happiness and security, our frenzied optimism created a bubble that quickly deflated and now pessimism has set in. Like the internet frenzy of the nineties, we moved too fast and expected (demanded?) too much and now reality has set in. Maybe our coaster roller rides are making us weary, or maybe we are growing out of cheap thrill rides and maturing as a people in preparation for a more stable and realistic future.
I do know that we are a people who don’t stay in gloom too long. We move on and continue to build and to grow, in spite of the predictions of our downfall. Predictions of our demise have been made over and over whenever we’ve hit a rough spot. It’s hard not to think they are true when all around us the talk is of everything negative about our society, our economy or our way of life. Yet, we keep on going.
In times like this, and I have been through a few in 54 years, I have to put things in perspective and look at what is really going on around me. Yes, business is much slower right now, but that’s natural. Reality doesn’t work in straight lines upward — there are zigs and zags. I suspect in 2009 we will have had enough gloom and we’ll buckle down once again, solving problems, building new things, thinking of new and better ways to live and prosper, all with a better attitude.
The shake-out in real estate was natural and needed - it was over-heated and there was no way to sustain the growth. People will begin looking at homes as extensions of themselves and not as cash flow investments. The road back will be gradual, as it should be. All those who have been negatively affected will adjust, banks will adjust, the real estate industry will adjust and all will be mended, but not without thought and effort.
What will the real estate industry look like going forward? It will be less sexy for one thing - in fact it may not be sexy at all. I have a feeling people will look at homes in a much different way that has to do with long term plans. Yet where we live is so imortant to us it will still be a vital part of our lives. Americans aren’t renters by choice, although for a few years many Americans will most likely have to rent. This presents a challenge to the real estate industry — how to meet the growing need for rentals.
There will be a demand for good rentals in areas where people want to live. There will most likely be a big need for creative arrangements having to do with lease/purchase and maybe alternative financing. Many people who were credit-damaged or just don’t have a downpayment, will be looking for ways to create future security when it comes to housing. Some will need a couple of years to rebuild and they will want to find ways back to ownership, or TO ownership for the first time.
As real estate professionals we should be thinking of how to meet these needs. The challenge will be to find ways to make a living off helping people work out long term goals, at least long term compared to the quickness of buying during the last five years. Property management and investment strategies will become a focus for real estate pros and quick big bucks won’t be easy to find. Throwing the sign up and getting multiple offers will be a rare occurence. Working with clients who are in an iffy middle land of financing problems will be common.
Have you got a plan? It’s time to earn our money or start another career.
