Stormy Monday

September 17, 2012

  • What a way to open the week: discouraged 20-somethings respond to Fed announcement… suicide rates on the rise…
  • “F-you, Bernanke” and other encouraging words for young people… (plus, an invitation to join a live Whiskey Bar chat on the subject…)
  • An innovative solution to the exploding student loan bubble… although like anything, you need talent for this one too…
  • The Mayer-French debate on housing heating up… readers chime in with personal experience…

 

  “Gosh,” our Monday began with a disturbing IM conversation with Jeffrey Tucker. “I just took what must have been my 20th phone call from a 20-something who is out of work, living at home, despairing for his prospects, lost and confused, and even considering suicide.”

The calls were apparently inspired by Jeffrey’s appearance on HuffPost Live last Friday, which he details here. In today’s 5, we take a look the real-world impact of the Fed’s latest announcement. Apart from being “stuck on stupid,” there are far-reaching and serious consequences to the Fed’s policy…

“There are millions in this young man’s position today,” Tucker worries. “Millions. When we were this age, the world was all opportunity. We never worried. We did whatever the eff we wanted to do. Today, we have a generation of caged tigers. They have nowhere to go, no way to escape.

“I’m bullish on suicide.”

Yikes.

We assume he meant he believes the suicide rate is going to rise…

 “Though stock prices may be dropping,” Huffington Post comments as if on cue, “one thing is on the rise: suicide rates.”

According to the National Suicide Prevention Lifeline, following the meltdown in 2008, calls to their helpline jumped 36%, and another 15% in 2009. In other words, Jeffrey’s bullishness may hold merit.

“Data compiled by The Wall Street Journal in late 2009 showed increases in several states,” HuffPost continues. “Of the 19 states surveyed, 13 had seen marginal increases in the suicide rate. Tennessee had the highest rate of increase, with over 15% more suicides in 2008 than 2007. Across the 19 states, the average increase was 2.3%.

“This trend was also seen during the Great Depression, when the suicide rate increased by 21% in the early 1930s (about 17 of every 100,000 people).”

  “While taking the call this morning all I could think was: ‘F&ck you, Bernanke’,” Tucker relates, coming around to the point.

“Bernanke is playing with the most-sensitive price signal there is, the interest rate, and that distorts the capital structure and prevents the necessary adjustment that would lead to sustainable investment. So long as that persists, and especially with the high costs of hiring, there will be no opportunities for young people.

“My advice to the young when they do call,” says Jeffrey, “lower your reservation wage, take any job you can find, commodify yourself and get on the market, work for free if you have to, just get your foot in the door somewhere. It won’t pay the bills, but it does provide some light that prevents the onset of that great enemy despair…”

  As I wandered around the crowd of NYU students at their rally protesting student debt at the end of February,” a satirical Jerry Ashton writes in “A Love Letter From Your Student Loan Bill Collector,” “I couldn’t believe the accumulated wealth they represented — for our industry.

“It was lip-smacking,

“At my right,” Ashton continues, “to graphically display how she was debt-burdened, was a girl wearing a T-shirt emblazoned with the fine sum of $90,000, another with $65,000, a third with $20,000 and over there a really attractive $120,000 was printed on another shirt. Guys were shouldering their share, with T-shirts of $20,000, $15,000, $27,000, $33,000 and $75,000.

“Although not every NYU student debtor was there — past or current — to participate,” Ashton writes, “it’s been projected that some $659 million in NYU student debt is hanging out there. Yes, $659 MILLION! This is the largest student debt of any nonprofit university in the country. If nonprofits can rack up these numbers, you can imagine the dollars owed, collectively, by for-profit schools.”

Student loan debt has now surpassed that of credit card debt. It reached astronomical levels last year when, according to officials at the Consumer Financial Protection Bureau (CFPB), it took out $1 trillion.

130  Well, at least one set of entrepreneurs appear to be on the case:

“Over the past few years, the number of college students using our site has exploded,” says Brandon Wade, founder of SeekingArrangement.com, a website offering this innovative matchup: the “college tuition sugar daddy.”

“Saddled with piles of student debt and a job-scarce, lackluster economy,” reads an advertorial, also conveniently hosted on the Huffington Post site, “current college students and recent graduates are selling themselves to pursue a diploma or pay down their loans. An increasing number, according to the owners of websites that broker such hookups, have taken to the Web in search of online suitors or wealthy benefactors who, in exchange for sex, companionship or both, might help with the bills.”

As the economy begins to sag, “rich guys well past their prime have been plunking down money for thousands of years in search of a tryst or something more with women half their age — and women, willingly or not, have made themselves available.

“With the whole process going digital, women passing through a system of higher education that fosters indebtedness are using the anonymity of the Web to sell their wares and pay down their college loans.”

[Ed. note. Ooh la la. The initial theme running through today’s 5 seems to have suggested itself: No matter how you look at it, in this era of low interest rates, you’re going to get (expletive deleted). For continued insight on the student loan bubble and several ways to survive and prosper through it, please see the August issue of Apogee. If you’re not already a subscriber, you can join us here.

  “I’ve put my money where my mouth is,” Chris Mayer writes, ignoring even the 5’s own concern that student loan debt will delay new homebuyers getting into the market by up to a decade.

Rather, today, he’s adding jet fuel to a debate already heating up with Doug French… and many readers.

“I’ve heard macroeconomists of various persuasions make these arguments,” Mayer writes, trying to be clear. “But I look at these things as an investor. The best way to get a good price is to buy something someone else is forced to sell. The U.S. housing market has that in spades.

“French’s arguments are actually reasons for bullishness. The large number of people who are still underwater and the large number of mortgages still in distress are what create the opportunity today. The fact that so many people can’t qualify for mortgages is another reason why the opportunity exists. By the time the issues French cites are cleared up, the best buying opportunity in more than a generation will have passed.

“Also,” he goes on, “the focus on prices is shortsighted. The fact is you can buy a house today and lock in 30-year money at about 3.5%. You don’t have to be a slumlord to earn net yields of 8-12%. So you enjoy income and build equity in the property. Even if the price of the house goes nowhere for years, it doesn’t matter. Over a 10-year time horizon, the odds are heavily stacked in your favor. Even minimal price increases yield big returns.

“If you borrow 75% of your purchase price, then a mere 10% price increase means a 40% increase in your equity. I closed on a rental in January where this is already the case.”

  “I think housing prices will rise with inflation,” Chris anticipates. “Buying a home and renting it is among the easiest and best ways the average fellow can short the dollar. You borrow today and pay the money back in depreciated dollars. Meanwhile, your rents rise.

“As a landlord, you are practically rooting for the Fed to devalue the dollar.

“I’ve been writing favorably about housing since January 2011. Since then,” he details, “I’ve spoken with a number of professional investors buying houses and renting them. I’ve reported on these conversations to my readers and told them how to participate in the funds. All of this work has led me to believe more strongly than ever: Now is the best time — a once-in-a-generation opportunity, really — to buy and rent a home.”

More from your fellow readers, and their actual experiences, in the mailbag, below.

  Stepping aside from the housing debate, let’s take a quick look at the markets: The Dow is down 39 points, to 13,553.

Topping $2 million in orders in its first 24 hours, “iPhone 5 fever” caused Apple’s stock to jump up to a record high of $699. Apple now sits a hair above $697.

The Nasdaq is squatting at 3,173 and the S&P rests at 1,461.

Gold is holding onto its gains at $1,772. The new “devil’s metal,” AKA “gold on crack,” as dubbed by HSBC managing director of metals John Levin, sits at $34.47.

 “Looks like we’re getting closer… and closer… and closer…” our publisher Joe Schriefer commented via email this morning. “Another deal outside the dollar. Another nail in the coffin.”

According to one Reuters report, “Germany and China plan to conduct an increasing amount of their trade in euros and yuan, reported this weekend, the two nations said in a joint statement after talks between Chancellor Angela Merkel and Chinese Premier Wen Jiabao in Beijing on Thursday.

“‘Both sides intend to support financial institutions and companies of both countries in the use of the renminbi and euro in bilateral trade and investments,’ said the text of the statement.

“It also said,” Reuters goes on, “that both parties welcomed investments in China’s interbank bond market by German banks and supported the settlement of business in the yuan by German and Chinese banks and the issuance of yuan-denominated financial products in Germany.”

  “World oil markets are on the cusp of disaster,” Byron King writes this morning. This was written only a few hours before oil’s mysterious drop of $3 in one minute right before 2 p.m., slamming it down to $95.89 a barrel.

“In such cases,” Barron’s reports, taking a tone you might recognize from our own commentators, “the chatter inevitably turns to the Strategic Petroleum Reserve. But we have no credible reports of a release at this point. Heck, we don’t even have a shady report to point to. CNBC’s befuddled anchors are just now floating the idea that options expiry may be playing a role.

“And CNBC has a White House spokesman saying there’s no change to the strategic petroleum reserve.

“‘Fat finger’ error? Probably not: Brent moved and a few other commodity markets weakened around the same time.” According to the Dow Jones Newswires, the crude prices took a tumble due to “a huge spike in trading volume.”

Whatever the cause, it’s not pointing in a happy direction: “We’re as close to total calamity as I’ve ever seen,” Byron Kings warns. “If things keep going downhill, your life will change forever, and you won’t like it.”

As Byron mentioned last week, “We’re looking at a Middle Eastern meltdown.

“Right now, the hot spots are what you see on the television and read about in the newspapers and online — Egypt, Libya, Yemen and Pakistan.

Hardee’s and KFC get torched in Beruit: “At least they’ve got their dietary priorities right…” writes one reader

“Of course,” Mr. King writes, “we have another big question of the next few months, which is what will shake out between Israel and Iran? Nobody knows, although we’ll all likely live to see it.

“There’s plenty of ripe and informed speculation about the Israel-Iran confrontation. According to the U.K. Telegraph, ‘An armada of U.S. and British naval power is massing in the Persian Gulf in the belief that Israel is considering a pre-emptive strike against Iran’s covert nuclear weapons program.’

“Investmentwise,” Byron concludes, “get the heck out of the Middle East. Go elsewhere, where the oil is. I cannot see how this ends well.”

  “Mayer is right,” one reader chimes in, bringing us back full circle to the housing debate, “in select markets.”

The 5: “Select markets” being the operative phrase, if we’re to use today’s reader experiences as a guide.

“I have bought houses that pay a net 8% cash yield, and the renters could save 40% on their housing bill by buying the house they rent from me. Prices have not recovered, but that is a value floor if I ever saw one. Someday, renters’ credit will be repaired and they can save money by buying the house from me at a premium. Meanwhile, I sit back and collect my 8%.

“There is some overhead in time costs, but still… it represents safety in a zero-percent world.”

 
“I owned several properties,” writes another with a less-enthusiastic take, “single-family homes, in a good area of Florida, Sarasota. When the bust occurred, I managed to sell most of them, usually as short sales. The last property I owned I had on the market for over nine months in 2008, lowering the price by $5,000, starting at $160,000, every two weeks. We got down to $95,000 and never received one offer. I offered the bank the deed in lieu of foreclosure very early on, and tried to communicate with them for over two years. I got no response of any kind.

“So in September of 2008, I stopped making payments and walked away.

“The property was built new in 2004 and appraised at $204,000. In 2006, I refinanced for $150,000 and held it as a rental. The tax-appraised value is now shown as $78,000. To date, I have never received anything from the lender except ‘reminders’ that my account is overdue. I have not made any payments for over four years, yet the bank has not foreclosed. Think Bank of America doesn’t want this ‘reflected’ on the their books or pay the maintenance and taxes?

“If this indicates a ‘recovery,’ what will a ‘bad market’ look like? There are hundreds of homes just like this all over Florida.”

 
This may look like a bottom, but RealtyTrac shows over 2 million foreclosures in 2012 and estimates another 2 million in 2013,” a third reader piles on, “Prices might go down or stay at this level until the additional foreclosure inventory is absorbed, but probably won’t rise for a couple more years, and may take years to regain their pre-2007 values.”

Agreeing with Mr. Mayer, the reader suggests, yes, “Real estate is at the cheapest levels seen in years, so if you have a large unencumbered income, great credit, high liquid net worth and low debt ratio, then you might be able to qualify for a loan.

“Otherwise, you can’t play.”

The 5: And that could be just the rub for many would-be investors, as the next reader intones: “In addition to Mr. French’s observation,” another writes clearly siding with Doug’s on the issue, “I will add another that Mr. Mayer is failing to consider. Americans’ real incomes are declining and, with QE4Ever, will not only continue to decline, but the erosion is likely to accelerate.

“His median income/median home price ratio is changing every day for the worse unless home prices continue to decline at a rate commensurate with income decline.”

  “Up here in Michigan, it is cheaper to own a home,” writes our last, rather agnostic, reader with an invitation of sorts: “My home cost $120,000. My mortgage payment is fixed at 3.75% and costs about $750 a month for a three-bedroom, 1,400 square feet. Michigan has a lot of farmland that goes up in times of inflation, sits right besides some of the largest bodies of fresh water on Earth and has a decent shale gas formation.”

Amen,

Addison Wiggin

The 5 Min. Forecast

P.S. Robert Mulligan, one of the leading monetary economists in the business, called Jeffrey Tucker’s commentary “5 Deadly Effects Of QE3” “the best thing I have read on monetary policy in ages.”

Tomorrow, we’re going to present a Live “Whiskey Bar” chat with Mr. Tucker on the Laissez Faire website. Subject: the Fed, why the political elite need to control money and our new Freedom Kit Initiative. If you want to join in, get details here.

rspertzel

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