Seattle Bubble

• Housing Shortage or Overbuilt—A New Look at Supply and Demand
• Local Unemployment Up Again
• Those Darn Fundamentals
• How people do it
• NWMLS: King County SFH Prices Hit 0% YOY.

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95 responses so far ↓

• 1 Jason // Nov 1, 2007 at 11:08 am

  Buy non-dollar securities: UDN (a basket of currencies), FXC (Canadian dollars), FXE (Euros), and others. See http://www.currencyshares.com for more. You even get interest payments as dividends. If the currencies themselves are too boring, invest in internationally-focused stocks and funds. Companies that export suddenly cheap American goods are also helped by the weak dollar.

  Disclosure: I bought FXC earlier this year expecting that the loonie would reach parity with the US dollar, and sold after it did so. I don’t own any foreign currencies any more.

• 2 B&W Nikes // Nov 1, 2007 at 11:17 am

  I read recently that the cost of a home purchase is not a factor in CPI, it was pulled out in the 80s and only rental average is used for housing costs now. If one could factor in the doubling of home prices over the last decade, the reduction of purchasing power would look even uglier. I believe that was a communications control benefit in removing home ownership from the index.

• 3 bigdollordog // Nov 1, 2007 at 11:24 am

  so in other words home owners making payments just got a 10% discount !
  as long as your payments are based in dollors you get a discount

• 4 John // Nov 1, 2007 at 11:28 am

  Is it possible that the housing bubble in the last few years is partly caused by the devaluation of the US dollar? Our currency has lost 40% against the Euro since 2001.

• 5 sean // Nov 1, 2007 at 11:35 am

  bigdollordog

  homeowners did not get a 10% discount because they are most likely also being paid in dollars. so their income is going down in terms of real purchasing power as quickly as the value of their house is. If you already own a house and you’re not getting raises that beat inflation its all a wash, assuming you have a fixed mortgage payment, and assuming we don’t count the water, electric, adn gas bills that are undoubtedly begining to go through the roof.

  My thoughts on the broader question: What to invest in in an inflationary environment?
  If you want to protect your purchasing power, you should do what people have always done. Buy things that have inherent value. A bushel of wheat will always be valuable and its price is likely to rise at about the same rate as everything else, all things being equal. So companies that produce solid tangible goods, wheat, oil, gold, other commodities are probably a solid bet in an inflationary environment. Of course, gold doesn’t rot and can be stored cheaply, that’s part of the reason its had so much success with savers over the millenia.

• 6 Scotsman // Nov 1, 2007 at 11:38 am

  It’s too early to tell how this will play out. Liquidity is rapidly contracting, and in the short term we may actually see deflation in some areas. The longer term is likely to be inflationary with a slowing economy- the worst of the worst. But much depends on how our government and others react, and there’s no way to know at this time which of the many possibilities will play out.

  In general, buying non-dollar denominated assets, i.e. foreign stocks, currencies, etc. is a good bet, as is any kind of commodity, with preference for those that have real value as components of manufactured goods.

• 7 casey1167 // Nov 1, 2007 at 11:39 am

  This is great news. Forget MSFT, BA, SBUX, and WM, all the Canadians with the inflated Canadian dollars are going to buy houses on Snoqualmie Ridge as investment properties.

• 8 ken // Nov 1, 2007 at 11:44 am

  Good read about housing and loans at money blog

  http://www.mymoneyblog.com/archives/2007/10/we-got-pre-qualified-for-a-mortgage-and-it-was-shocking.html#more-1690

• 9 B&W Nikes // Nov 1, 2007 at 11:49 am

  Speaking of WM, they are the goat de jour in the subprime debacle.

• 10 MrRational // Nov 1, 2007 at 12:03 pm

  TIPS (Treasury Inflation Protected Securities) and Gold would be decent inflation hedges. Both are available as ETFs, TIP and GLD respectively.

  I’d be more concerned with what your landlord will be doing to your rent in an inflationary environment. If the dollar continues to tank you can bet that rents will be moving up substantially.

• 11 Alan // Nov 1, 2007 at 12:11 pm

  TIPS aren’t so great when the government is lying about inflation.

• 12 Alan // Nov 1, 2007 at 12:13 pm

  Is it possible that the housing bubble in the last few years is partly caused by the devaluation of the US dollar? Our currency has lost 40% against the Euro since 2001.

  I saw a graph several months ago that showed housing and inflation movig in lockstep until just a few years ago. My first thought was, “What if inflation has been much, much higher than the government has been saying?”

• 13 jon // Nov 1, 2007 at 12:20 pm

  Cheap dollars will be good for US exports, so what I would do is buy real estate in a part of the US that does a lot of exporting. Also, to buy the real estate I would borrow money that could be paid pack with cheaper dollars later on.

• 14 Scotsman // Nov 1, 2007 at 12:31 pm

  A falling dollar is essentially a transfer from the U.S. to other nations. As we sit here at home and look at our neighbors across the street, everything is fine. It’s like watching all the other dancers in the ballroom of then Titanic as the ship goes down. Nothing seems to be changing. We’re paid in dollars, buy in dollars, see costs and benefits in dollars, not much appears to be happening. BUT, your foreign goods, (like the parts for your BMW), are suddenly more expensive, and there seems to be more foreign interest in buying the stuff you already have- because it just got cheaper for them. It’s a re-balancing that the vast majority of U.S. citizens won’t even know is happening- until our government programs are forced to contract and everything gets a lot more expensive. The long term result is a reduced standard of living for those in the U.S., and an increase in prosperity for other nations.

• 15 Alan // Nov 1, 2007 at 12:34 pm

  I agree with Jon. Look for companies that have a large component of their income coming internationally. As the dollar weakens their earnings in dollars should go up.

  Although if we hit a recession that could change. To plan for that, buy stock in companies that produce basic necesssities. Alcohol is also a good bet for a recession if you don’t mind capitalizing on the desparation and misery of others.

  In a total collapse of society, farm land and a water source would be good to have. You will probably want armaments to defend those resources. But not so much that you attract the attention of the government (you also don’t want to so much access food or water to attract the attention of anyone).

• 16 Matthew // Nov 1, 2007 at 12:49 pm

  CPI data is a joke. How can you possibly exclude energy, food, and real estate prices and expect to come up with a reliable inflation number?

  So our inflation data is based on cheap electronics on from China… Great. Tell that to JoeSixPack when he is paying over 3 dollars a gallon for gas, milk is up a dollar a gallon and real estate in his neighborhood is at all time highs.

• 17 Matthew // Nov 1, 2007 at 12:50 pm

  BTW, when the sh!t hits the fan and we are headed into a recession what do you need to survive?

  A. Gas, food, shelter
  B. Plasma t.v.’s, IPod’s, Cell phones
  C. What’s a recession?

• 18 jon // Nov 1, 2007 at 12:56 pm

  “A falling dollar is essentially a transfer from the U.S. to other nations.”

  Actually, its a transfer from those who are lending money in US dollars (e.g.Japan and China) to those who are borrowing, namely us, because now it will be easier for us to sell products and pay back with cheap dollars. Those lenders are going to get very worried about the continued path of the dollar, and may require higher interest rates to compensate. I don’t understand why that hasn’t happened already. Perhaps it is an expectation that as the Iraq war ends, the US will go into a massive surplus because, if you look past all the the doom and gloom reporting, our economy is in fact booming.

• 19 laxtosnoco // Nov 1, 2007 at 1:07 pm

  Yes, the dollar has fallen. Yes, it’s unfortunate that our fiscal and monetary policies are encouraging inflation. But much of the discussion of these issues on the Internets is your average conspiracy theory-mongering.

  The chart Tim posted showed that the dollar has declined about 8% as measured by a currency futures index. In Jan 2001-2002 the same index went up about 7%. Where were all you folks then? Why didn’t we ‘feel’ the deflation then when our dollar was so strong? The answer is that purchasing power has many more influences than the strength of the dollar.

  Like most good conspiracy theories, there are some kernels of truth in the M3/CPI theories. However, the idea that the Man is trying to hide data is not very well supported.

  M3 is not an inflation measure; it tracks money supply in certain categories. The data is not being suppressed, but the Fed has stopped tracking and reporting the numbers. Even hard core monetarists (and they are a declining breed) wouldn’t buy the leap from ‘M3’ = ‘perfect description of money supply’ = ‘inflation.’

  As for the CPI, weights get changed every 10 years. There’s not necessarily a sign that the Man is hiding information from us. Anyone ever met a rank and file government economist? They’ll argue endlessly about minutia, and they may not always be right, but the dataheads rarely have strong agendas. Every decade, they run a thorough analysis of consumers’ purchases and do their best to reflect changing habits into a revised index.

  Rather than parrot back conspiracy theories, I’d like to see some real analysis from the inflation conspiracy theorists. Why is M3 a better indicator of inflation that other measures (like price indexes)? Why were the adjustments to CPI weights in the 1990’s incorrect?

• 20 EconE // Nov 1, 2007 at 1:07 pm

  I think that the other countries will have their own currency issues in due time. Isn’t the housing/credit bubble global?

  Tim…you asked a while ago what to invest in and even asked for input on aggressive investments with 30% of your funds.

  Were you proactive or did you just sit on your $’s?

• 21 softwarengineer // Nov 1, 2007 at 1:55 pm

  ONE ASSUMPTION I READ HERE IS AMERICAN PURCHASING (OR LACK THERE OF) HAS NO EFFECT ON CANADA, CHINA, EUROPE, ETC

  This is presumptious, as I figure as goes Walmart in America, so goes China.

  Have you noticed Mercedes Benz is offerring $29K cars in America, that’s cheap for MBs. Japanese Camrys have come down from the low 20s base to 19K in price too from years ago. Now, add in the dollar devaluation to imports from abroad getting cheaper and that spells trouble for the rest of the world that depends on our imports. Their profit margins are getting dinky. No wonder GM stock is topping Toyota the last few months.

  No one is immune when America sneezes.

  Then add in $96/barrell oil to this witches brew, a subprime banking mess (Citi plummetted 6.5% today and all the banks took a hit in the stomache together) as the stock market DOW crashed about another 400 points today. Dr.Roubini says [and I believe him] that it would take a 2% fed cut [not that dinky 0.25% cut yesterday] to help fix the housing market and that just ain’t gonna happen folks, for a plethora of reasons.

  Gold is sky rocketing with oil, but ya know…when gold shoots up and the dollar plummets together, watch out. This is very, very bad economic news…..severe recession stuff at the very least [Roubini just recently predicted a severe 2008 recession for America].

  How is Boeing gonna sell planes when airlines have to massively raise fares to pay for massive jet fuel increases? Whose gonna buy Microsoft computer S/W when we stop buying at Walmart?

  Safe investments…there are none really, we’re on this Titanic together. The best we can do is rearrange the chairs and slow the speed down toward the ice
  berg.

  If I was gonna hope and make the best possible investing changes right now, the European Bonds look attractive, they’re in Euros too.

  I’d keep a can of cash buried somewhere. If the American banks do fold some day, there’s only 5 cents on the dollar in their safes, even with FDIC….during the Great Depression there were line-ups at the banks and they closed the doors.

• 22 Shawn // Nov 1, 2007 at 2:04 pm

  Off topic, but a good read:
  http://preview.tinyurl.com/2huzmg
  Cuomo: Subprime loans deliberately inflated
  New York’s attorney general accuses First American and Washington Mutual of using appraisers to overstate the value of home loans.

• 23 NolaGuy // Nov 1, 2007 at 3:03 pm

  After recently spending $5 on a single loaf of bread, I’m hedging by increasing my pantry-equity. Just joined coscto and am loading up on TP, peanut butter and canned tuna!

  (we’re a two-person household and have never seen the need to shop there until recently)

• 24 Doug // Nov 1, 2007 at 3:08 pm

  I’ve been worried about the dollar devaluation, even if its just part of a “healthy” cycle. Inflation protected securities (i.e. TIPS) seemed at first to be a good way to go because I’m risk averse these days. However, I realized that TIPS are indexed to the CPI. According to the CPI, inflation is under control. If “real” inflation is much higher, then what good are TIPS going to do me? Any thoughts on this problem? Are there any lower-risk securities that might accomplish the same goal and not be indexed based on the CPI?

• 25 Scotsman // Nov 1, 2007 at 3:42 pm

  While it’s true that the U.S. economy has a large impact on other economies, i.e. China, Japan, Canada, etc., that impact is not what it’s been in the past. National pride, or maybe just ignorance, seems to keep us from seeing that we don’t have the impact we used to. Other nations and economies have caught up and diversified while we’ve gotten fat on consumerism. To expect them to significantly alter their behavior now to save our butts is unrealistic.

  Ask yourself where the five tallest buildings in the world are, for example. Yeah, we’re big, but we’re dummer and slower than we used to be. Reality is going to be smacking us hard over the next decade.

• 26 rose-colored-ghoulaid // Nov 1, 2007 at 3:53 pm

  I would absolutely avoid TIPS, because they are based on misrepresented inflation. I think gold/silver are safer if you are truly risk averse. Like stated above, another good move is investing in any company that produce essentials (hint, think alcohol).

  One point I want to make is that everyone seems concerned about transfer of wealth. The mindset is, if other’s do better then we must do worst. In reality, this is not always true. The Chinese economy is growing at like 10% a year (if the numbers can be trusted), and we grow at about 2% a year (if the numbers can be trusted).

  In that light, the dollar could lose 8% against the yuan, and we could still be 2% better off than last year. I’m not saying this is what will happen, but economics is a net gain game in general. Everyone can do better, and it’s possible that one of the reasons the dollar is losing value is because our quality of life is simply growing less fast than others.

  In a real sense though, who can complain if this is true? Even if you are living 3 people to a 700 sq ft apartment in Renton, you are still better off than almost everyone in China.

  In summary, use this opportunity to get ahead of other American’s, but don’t complain that people in other parts of the world are starting to receive electricity and clean water. They deserve it as much as we do.

• 27 BanteringBear // Nov 1, 2007 at 4:04 pm

  “What do we as financially responsible, saving individuals do to avoid having our savings become worthless?”

  Go all in on Google stock. Yeah, it’s around $700 per share, but the “experts” say it’s a $1000 stock. That’s easy money…NOT! Many, many stocks (Google included, IMO) are totally bubblicious right now, and a major crash in the DJIA won’t come as a surprise to me. Many of the ill gotten gains from the housing bubble have made their way into stocks, and this speculative fever has pushed current values far beyond what FUNDAMENTALS (there’s that pesky word again) support. It’s a crapshoot as to how to protect, much less grow your cash right now. Liquor and guns?

• 28 Mark L // Nov 1, 2007 at 4:21 pm

  Some say the yuan (artificially pegged to the dollar) is 40% or more undervalued. W has been trying to get China to float or appreciate the yuan.

• 29 John // Nov 1, 2007 at 4:33 pm

  The Chinese stock market has skyrocketed in the last two years. It may be a simplistic view but if you are talking about wealth transfer, that is it. Five of the ten biggest companies in the world by market cap are Chinese. A few years ago, they didn’t even make the list.

• 30 BubbleBuyer // Nov 1, 2007 at 4:39 pm

  ” agree with Jon. Look for companies that have a large component of their income coming internationally. As the dollar weakens their earnings in dollars should go up…”

  The problem with this is that most of the world regards the dollar as a reserve currency and if they perceive that the feds are trying to drive down the value of the dollar to increase exports or repay debt with deflated dollars they will begin to sell existing dollars and dollar denominated investments. This will cause a run on the dollar and the fed will have no choice but to dramatically increase interest rates sending the US economy into a severe recession. This I think is the most significant risk the USA faces and it amazes me how tolerant countries like China, Japan and Germany have been to the games the Fed is playing.

• 31 casey1167 // Nov 1, 2007 at 5:16 pm

  “BanteringBear said, Go all in on Google stock.”

  Come on Mr. Bear, do you not believe that Google is worth 219 BILLION???? And fundamentals… I thought a 50+ P/E ratio was a bargain! If they hit $1000 a share, they will be worth what MSFT is…

  And Matthew, you left out:
  D: A good RE professional

• 32 bud // Nov 1, 2007 at 5:33 pm

  One hedge would be to buy puts in Wamu, Countrywide, Ambac, and most of the builders. The bad news just keeps coming for these companies, and with ARMs resetting over the next 2 yrs, the news won’t be getting better for these companies who really have no idea how big their losses will become. WM and CFC puts are like shooting fish in a barrel right now.

  Also, don’t underestimate the 900-lb gorilla that GOOG has become. It’s the most important business in the world right now.

  Investing a crapshoot? I think that’s just giving up.

• 33 mikek // Nov 1, 2007 at 5:55 pm

  I think it is a very scary time for investing. Seasoned investors probably will be able to do well with all the volatility, but I lack the expertise to properly evaluate risk, and I do not trust ANY financial advice from parties who have a vested interested in my investment strategy. 6% interest in an inflationary environment is not good. But losing capital in uncertain markets is worse. I liquidated 40% of my mutual fund based IRA and moved it to a small local bank with a good CAMEL rating. I only got just under 5% for a CD. Thats less than other options, but if you look at the banks paying higher rates, they are all on shakier ground (WAMU, Countrywide, higher risk = higher rates). I am seriously considering moving the rest of my IRA to a CD at a different bank. And I DO worry about bank failures and FDIC coverage as well.

• 34 jon // Nov 1, 2007 at 6:41 pm

  The difference between GOOG and MSFT is that MSFT has copyright protection and a large entrenched base, while GOOG is profitable in an area that has a much lower barrier to entry. A new company in placing online ads can simply show a slightly better cost effectiveness and overnight GOOG is gone.

• 35 deejayoh // Nov 1, 2007 at 7:46 pm

  jon said,

  on November 1st, 2007 at 6:41 pm

  The difference between GOOG and MSFT is that MSFT has copyright protection and a large entrenched base, while GOOG is profitable in an area that has a much lower barrier to entry. A new company in placing online ads can simply show a slightly better cost effectiveness and overnight GOOG is gone.

  Jon, no offense intended, but I don’t think you have a deep understanding of the search business… Not that I’m the expert, but Google is growing revenues 45% per year in a market growing 25%. They own 65% of searches and their share grows every month. They dominate in every country but China and Korea. Absolutely noone can deliver the economics of ads through search that they do, and noone can pay as much to acquire traffic as they can because it is worth so much more in their hands. Why do you think Microsoft has lost the battle every time they’ve gone up against them for buying a business, in spite of bidding more (e.g. Double Click)?

  At $700/share their biggest problem is running out of air in the box in terms of ad revenue, before they figure out a new revenue stream

• 36 The Pat // Nov 1, 2007 at 8:00 pm

  We have a ferocious bubble because when we look at the past 4 or 5 years we see housing’s been going up at an average of like 8 - 10%. Whereas inflation has been at 2.5%, or maybe at 8 - 10%. Hmm, seems like I could find some meaning here……..No, nothing.

• 37 bigdollordog // Nov 1, 2007 at 8:17 pm

  did somebody say “conspiracy theories”
  yippee!, I’m seeing a lot of post here like “The FED is trying to do this or that to this country or that country, .. but hello! does the FED really care, really now…. people,.. please the FED is made up of people from several countries…..

• 38 Matthew // Nov 1, 2007 at 8:37 pm

  BigDollarDog,

  Not only can you not spell your own name correctly, but your entire post was wrong. The Fed board is made up of only Americans.

• 39 Ira Sacharoff // Nov 1, 2007 at 8:38 pm

  It’s a two edged sword:
  There’s been a lot of bad news about the housing and financial industries, and people are very cautious about both buying houses and spending money in general. Christmas is coming and the Fed needs to show that things aren’t so bad, so they’re lowering interest rates.
  At the same time most of the crap in stores is imported from countries whose currencies are killing the dollar, and these foreign entities have been buying treasury notes and bonds, but if interest rates are lowered, they are not going to be buying our devalued low yielding t notes forever…
  Burying dollars under the mattress is a good idea as long as they’re Canadian dollars.

• 40 The Pat // Nov 1, 2007 at 8:45 pm

  Hey, I have an idea for a new index. I call it the TBEI, and it goes like this. First, take the Seattle Case Shiller Index for when Tim started the blog. I think it was mid-2005 and the CSI was about 150. Now look at the current CSI (I think it’s about 190). If we divide the difference into the current CSI we get the % that the market would have to tank in order for Tim to buy a house at what he could have done in 2005. It’s the Tim Breaks Even Index, and I estimate that it’s about 21%.

• 41 Matthew // Nov 1, 2007 at 9:00 pm

  21 percent? We’ll break that by 2009, easy.

• 42 DougInSpokane // Nov 1, 2007 at 10:11 pm

  International investments in india, china, russia and brazil (called BRIC’s): Too many people wanting a basic life aka western world folks driving demand.
  Gold and mining stocks: inflation driven
  Oil and oil services: oil shortages and demand drivers
  Solar energy plays: see above
  Commodities of any stripe: hedge funds and momentum players as well as demand from the BRIC’s as well as the current 5-7 yr droughts in various places make this a bubblicious play

• 43 Markus // Nov 1, 2007 at 10:34 pm

  It’s late, but a few quick comments:
  1. Lowering the FED rate helps the US economy, but deflates the dollar on the international market and increasing the rate has the opposite effect.
  2. Don’t gold directly (you’ll need to pay for storage…), instead buy some precious metal stocks like GG, KGC, GOLD, GSS, etc… These companies mine, refine, and manage silver, copper, gold, etc…
  3. Once the war stops in Iraq we’ll really be hurting. The war is pumping a lot of money into the economy (1.5x rate pay to soldiers, cottage security industries, US made equipment being sent to Iraq, etc…). I don’t support the war, but let’s face it, it added a lot to the economy that otherwise would not have been spent by the government and a lot of folks have benefited by the war inadvertently.
  4. Political change is coming, not sure if it will be Mrs. Hilary or Mr. Romney, but I’m sure neither will have the financial skill to unravel 10-20 years of poor fiscal policy.

  Good night folks… Markus

• 44 Markor // Nov 2, 2007 at 12:09 am

  I’m surprised no one’s mentioned it explicitly: If you want an inflation hedge, buy a house! In the long run house price increases have matched inflation. Suppose Seattle house prices are 30% too expensive now. That would be absorbed by 10% annual inflation in less than 3 years. Given the incredibly bad management of the country since 2000 (W even wants to spend a $trillion of borrowed money to pick up a few rocks from Mars), inflation could skyrocket over the next decade, and of course wages will not keep up. There may be better investments, but solely as an inflation hedge it’s hard to beat a house, since you can also live in it. The running costs for homeowners that are subject to inflation are a small fraction of rent, so I would not want to be a renter during a sustained period of high inflation.

• 45 NostraDamnUs // Nov 2, 2007 at 1:48 am

  “I’m inclined to believe that the bloggers may be closer to the truth.”

  Oh the hubris !! Bloggers know the ‘truth’? This country’s going to hell in a handbasket!

  Oh, and I forgot - 95% house price drops coming to a cinema near you soon! Keep the breath in, and your diapers on!

• 46 Jay // Nov 2, 2007 at 2:29 am

  Tim,
  This is going to sound contradictory to you and many others on this thread, but at this point a debt/liquidity deflatioanry spiral is of greater concern. The velocity of money and liquidity in interbank lending is slowing rapidly due to all the bad debt that has been loaned. There is nothing the fed can do about this. When net productive capacity exceeds net loan orgination, you get deflation. In a deflationary environment, cash is king. As this progresses, currently suring commodity prices will reverse with decreasing demand. The debt problem is global so diminished demand will be global. Be careful before investing in gold, oil, or foreign stocks if this is a deflationary spiral and not inflation. You may be surprised to learn that in a deflationary spiral, as it develops more fully, the dollar will actually appreciate. Learn more about deflation before you make any knee jerk reactions with your hard earned capital.

• 47 Buceri // Nov 2, 2007 at 6:00 am

  Here is my plan:
  Gas and Oil stocks might continue to do fine until ‘08 elections. Then the GOP (Gas Oil Prostitutes) will loose the remaining closeted gay members of Congress, leaving 3 Republicans in the House and 2 in the Senate.

  If Hillary wins, move your money away from old energy and pharma as soon as the polls show it won’t even be close. If Rudy wins, you have a couple more months of energy stocks gains. But the first thing he’ll do in the White House is to install a compost bin to dump the right wingers in it using a corn based biodegradable bag, THEN RUN and move your money away from old energy and pharma.

  Bush will try to spread democracy with his foundation. This will give you 3 profitable years of International Stocks; that’s how long it will take him to figure out how to spell and pronounce Democracy and Foundation. BUT once he manages that, and he starts to travel, RUN and MOVE your money back to the DOW and solar/hydrogen stocks, AND stay away from all International stocks. The son of a "dog" is like “nuculear” waste and will be toxic for millions of years (and he is hated by the population of democratic, communist, socialist, and tribal countries alike).
  If all else fails….move with all your belongings to Vancouver, BC.

• 48 j // Nov 2, 2007 at 6:36 am

  Markus,

  “3. Once the war stops in Iraq we’ll really be hurting. The war is pumping a lot of money”

  Wait, stop right there. The war is pumping a lot of fake, borrowed money that’s causing this inflation in the first place. Bush has yet to show exactly how this thing has and is being paid for with “real” tax dollars. He just knows that he’ll be gone by the time the debt collectors (a recession) comes and squares things away.

• 49 Andi // Nov 2, 2007 at 7:12 am

  Seattle PI has an article reporting two insurance companies raised rates this year by nearly 20%. Is this accounted for in the inflation rate?

  http://seattlepi.nwsource.com/local/337795_lifewise02.html

• 50 softwarengineer // Nov 2, 2007 at 7:13 am

  THE ANSWER TO ALL OF AMERICA’S CURRENT CASH DILEMMAS, THE WORLD’S TOO, IS WE MUST DEPOPULATE THE PLANET

  Big buildings are a joke, they’re like Rome’s Coliseum or Seattle’s Quest Field [stupor bowl], do big buildings stop Rome from collapsing? Does building big buildings or sport arenas make the sidewalk cracks and generally delapidated “3rd world country” Pike Place area buildings in Seattle suddenly disappear? Will gridlock magically go away in Seattle without depopulating and no money for infrastructure maintenance?

  Get real, stop being so negative too. If America had done what JFK, Jack Kennedy, Martin Luther King Jr and even Nixon had warned us to do, we would have a strong economy at 200M people [little or no immigration the last few decades too, but what's that got to do with anything political?] and we’d being setting a positive example to the rest of the world to get back down to 2 billion again. Our present phony open border New World Order 300M overpopulated America is the laughing stock of the world. It isn’t more people we need to fix it, more people has made it far worse in America. My proof, history.

  China’s rivers are toxic waste [Russians can't even breath the air when China's pollutions drain down the rivers], India’s skies are horribly brown with pollution [its global cooling there, the sun can't get in], there roads are completely clogged and hardly anyone there owns a car yet. They are to be envied because their environment and water tables are destroyed, but they have coal plants belching global warming so we don’t have to manufature and work in America?

  Get real and stop being so negative, by completely ignoring environmental degradation due to overpopulation in Seattle and planet earth. If you are a liberal and don’t support depopulation in Seattle, my advice. Go buy a big house in Seattle right now, they’ll sky rocket in price [that should be fine with you and your lower IQ].

  If you’re an intelligent liberal, you know there’s already massive dead spots in Puget Sound and the only solution is depopulation. The Orcas whale is on the endangered species list and more people in Seattle simply adds to global warming and will clearly kill the Orcas all off.

  But Jesus is coming back soon, to quote James Watts, it doesn’t matter?

• 51 Amy // Nov 2, 2007 at 8:25 am

  We are looking at international real estate to fight inflation. We just bought some ocean view property in Brazil a month ago for the price of a car. They are a very law abiding country with a growing middle class of consumers who want a house on the beach like everyone else. Plus, most of the buyers are nationals, South Americans with money looking to move their assets out of communist or unstable countries, or Europeans.

  We also own a significant amount of Gold/Precious metals. I think the best use of cash if you are long on the metals is to buy long options. You don’t have to tie up as much cash, and you can reap the rewards. Be careful with commodities though, they swing wildly and are sitting at all time highs. I don’t know how much is left. I think we are starting to see the 3rd and maybe last leg of the commodity bull, which is usually the strongest, but calling a top is hard.

  We have a self directed IRA that owns shares in a timber company in Panama as well.

  That’s all for the risky part of my portfolio.

  The semi-risky is in international funds and has been for 4 years. Again, these markets have had a long run and it may be time to take some money off the table.

  For the conservative part of our portfolio, I have loaded up on MSFT through the ESPP, which is 10% off the stock price. If I add in the dividend I get around 12%, even if the stock goes nowhere, so I’m getting a pretty good deal and Mr. Softie isn’t going anywhere with no debt on their books and tons of cash. This is sort of my armageddon play. It may not be sexy, but it’s safe.

  The other part I’ve been forced to put in a short -term CD and to shop for the best rates. 5.75% isn’t great, but when the Fed is cutting rates and even my money market is going down, then I have an even bigger problem.

  Our problem is that we will need money in the next few years so I can’t afford to be risky with all of it. We are sitting on a lot of cash right now for some major purchases ahead in the next 2 years.

  I also think stocks have gotten overvalued so I’m looking at buying some long puts on some stocks. Over the next 6 months I think we’ll have a better idea of where things are headed. I do expect a major correction in the indexes and then I’ll be all over cheap stocks again.

  Everyone says trash is cash until they lose money and have no cash to buy anything with.

  We are in our early 30s so that factors in our decision.

  We had a house in St Louis, but sold it in May to move out here. We don’t know yet if we’ll stay so for now I’m really glad to be clear of U.S. real estate. We will be looking at investment property though come next Spring/Summer, especially in Florida, where there are a lot of international travelers.

  Just some ideas. I hope they help and get your mind thinking. You can find lots of international real estate investing ideas on:
  http://www.internationalliving.com
  http://www.viviun.com
  http://www.escapeartist.com

• 52 C // Nov 2, 2007 at 8:59 am

  – The alternate CPI is clearly hooey. It’s just some simple arithmetical transformation of the official estimate. % changes don’t just scale like that. (& reality check, folks, if inflation were 10% you would not see the kinds long-term interest rates around 5%.)

  – the $ stuff is overdone. If you earn $s you have benefited from cheap foreign goods in recent years. If $/foreign currency rates decline foreign goods get more expensive. The people who are really screwed are foreigners who bought U.S. Treasury securities and who will now get paid in $ that are worth less to them. Yes, it’s very likely foreign goods will cost you more than they used to, and there is something to be said for holding foreign assets in a diversified portfolio.

  – we *are* in the middle of a moderately serious financial crisis. There’s a story here. But puhleeze, not this paranoid conspiracy stuff.

• 53 B&W Nikes // Nov 2, 2007 at 10:35 am

  Does anyone else find it interesting that the belief of constantly increasing median home (not land) prices are accepted as a positive economic indicator and direction in the first place? It honestly seems counterintuitive from a birds eye view. People generally don’t feel that way about most other needs that consume their earned income. Don’t continually increasing prices usually indicate either scarcity or lack of purchasing power?

• 54 SteveH // Nov 2, 2007 at 11:01 am

  This topic is very timely for me. I just sold my house here in New Zealand and am sitting on about $400k in NZ dollars. The NZ dollar has risen about 20% against the US dollar in the last few years. Deposit accounts in banks here are paying 8.4%. Tax rate on interest income is 19%. I am returning to the US in a month (I hold both passports). Sold my house in Seattle in 2004. I am totally unsure of a good financial strategy. I obviously WON’T be buying a house; will probably end up in California (yuck) as I am a wine maker and that’s where most of the jobs are. What’s going to happen with the economy? Inflation? Deflation? Recession? Right now it looks like I just let things sit, but I would like to be a bit more proactive. Advise (I’ll value it at what it cost)?

• 55 NolaGuy // Nov 2, 2007 at 11:29 am

  Softwareengineer. I used to have similar thoughts about population.

  But then I read “The Ultimate Resource” by Julian Simon. It changed my entire outlook on life in a positive way. I strongly recommend you give it a read.

  http://en.wikipedia.org/wiki/Julian_Lincoln_Simon

• 56 jon // Nov 2, 2007 at 12:28 pm

  “Does anyone else find it interesting that the belief of constantly increasing median home (not land) prices are accepted as a positive economic indicator and direction in the first place?”

  There are plenty of places where you can get a really inexpensive house. They only problem is nobody wants to live there. The fact is there is greater value to be had in cities with strong economies where you pay a higher price but also get a better job or more activities. So the higher prices that people are willing to pay reflect the strength of the economy that allows that choice.

• 57 B&W Nikes // Nov 2, 2007 at 2:05 pm

  These places you refer to where you can purchase an inexpensive house are places where you can often find inexpensive labor and they have experienced price changes relative to their local economies.

  I think there is not a huge demand and scarcity issue driving prices here like there is in other comparably priced urban metro areas as much as there is a local collective mania influencing perceptions of reality.

• 58 softwarengineer // Nov 2, 2007 at 2:33 pm

  HI NOLAGUY

  I read your WIKAPEDIA reference.

  Its made me more convinced, not less. He talks resources and recycling. We’re out of oil. We’re out of trees, fish, land, potable water, etc, etc….. Recycling plastics is done in places like India [so we don't contaminate America], because its an environmental nightmare [similar to the low production nickel batteries in the hybrids] and where do we put all the barrells of Dupont acids and solvents for recycling? In landfills to leach into the ground water?

  Recycling is a moot point right now anyway, much of it ends up in the landfills anyway, even if you separate it. The only way to know if your recycled stuff is recylcled, is follow the trucks. Michael Moore did a book on this and followed most of it to the landfill.

  Here’s a good website on the environmental harm of recycling:

  http://www.heartland.org/Article.cfm?artId=14557

• 59 yaomogaochaw // Nov 2, 2007 at 3:24 pm

  I have been quietly reading on this site for some time and would like to take the opportunity to thank many of you who have gaven me a lot of insight and inspirations.

  I began to learn about economy, finance, and realestate only after I decided to buy a house. As I read and cross checked the opinions from more than one source and language, I woke up. What? The Fed is a central bank? Whose bank is it?

  To understand the surface ripples, such as the housing market bubble, one has to know the source of the wave, analyze the history of the source, then finally see the motivation behind the whole game.

  We are sheeps surrounded by shepherd dogs owned by shepherds.

  Run!

• 60 John // Nov 2, 2007 at 7:02 pm

  i hate to state the obvious, but owning a house can also be a hedge against a declining dollar. it is a “real” asset, hence the name. i’m becoming demoralized, a shack near my condo bldg just sold for 529K. when will it ever end? i am having a great pumpkin moment here bubble heads…will the s-town bubble ever really pop?

• 61 david losh // Nov 2, 2007 at 8:12 pm

  Hyper inflation is kind to secured debt. Real property is like gold. Make sure the structure however is worth the dollars it costs you. Buy the biggest property you can in case you have to rent rooms.

• 62 Brian // Nov 2, 2007 at 8:50 pm

  I followed the link to see why that guy thinks inflation is much higher than measured, which was interesting but a bit off-base. Seems to me that there are 2 reasons to track inflation. 1. To measure the cost of living. 2. To measure, and prevent, the errosion of the value of the dollar.

  I agree with him that the cost of living is not reflected in the current measure of Core-CPI. However, I don’t think that measuring the increase in price of houses, energy or food would be a good measure of the decline of the dollar.

  Think about it. If all of a sudden oil increases dramatically in price, the last thing we want to do is raise interest rates because it looks like inflation is getting out of control. Rising oil prices due to increased demand, or weaker supply have nothing to do with the value of the dollar.
  Thus the feds should be making their decisions based on the Core-CPI, but raises, etc should use another measure.

• 63 The Pat // Nov 2, 2007 at 10:03 pm

  WE MUST DEPOPULATE THE PLANET???

  Okay. You first, Major Tom

• 64 Alan // Nov 2, 2007 at 10:08 pm

  I’ve been wondering for months if the climb in RE prices has been the market responding accurately to stealth inflation or the market correctly prediction upcoming hyper-inflation. As David Losh points out, inflation is kind to fixed interest debt. That is the only theory about how housing prices are not a bubble that I have yet to collect enough evidence to disount. If that is the case it doesn’t change anything because I still can’t afford to buy and I would rather risk my principal in another way than taking on massive amounts of debt.

• 65 takenroad // Nov 2, 2007 at 10:19 pm

  If life were fair, the costs of the subprime mortgage debacle would be born only by foolish borrowers and foolish lenders. However, letting all those folks crash would cause chaos in the economy. Instead, the Fed drops interest rates to ease their predicament. The value of the dollar drops with interest rates on dollar assets. So, “the rest of us” pay more for gasoline, Chinese imports, etc. It’s how we’re socializing the costs of the subprime implosion. We all get to pay.

  That’s my theory…

• 66 SLTO // Nov 3, 2007 at 7:50 am

  exactly… dropping interest rates and devaluation of the dollar is a backdoor tax that only the rich (like always) can avoid via offshore funds… (non dollar denominated)…

  it’s sad how everybody has to pay for the fraud and stupidity of the masses…

  regarding population, it is a self correcting phenomenom… already illegal immigrants are going home voluntarily as the housing jobs has disappeared and they end up penniless in a land where the penny has no more value…

  devaluation of the dollar hit these guys the hardest… they are paid less, and the money they send home are worth less… there was an article recently on how remittances to mexico is down significantly and workers were no longer crossing as it was not worth the premium…

  we are no longer the land of bees and honey… just the bees… and even that is disappearing…

  unfortunately illegal immigrants are the canary in the coal mine… if their jobs are going… who’s job is next…

• 67 Jaisn // Nov 3, 2007 at 9:46 am

  softwareengineer,

  Deep breaths my friend. Read the actual book, not Wikipedia. Environmental destruction in poor countries is because they’re too poor to worry about the environment. When they aren’t worried about where their next meal comes from, they’ll start cleaning up the environment like every developed country in the world has. Could we do better? Yes. But the sky is not falling.

  Forests are growing, air and water is cleaner in wealthy countries now than it was 2 decades ago. I suggest you stop reading Greenpeace doom and gloom bedtime stories. There’s a reason one of Greenpeace’s founders, to cite one example, actively speaks out against the organization today, they’re anti-science, anti-fact, anti-technology. They want to rid the earth of humans and have us live in grass huts. They aren’t looking for or proposing real solutions to problems that aren’t nearly as dire as they claim.

• 68 david losh // Nov 3, 2007 at 10:06 am

  I have to respond to the person (yes, I changed the term) talking about Hispanic labor leaving America.
  In my opinion, because there is no Census Data for this, illegal immigrants from China are a very large population segment.
  The United States does not watch the Canadian border as closely as the Mexican border. Canada does not have the same restrictions on immigration as the United States. Many Hispanics would prefer to cross from Canada, but that would be foolish. The Chinese however have amassed at our Northern border since before China reclaimed sovereignty of Hong Kong in 1997. It has also been my opinion that the Chinese population of Vancouver B.C. is one of the things that makes Seattle very special in the world.
  Hong Kong dollars fled the country in fear of Communism. Many of those dollars left, from what I have been told, in cash, in suit cases. The economic up heaval of the Communist Chinese rule of Hong Kong has caused all kinds of political and economic posturing.
  I could go on, as most of you know, but I’m a little grateful for the depopulation comments and would like to read more.

• 69 jon // Nov 3, 2007 at 10:37 am

  “devaluation of the dollar hit these guys the hardest… they are paid less, and the money they send home are worth less…”

  The peso and dollar have been tracking very closely.

  http://finance.yahoo.com/currency/convert?from=USD&to=MXN&amt=1&t=5y

  Event the Yuan has fallen against the Euro.

  http://finance.yahoo.com/currency/convert?amt=1&from=CNY&to=EUR&submit=Convert

  It looks like the Euro is rising rather than the dollar falling. Perhaps the oil countries are switching over to it.

• 70 jon // Nov 3, 2007 at 10:41 am

  I remembered the Yuan and $ are pegged after I hit send, but the Ye, Yuan, Won, and $ all are falling against the Euro.

• 71 Magnum // Nov 3, 2007 at 12:12 pm

  You have a great website, and this is a very interesting thread of conversation. A lot of very intelligent people posted well-written comments above. Perhaps ironically, considering this is Seattle Bubble dot com, the best longterm hedge against inflation and protection against a weak currency is real estate. Single family homes top the list.

• 72 Steve F // Nov 3, 2007 at 12:36 pm

  Inflation is not higher prices. Inflation is an increase in the quantity of money and credit. The result is higher prices.

  The Fed wants to inflate constantly, as long as no-one notices. Hence the bogus CPI, GDP or employment numbers. If no one perceives inflation or expects more of it, everyone will continue to borrow, invest and spend.

  Everyone is happy as long as this easy money shows up in the prices of our assets. We’ve gone from one bubble after another: stocks, real estate, and now back to stocks. We only complain when the higher prices start to show up at the gas station and the grocery store.

  The 1913 dollar is worth 4 cents today.The price of oil is near $100, gold above $800 and wheat is up 70%. It’s good to know that “inflation” is under control.

• 73 rose-colored-ghoulaid // Nov 3, 2007 at 2:31 pm

  The Yuan is no longer pegged to the dollar. The Chinese government is, however, playing some games with the Yuan to keep it from rising against the dollar as quickly as it should.

• 74 Chris // Nov 3, 2007 at 3:16 pm

  Two quick comments:

  1. When purchasing inflation hedges (foreign currencies, stocks of companies that sell globally, whatever), you are assuming that you have some insight that is not already priced into the market. If most market participants already expect the dollar to decline, they have already moved towards the inflation hedging investments, driving their prices up. You could easily be acting just like the house purchasers that this blog critiques - jumping into a hot asset class after it has already appreciated.

  2. There are two reasons houses may not be an effective inflation hedge:

  A. Houses are purchased with debt. When inflation rises, so do interest rates. High interest rates increase the cost of mortgages, driving prices down.

  B. If an asset’s price is already inflated, it is too late to use it as a hedge. Housing prices are so high relative to income that they are already an inflated asset class.

  Overall, I suspect a calm, long-term, buy and hold strategy with a stable mix of stocks, bonds, foreign and domestic will substantially outperform any strategy driven by performance chasing or fear (chasing particular economic sectors like tech or healthcare, chasing inflation hedges, etc).

• 75 Lil' Skwappy // Nov 3, 2007 at 9:05 pm

  Hate to be obvious, but just investing in CAD/USD through forex will net you several months pay on days when US interest rates go lower (if you are willing to accept the leverage risks of course). Though the gravy train may be over with no more rate drops expected and the expectation that foreign economies will adjust their rates to counteract the rising dollar and protect their exports.

• 76 jcsc // Nov 4, 2007 at 9:24 am

  I don’t think that you need to be a conspiracy theorist to be concerned that the govt got rid of the M3. I was distressed that people didn’t hop up and down and yell about it. The M3 was the report that clearly quantified the increase in the money supply, ie money printing. It is true that this info is not being suppressed, but in order to get at the info you need to do a time consuming analysis of the M2. From 2002 to the time they got of M3 note I’m going from memory so would need to verify it all, the govt was lending at one percent and increasing the money supply by about eight percent. When I read an analysis of the M2 after they got rid of the M3 they had ramped up the increase in the money supply to almost 12 percent. Yes, the increase in the price of homes is inflation and we have all be talking about how much of the inflation is real and how much is money spent unwisely that will lose value.

• 77 jcsc // Nov 4, 2007 at 10:57 am

  Hey The Tim,
  I don’t know if you’ve already done this or not, but
  I would suggest that you pull big picture mortgage market data for 2002 and 2005. Things like total value of all US mortgage debt, net equity extractions, total value of homes sold, and any other areas of interest. I think you will find the numbers very interesting.

• 78 laxtosnoco // Nov 4, 2007 at 11:13 am

  jcsc,

  Why is the M3 a better measure of the money supply than M2?

  Specifically, what components of M3 are important and are being left out?

  Also, why is tracking a measure of money supply (M3) a better measure of inflation that using a price index?

• 79 Markor // Nov 4, 2007 at 12:42 pm

  Chris,

  On #1, you’re talking about efficient markets. But it takes time for investors to move $trillions out of the US dollar, and buying an inflation hedge can be a long term investment like any other that expects a gain only in the long term.

  On #2A, rising interest rates are not an issue when you have a fixed rate loan. With a fixed rate, inflation can be a good thing, esp. if you have some spare cash (think paying your PITI on a 6% loan with the interest made from a 15% CD).

  #2B is the same #1. Sustained high inflation could make short work of the housing bubble.

  I think there’s little doubt that the US is in for sustained high inflation, thanks to foxes being let into the hen house in D.C. It’s obvious now that the euro will be the new reserve currency. It will take a generation of excellent fiscal management just to undo the damage done since 2000.

  There may be better inflation hedges than a house in terms of reward only, but I can’t think of one that offers a better reward/risk ratio than a house, and you get to live in it too. If I were a first-time buyer, I’d wait until inflation absorbs the bulk of the bubble (during which time list prices could even rise) and then jump in.

• 80 Chris // Nov 4, 2007 at 2:17 pm

  Markor,

  Your points are well-stated, though I disagree with them:

  On 1, true, I am assuming that international currency markets are reasonably efficient. If speculating in international currency markets was easy, you’d think there would be more high-return funds based on currency speculation. There aren’t very many traders with records like Soros running around. If you can achieve above average returns speculating in currencies, your talents are wasted in Seattle, you should be running a hedge fund.

  On 2A, my point is that the higher interest rates associated with inflation driving mortgage purchasing power, and thus home prices, down. The inflation will help you on your payments, until you go to sell, and find that your house is worth far less than you paid in real terms (though it most likely appreciated modestly in nominal terms).

  You are actually saying something similar in your response to 2B above, when you state “sustained high inflation could make short work of the housing bubble.” How would it do so? Presumably, by inflating nominal salaries at a much higher rate than nominal home prices. However, if salaries inflate much more quickly than home prices, the price of the home is declining in real terms.

  The only way for the housing bubble to resolve itself is for the income-to-home-price multiple to decline. Whether that happens because incomes are inflated up, or home prices are deflated down, the home is still going to be worth less in real terms.

  However, people will perceive less pain from the bubble decline in a period of high inflation because they think in nominal terms. For example, the average homeowner might have their salary double over several years due to inflation (say, $100K to $200K) and their home increase in value 25% (say, to $500K to $625K). That would bring prices down from 5x income to around 3x, and the homeowner will still tell you they ‘made’ $88K after commission when they sold their home.

  Also, note that a down payment sitting in a money market account will inflate as well (there will be tax issues with the nominal gains). The person who waits out the period of high salary inflation/home price stagnation will see their down payment grow as a percentage of the home purchase price.

  Overall, I think purchasing a house now as an inflation hedge is not likely to work out well. I could be wrong though!

• 81 jcsc // Nov 4, 2007 at 2:40 pm

  The M3 reported the total number of dollars in circulation and it was the only report that did so. Thus, it was very easy to calculate the real increase in the money in circulation from year to year. Over the last several years of their joint existence, the M2 and M3 were digressing in terms of the percentage change and direction of change of the total money supply. I personally care about this issue because I think it is important to have verified, comprehensive numbers that can be discussed openly and with transparency. If I want to know how much the population of the united states is growing and what percentage of growth is from greater birth to death rates of citizens and how much is immigration and births to immigrants, I believe that it is helpful to have this number collected, quantified and verified by the federal govt and released to the public. Then we have this knowledge in a simple format that allows us to discuss it factually and not simply vaguely or rhetorically. If a special interest group collects this information from each state, does their own analysis and then releases this information not as raw data but as a comprehensive analysis, individuals without the resources to collect and analyze the data are hampered from drawing their own conclusions. The government has a very strong vested interest in disguising any increase in the money supply. By making this information difficult to assess openly, they naturally create suspicion. There is evidence to suggest that the printing presses did indeed run overtime as soon as the M3 was axed. I’m sorry if my analogy is confusing. I consider this a general principle regarding this kind of data collection and presentation, and I see a real value in correctly quantifying information. I do not want to see my government participating in Enron style accounting while attempting to delude the investors in our currency. The value of our currency has been declining because investors know that we have been inflating our currency by increasing the rapidity with which we increase our money supply. House value euphoria may indeed actually devolve into an understanding that massive inflation has been underway for a long time now. Excluding house values and tracking to rent and excluding food and energy prices and using this to calculate inflation is only the beginning of the cpi voodoo as it also calculates substitutions and other sociological patterning. People are talking about the inflation now because it has become difficult to supplement their spe