A Fool and His Money

Well I've finally got some time to spend on my blog but don't seem to have anything on my mind today. Sure was a beautiful day, though, and that's the problem right there - I'm in too good a mood to be writing right now. You know, we writers have to be depressed and disillusioned before we can really set pen to paper, but what the heck. At least when there's nothing else to write about I can always take a stab at the financial news. Everyone's got an opinion about money, right? Well I do anyways, and I'm sure I can do just as bad a job of predicting the future as any of these other financial writers/advisors out there. So here goes...

I see a lot of people seem to be worried about the housing market these days. Prices keep going up and a lot of experts keep talking about the housing bubble. They also talk about rising mortgage rates and the increasing number of homeowners with adjustable rate mortgages. Add to that declining incomes, declining prices, sporadic job growth, and high debt-to-equity ratios among homeowners and it's no wonder they've got people worried. To which I say "So what?"

I mean, isn't it clear that if you have rising real estate prices alongside declining incomes then that must mean that homes are undervalued? How else can you have both things at the same time. Think about it. If real estate is overvalued or fairly valued, then declining incomes are going to shrink the pool of potential buyers. But the fact that real estate prices have been increasing (booming, in fact) clearly indicates that housing is still well within the means of most people, even those who have lost jobs or have been forced to take lower paying jobs.

Here in Silicon Valley some 200,000 or so jobs have been lost over the last few years while the median price has climbed around 17% to $599k, and home sales are still brisk. That would indicate to me that you could still see another 10%-15% rise in the median before prices start to approach fair value, and if employment begins to pick up then you might see another 25%-30% rise in the median after that. I'm just making up those numbers, of course, but then this isn't a real financial column anyways.

Anyways, I was talking to someone last week and she told me there was no way that prices could keep rising. She said that people were already overextended and it was just a matter of time before they all were priced out of the market. I admitted she might be right, but I think there were 2 points she was missing. First, here in Silicon Valley there is a housing shortgage, there has always been a housing shortage, there will always be a housing shortage, and that will always be bullish for housing prices. Second, as long as there are lenders there will always be someone coming up with a new scheme to get people buried in debt. I think people are more focused on the monthly payment than the sales price anyways, and if a lender can find some way to come give people an affordable monthly payment then housing prices will continue to rise. I don't know what they'll do, 50 year interest-only adjustable rate mortgages, maybe, but as far as I'm concerned, the housing bubble is a myth. Remember, you heard it here first.

The stock market, on the other hand, is different. By that I don't mean I think it's a bubble, but I do think I hear a bear starting to growl. There was an interesting little article in one of the financial mags today where the author used a word I hadn't heard in 25 years. I don't know if anyone remembers the old "S" word, but back in the '70's we had an economy that somehow managed to combine inflation and recession into something that some clever economist called "stagflation". Now I'm not going to compare economic conditions in 2004 with those of 1974, but it was interesting to note some of the similarities. If you think back, we had just finished a war, we had rising oil prices, we had rising inflation and we had huge deficits, all of which left the stock market flat for many, many years. Of course inflation was much worse back in the '70's than it is now, but the deficits were much smaller as well so it's fair to at least make the comparison.

If I remember correctly, gold was the big investment back then, along with those new fangled things they called money market funds. So, you ask, does that mean we should be dumping all of our stocks and moving back into money market accounts and precious metals? Hmmm, tell you what, you go first. Actually, I have been looking at some bear funds lately, just in case, but I'm an old dyed-in-the-wool Graham-Dodd type and it's not an area I feel comfortable with. Still, you've got to change with the times and if it seems prudent to go short with part of my portfolio, then that's what I'll do. But I wouldn't be suprised to see a little bounce before the end of the year and I don't think I'll do anything drastic before 2005 rolls around anyways. What's that old Chinese curse - "May you live in interesting times"? Seems like when it comes to investing I'm always living in interesting times. I guess that's the draw of it all.

So that's my financial column. I hope you liked it. It's all a bunch of bull, of course, but at least it's well thought out bull. At least I hope so, and maybe next time I have something more interesting to write about.