Real Estate/Mortgage Loan/Stock Market

[squiffy]

In a recent post, which I cannot locate, one poster was saving up to buy a home. And he wanted to know some of the pros and cons of either paying for the home in cash or making a small downpayment and borrowing most of the money at 6%.

I thought the responses were excellent, but wanted to add two more points, which I don't recall being mentioned.

First, I believe you also need to consider inflation. If you borrow 100K today in 2005 dollars and pay it back slowly over 30 years, you will be repaying the loan in dollars that are worth less then the dollars you borrowed.

Assuming inflation at a typical historical rate of 2-3%, the borrower benefits from inflation and wants to delay repayment so that he is paying back in dollars that are worth less, due to inflation.

Note, according to some CPI calculators, $100 in 1975 is the equivalent of say $600 in 2005, 30 years later, due to inflation.

And, in the event of a major war or economic or political problems, there is a chance we could face major inflation as we did during the 1970s after the inflationary effects of the Arab oil embargo and the Vietnam War. I believe inflation was running at about 10-15% or more, which again, hugely favors borrowers. You borrow money today which has great value, and hopefully repay it with inflation-ravaged dollars that have less value.

In other words, if you know we will have 50% inflation for the next 30 years, starting tomorrow, then you would want to borrow as much money as you can today, buy assets which will hopefully hold their value despite inflation (say gold, commodities, or real estate)and laugh at the bank or creditor who was foolish enough to lend you $100 K and let you repay him with the equivalent of 50K or less in tomorrow's dollars.

My second point, is merely to illustrate a point which was already made in one of the other responses. If you borrow money at 6% and inflation is at 2%, you are really only paying a real interest rate of 4%. And after tax benefits of say 2%-3%, you are really only borrowing the money at a true cost of about 1-2%.

So, instead of paying 100K for the home in cash, if you can invest the 100K in other real estate or in stocks which reliably earn a real investment return of more than 2% after taxes, WITHOUT LOSING THE MONEY, then you are better off NOT PAYING CASH, but keeping the cash and investing it.

The magic of the American economy is that if you put down only 5% of the purchase price and sign a contract promising to pay the rest over 30 years, you have the legal right to call yourself the owner of the land and to profit from any gain in equity over that 30 year period, even if you havn't paid for the land yet.

So, if you can pay $5000, control the land, and invest your remaining cash in the stock market, why would you pay cash and drain your investment portfolio and forgo those POTENTIAL stock market returns.

For example, the leader of the stock investing competition made 45% in one month. I would like to know what investments the top 10 participants selected.

But clearly, if you can borrow money at 6% and invest it and make 20% a year on the stock market WITHOUT LOSING YOUR PRINCIPAL, then over 30 years, you should be better off investing.

Remember, society recognizes your ownership of the land, just based on the down payment and the promise to pay. So if the home goes up in price from 200K to 400K, then you have the right to sell it and pocket the 200K equity gain, even if you only put $5000 down, and even if you still owe 195K to the bank or mortgage co.

Last year, in July 2004, I had about 107K in my retirement account. It was in an IRA rollover account with an online discount broker. So tax deferred.

I bought about 9,400 shares of NOK at prices ranging from 11 to 15 or so, and sold them at about 16.5 a year later. After dividends etc. the balance a year later was about 160K. So the return was 49% or so.

Remember this is tax-deferred. And in a sense, I can keep that money there because I did not need it to pay for the home I live in. And the stock returns, assuming I don't lose everything, will grow tax-deferred for 30 years.

I bought a home in California in May 2002 for 200K. This week it was appraised at 420K. In theory, I have 220K equity in the home. I doubt the price will stay that high, as I believe CA property is way overvalued. In any event, I bought the home with no money down. So I didn't have to borrow any money from my retirement account or cash account to buy the home.

I just signed a piece of paper promising to pay for the home over 30 years and the bank loaned me 200K. Just like that at 6%.

These rates are some of the lowest rates Americans have seen in 37-40 years, since the 1960s.

In other words, money is a commodity, like filet mignon steak.

When banks are loaning money cheaply, you should borrow as much as you can safely afford to borrow, assuming you know how to invest it wisely and profitably.

If high quality filet mignon steak is on special sale today at $1 a pound, instead of at its normal price of $20 a pound, why not buy a lot while it's cheap.

Borrowing money at a real interest rate of 2% is a bargain we may never see again in our lifetimes.

[Dan Mezick]

[ QUOTE ]
My second point, is merely to illustrate a point which was already made in one of the other responses. If you borrow money at 6% and inflation is at 2%, you are really only paying a real interest rate of 4%. And after tax benefits of say 2%-3%, you are really only borrowing the money at a true cost of about 1-2%.


[/ QUOTE ]

One can argue that money had a negative cost when rates bottomed. They were literally paying you to take it away.

[imported_bingobazza]

Cheap money (low interest rates) have the effect of inflating the prices of the assets of choice...in this case....real estate. This ploy has commonly been used by central banks with monotonour regularity to depreciate debt....mostly with the same outcome...a bust with a credit crunch, or a deflationary boom. The point we are at now is a game of 'greater fool' where everyone tries to find a bigger fool to pay more than he paid for the inflated asset...we're getting close to the end now.

I read recently that the real estate bubble is currently hndreds of times bigger than the dot com bubble and that the world has never seen a bubble so large when measured in USD. It isnt just in the US, but almost every major financial centre in the world has ridiculously overvalued property, fuelled by cheap money...(but its different this time...is the cry of the masses).

How about this scenario....the property market starts to level off, people have made a lot of money and are starting to take some profits, then interest rates creep up, smart money leaves inflated areas and find new investment themes that arent on the publics radar yet (Nikkei anyone?)(Donald Trump has starting to sell), fewer buyers for houses as they are too expensive, prices slip, a few inexperienced developers go bust very publically, more sellers in the market, prices fall, interest rates continue upwards, people liquidate stocks to pay mortgages on investment property, the stock market also slips, people feel less wealthy, decide to cash in property investments and retire, prices fall faster now. No one is buying, interest rates go up again...landlords feel the pain, liquidate more stock, stock markets fall heavily, new saving money is diverted from stocks to mortgage payments as higher interest rates bite...no one can sell. Prices are in freefall.....people start handing the property keys back to the banks, and accepting credit blacklisting as they slip into negative equity (the mortgage is larger than the property value) and cannot pay.

Things calm down after a year or two and smart money sells Nikkei stocks and picks up the bargains you left behind, as interest rates begin to fall again.

Heres another scenario...property will continue to increase and cheap money is here to stay. The boom and bust in property is dead, thanks to Alan Greenspan printing money, and everyone grows wealthy as interest rates stay around their 35 year lows for ever....the 'new era' in interest rates. New average university graduates get jobs that pay 3 times more than normal and are able to afford to buy a home to get then onto the housing ladder. Because of this shift, the housing market is fuelled with a new stream of endless buyers each year, enabling the market to keep going up.

You cannot fix one bubble (dotcom) with another (realestate), and they generally all look the same. Be careful if you get involved at this point.

Good luck.

Bingo

[MonarchDon]

Would you consider obtaining a 40 year mortgage ? Many banks are starting to offer 40 year terms. And what about when they come up with 50 terms would you go for that ?

I'm not being a smartA.. I'm seriously asking for your opinion.

[adios]

[ QUOTE ]
I read recently that the real estate bubble is currently hndreds of times bigger than the dot com bubble and that the world has never seen a bubble so large when measured in USD.

[/ QUOTE ]

I don't have a link handy but compare real estate prices in Tennessee and Southern California then tell me there's a real estate bubble in Tennessee. Mentioned many times on this forum real estate markets are localized and not ubiquotous. There was a blurb in the WSJ about rental prices. To pick on Tennessee and California again, California markets occupied 5 of the highest rental price markets while Tennessee had two of the lowest. I'd also point out that in the Mortgage Backed Secuirty (MBS) area (securitization of real estate loans) there are all kinds of bonds with various ratings and the MBS market is bigger than the U.S. treasury market. I trust the agency ratings of MBS more than I do for corporates. In other words a AAA rated MBS is more secure to me than a AAA rated corporate. IMO if the real estate market slumps in SoCal, we'll see the speculators take a bath but so what?

[adios]

Hey squiffy did you notice my recent post about my predicting a bear market for bonds especially on the long end? You and Ray were just a little early /images/graemlins/smile.gif.

[laserboy]

What you just described is what I call a credit bubble.

Only you forgot the part about the banking system collapsing and the deflationary Depression (with a capital D).

Periods of prolonged credit expansion and inflation are followed by periods of credit contraction and deflation.

Total Credit Market Debt as % of GDP (http://www.pimco.com/NR/rdonlyres/72E4EAA9-0BA2-4880-9A29-2D4F0D8142B7/1162/total.gif)

Bingobazza does a good job explaining it.

To play devil's advocate, if borrowing money to chase 20% returns is so easy, then why is the most successful investor of all time Warren Buffett sitting on 50 Billion in cash?

Of course, I could be mistaken. You may have discovered the perpetual money making machine.

[laserboy]

Fannie Mae is completely collapsing right now. They have flat out stated that it will take them til the end of NEXT YEAR to finish cooking their books, and they face a possible delisting from the NYSE.

From my perspective the only reason their MBSs still carry an investment grade rating is fear of roiling the markets. Why rationale is there to trust the agency ratings of these securities?

The whole thing is like reading Smartest Guys in the Room in slow motion.

[adios]

Fannie Mae isn't the only entity issuing MBS securities, please. Also the rating isn't based on who issued the security and also there are all kinds of MBS debt securities. Also your definition of a collapse and mine are two different things apparently.

[laserboy]

I am suggesting their financial difficulties are symptomatic of a systematic problem with current mortgage lending standards and the current state of the mortgage lending industry. If Fannie Mae is having problems securitizing mortgages, is it not logical to surmise that other institutions might as well?

Look at the financials of the subprime lending institutions such as Irwin Financial and New Century Financial, it is apparent that they are propping up their earnings and balance sheets through creative financial means. Why are they doing this? Fannie Mae is refusing to even show their books. Every other financial institution is required to report their earnings every quarter, why does it take them 3 years? What are they using, an aabacus?

[Emperor]

You are absolutely correct about the difference in markets.

While rents are higher in CA than in TN, the ratio of rents:value is completely in TN's favor

Landlords in CA are ecstatic if they can get rent that equals .5% of the property value per month. Landlords in TN regularly see rents over 1% of the property value.

In other words landlords in CA are claiming a loss because the rents don't pay the debt load (of course they have been raking in the appreciation), while landlords in TN are showing nice income streams (of course appreciation is lucky to equal inflation here)

Buffet is sitting on a lot of cash which seems very strange to me. If he's really bear on the market, then why doesn't he sell short the overpriced stocks in the market? Declines always happen quicker and with greater severity, historicaly speaking. Hedge funds anyone?

[laserboy]

REMINDER: When you buy a mortgage backed security in the United States today, there is some idiot American on the other end "pulling equity" out of his house to buy a new SUV or plasma TV. Or worse plowing it back into the real estate market.

If you buy MBSs in the US today, you are playing with fire.

[laserboy]

Like you said, real estate "investors" in California have long ago dissociated themselves with metrics like cashflow or capitalization rate. They are only concerned with flipping their overpriced property to some greater fool. Becoming a landlord of a newly bought property no longer makes any economic sense in most parts of the countries.

As Douglas Duncan, chief economist of the Mortgage Bankers Association, puts it: "I'm going to rent for while."

http://www.kansascity.com/mld/kansascity/news/local/12026905.htm

[Emperor]

[ QUOTE ]
Like you said, real estate "investors" in California have long ago dissociated themselves with metrics like cashflow or capitalization rate. They are only concerned with flipping their overpriced property to some greater fool. Becoming a landlord of a newly bought property no longer makes any economic sense in most parts of the countries.

As Douglas Duncan, chief economist of the Mortgage Bankers Association, puts it: "I'm going to rent for while."

http://www.kansascity.com/mld/kansascity/news/local/12026905.htm

[/ QUOTE ]

Exactly right. Actually I am getting ready to move to CA. The prospect of paying a $2K/month house payment seems ridiculous when I can rent the same house for $1K/month.

Darn I won't get that 45% appreciation that could turn -45% tomorrow...

[squiffy]

For one thing, he has too much money to invest. Peter Lynch writes about it in his books. Once a fund gets too large, it's hard to find enough undervalued stocks to invest in. And it's not easy to trade in and out of the market without affecting the stock price. Not to mention trading in and out leads to paying lots of short term tax gains.

There are some advantages to only having 200 or 300K to invest.

To me, making a few hundred or a few thousand on a trade is good money. If you have billions, it's a lot tougher.

My point is that it's not that hard to beat 4% a year. Heck, some stocks pay 2% in dividends and also appreciate.

[squiffy]

I actually tried selling short Countrywide CFC and lost about 10K. I am glad to see Adios is still here. I kept predicting the demise of homebuilders and mortgage lenders and he kept telling me I just didn't understand CFC and its business model.

Short selling is pretty tricky. If you buy and hold, you can theoretically wait 5 years if necessary for the stock to go up.

With short selling, a stock can take 6 months or a year to go down. And the natural direction of the American stock market, over time, seems to be up.

So betting against a stock is a lot trickier than betting on a stock.

I think if it were easy and profitable to short, Buffett would probably do it.

It's easier to buy and hold undervalued stocks or to buy entire businesses when they are cheap.

[squiffy]

In Japan in the 1980's they started doing 100 year mortgages. And typically a renter would pay his rent 100% one year in advance. Very scary stuff.

I have heard American 40 year mortgages are very unfavorable, not because the idea is bad, but because few lenders offer them and the terms are bad for the borrower.

But in theory, with a properly structured 40 year and with a highly liquid market for 40 year mortgages, a 40 year mortgage would be a great deal.

If you can borrow at 6% and invest the difference at 10% in the stock market and pay back in inflated dollars, why not?

If I can find a 40 year mortgage link I will post it. If all banks were forced to offer 40 year mortgages so that they became as standard and liquid as 30 year mortgages, then they would be fine.

But banks will want a higher interest rate to compensate them for the higher long-term risk of inflation, I would think.

[squiffy]

You have heard the saying a day late and a dollar short.

Well I was about a year early and I am now short 10K.

I tried short selling and also buying puts on CFC. But got in way too early.

It's just hard trying to get the timing right.

If you are going long and hold the stock, you theoretically have an infinite time to be right. You can collect dividends and wait 10 years if it is a solid company.

But waiting for the bubble to burst can be a long and difficult experience.

I knew long rates would start climbing and I knew home sales and auto sales would eventually slow down, but I cannot figure out a safe cheap way to profit from it.

Shorting is just downright dangerous. And puts go out only 2 years at the longest and often cost too much.

[squiffy]

Glad to see you are still around!!!
I haven't been back in about a year. After losing money on CFC, I couldn't show my face until I made it back on NOK.

Still. Homebuilders look like they are declining now. But cannot figure out a safe way to profit from it. Maybe puts on Hovanian. But they look very very expensive now.

[Sniper]

[ QUOTE ]
If you are going long and hold the stock, you theoretically have an infinite time to be right. You can collect dividends and wait 10 years if it is a solid company.

[/ QUOTE ]

This is a horrible way to look at the market. By waiting out a bad stock you lose TIME. There is also the possibility that the stock will never be profitable.

[squiffy]

Sorry. I incorrectly reported my NOK return. I have three accounts. One cash, one traditional IRA, and one Roth IRA, so it is a bit confusing to parse out all the different trades.

And I made the mistake of comparing the total account balance for 7/04 with the total account balance for 7/05. It is true that from that period the balance went from 107K to 160K. But that is not the correct return for NOK only.

I actually started buying in April 04, so the holding period was more like 1 year 3 months. And I started buying NOK at 17, 16, 15, 14, and 13. It kept dropping, so that initially I was losing money on my initial buys and praying that it would recover. Luckily I initially made small purchases after it dropped from 23.

In any event, my account initially had 120K and DROPPED to 107K, before slowly recovering to 160K. So the real total increase is only about 40K or about 30% over 15 months.

Adjusting to a 12 month return, the return was about 27% according to the gain loss calculator which Ameritrade provides.

Sorry about that.

Anyway the point is that it is possible to make more than 6% a year on the stock market.

Though it is also possible to lose your ass (I mean your donkey).

By comparison, my cash account went up only 6% because I lost a lot of money trying to short CFC and buying puts in CFC, which proceeded to go up. No thanks to Adios.

And my ROTH IRA account went up about 16.7%, but as there is only about 15K in that, it's a nice return, but doesn't really change the weather in terms of early retirement.

[laserboy]

[ QUOTE ]
My point is that it's not that hard to beat 4% a year. Heck, some stocks pay 2% in dividends and also appreciate.


[/ QUOTE ]

Your premise is sound and your strategy would have been extremely successful over the past few years. But many people who borrow at these rates today will end up investing in vastly inflated asset classes such as the real estate market or the US stock market and get burned badly. My personal belief is that at some point in the future, as has happened periodically through history, the average citizen will be begging for 4% returns.

Most of our generation doesn't have much fear because they have never really experienced a prolonged bear market before. You would have gotten completely owned investing in stocks during the 1970's, and bonds were considered the superior asset class based on returns from the previous few decades. Most of us probably weren't even alive during that. And this was nothing compared to the 1930's or Japan in the 90's.

They have been giving away money in Japan for a decade. How has that worked out for Japanese investors?

http://finance.yahoo.com/q/bc?s=%5EN225&t=my

http://www.economist.com/images/20050618/CSF103.gif

[Sniper]

If you own a home and are truly concerned about a housing bubble and want to protect your gains, you should take out some insurance in the form of LEAP Puts on housing stocks as a hedge.

[GeorgeF]

It depends on how things play out. For exmaple in Argentina when things blew apart alot of people lost their jobs so they could not pay their mortgages. The gov of Argentina desided that they would issue a new currency, and guess what mortgages had to be paid in the new currency with a principle indexed to salaries or something.

Also note that while inflation erodes the value of the principle, assuming you get pay increases in line with inflation, depreciation erodes the value of the building while costs taxes ect must be paid. Finally their is no way to predict where land prices are going.

[lu_hawk]

this is not the 'magic of the american economy'. it is LEVERAGE, and it works both ways. lets hope house prices keep going up forever.

[imported_bingobazza]

[ QUOTE ]
[ QUOTE ]
I read recently that the real estate bubble is currently hndreds of times bigger than the dot com bubble and that the world has never seen a bubble so large when measured in USD.

[/ QUOTE ]

I don't have a link handy but compare real estate prices in Tennessee and Southern California then tell me there's a real estate bubble in Tennessee. Mentioned many times on this forum real estate markets are localized and not ubiquotous.

[/ QUOTE ]

You are ofcourse right, the bubbles exist mainly where there are major pockets of speculative excess...and the US in general qualifies, even thought there are still pockets of value, as there always will be, much like the stock market.

During a property price slump, however, much like the dot com bust, when many unconnected companies got dragged down as well as the Hi tech companies, places like Tennesee could well see slips if the wider market goes down....the delusions of crowd behaviour takes over at stressful times like these...and no where is totally safe. Rental income levels, like dividends, provide a floor for prices, as does smart buying, in both property and stocks.

Nevertheless, this global property bubble is truly gargantuan. The warning signs are scattered throughout this thread...ignore them at your peril.

Bingo

[squiffy]

Japanese basically don't invest. They save at low rates.

They don't have as strong and diversified a stock market as we do and the average Japanese simply doesn't invest as much as the average American. Think America in the 1940s or 1950s when investing was still only for the wealthy and not really for the masses.

There is much more corruption in Japan. And Japanese banks have not written off their bad loans. So there are lots of structural, legal, and socio-cultural problems with the Japanese economy.

I imagine we will see high inflation again some day. I don't have much confidence in the ability of American government to balance its budget or to avoid costly wars.

[squiffy]

I have looked at that, but the puts themselves are very expensive and cut heavily into your potential profit. The stock has to drop a tremendous amount before you make a profit. Though perhaps builders and mortgage lenders' prices will collapse so dramatically over the next 2-3 year that you will profit, even after the cost of the put.

[Sniper]

[ QUOTE ]
I have looked at that, but the puts themselves are very expensive and cut heavily into your potential profit. The stock has to drop a tremendous amount before you make a profit. Though perhaps builders and mortgage lenders' prices will collapse so dramatically over the next 2-3 year that you will profit, even after the cost of the put.

[/ QUOTE ]

If you believe that we are in a bubble and its about to burst, the cost of put insurance as a hedge is cheap. If you are worried about the insurance cutting into your potential profits from continued home value appreciation, then you must not think the bubble is about to burst.

[squiffy]

Sometimes insurance is too expensive. Puts only go out 2-3 years.

Greenspan made his irrational exuberance comment before congress in 1997. The market didn't crash until 2000 or 2001. About 3-4 years. It's hard to predict when a bubble will burst, even if you know it's a bubble. That's the nature of a bubble, it's irrational and prices can reach irrational and unpredictable heights for an unpredictable amount of time.

Later I will post some put prices and we can talk numbers. Do you actually have some experience with puts? Or are you just speaking theoretically.

If you have actually tried shorting or buying puts, you may find it's not necessarily cost effective. Cuts pretty heavily into your profits.

It's like the difference between home ins. or car insurance vs. flood insurance if you live in a flood zone.

Certain kinds of insurance are cheap because the risk can be spread effectively.

It's not clear to me that options are traded widely enough to make them a cost effective hedge. And you have to pick the right stock.

If you really are familiar with puts, and can talk specific numbers for specific companies, that's great.

If not, we just have to agree to disagree.

I own one home in CA that I bought in 2002 for 200K. Now appraised at 420K. I bought one home in TX in 1993 for 183K, now worth about 250K or so. Not really sure.

I have about 340K in Ameritrade accounts. Mostly in retirement accounts.

In theory what you are saying makes sense. I agree with it. In practice. It's hard to find the right stock and hard to put in place a cost effective hedge.

But I am happy to talk specifics if you have experience with puts and can post some specific prices for puts on specific stocks.

Adios are you out there? Do you agree now that homebuilders and mortgage lenders are starting to tank or will tank.
Which ones are most likely to drop precipitously?

[squiffy]

Note. Some insurance is cost effective. I pay maybe $1400 a year in car insurance for two cars with 50/100K coverage.

For homeowners ins. in TX and CA I pay about $900 per year to insure against fire and hazard.

The puts seem way too expensive on stocks like HOV, CFC, MTG. Any ideas or thoughts.

[laserboy]

[ QUOTE ]
Japanese basically don't invest. They save at low rates.

They don't have as strong and diversified a stock market as we do and the average Japanese simply doesn't invest as much as the average American. Think America in the 1940s or 1950s when investing was still only for the wealthy and not really for the masses.

There is much more corruption in Japan. And Japanese banks have not written off their bad loans. So there are lots of structural, legal, and socio-cultural problems with the Japanese economy.


[/ QUOTE ]

The Japanese don't invest? Are you selectively forgetting the 1950's-1980's? Japanese investment activity reached feverish heights during the 1980's. They used EXTREME amounts of leverage just as US investors did in the 1920's and are have done for the past few years (and that you are suggesting people should do today).

By the way, in the 1930's the US enacted laws to limit the amount of stock that investors could buy using leverage to prevent the lemmings from doing what they are doing today. I believe the same thing will happen several years from now with respect to real estate.

And yes, the Japanese banking system is in shambles. That is what happens when your banking system collapses and they have done a poor job rebuilding.

The Japanese financial system is corrupt? We are not exactly Switzerland ourselves. How sound do you think our banking system is? Are you aware of the fact that banks currently lend out on average of 120% of their deposits? If you don't like 100 year mortgages, how do you feel about interest only or negative amortization loans that or option ARMs that balloon after several years?

The Freedom Home Equity Loan (http://www.ditech.com/equity/value.html)

[squiffy]

Japanese companies invest. Individual Japanese workers do not.

There is a difference between Bank of America or Bank of Japan and John Smith or Kenichi Tanaka.

John Smith has a 401k and invests in the stock market. Individual U.S. investment in stocks has grown a lot over the past 30 years.

You will find that in Japan, the average person is much less likely to own stocks.

Read a few books on the Japanese government and economy.

I am saying the average American is taller than the average Japanese. There are differences. You are saying some Japanese are tall. Both are true. But culturally, politically, and economically a lot of differences too numerous to describe here.

Do you know about the Liberal Democratic Party in Japan? Not really a two party system as we have here. Much more corruption.

Lots of ties between Yakuza and government officials etc.

Yes America has corruption. But overall, it's much worse in Japan, the Phillipines, and Mexico.

First, America has a lot more natural wealth to spread around, land, natural resources per capital. Second, we have a lot more checks and balances in our government.

Remember the Mexican president Salinas who was actually implicated, through his brother, in drug money and murder. Yes, we have Richard Nixon, but as far as I know he didnt take money from drug lords or have any political rival or dissident bumped off.

[laserboy]

Are you saying the reason the Japanese asset markets have been depressed the past 15 years is because the average Japanese citizen has a predisposition not to invest in the markets (I do not agree with this assertion, BTW)? Since the Japanese save so much more money than Americans, then where is this money going? I agree with you that it is not going into the stock market, but then that is plainly obvious. Americans were not investing in stocks in the 1930's either. I contend that the depressed markets are the result of the contraction of credit and deflationary monetary conditions even in the face of negative real interest rates.

And to say that the average US citizen invests more than the average Japanese citizen is ludicrous. The average US citizen curently has a ZERO percent savings rate. The average US worker has like 50 grand in their 401K.

And our vast reservoir of wealth and natural resources certainly do not seem to be generating much wealth for the country. The last time I checked, we were running a trade deficit of several hundred billion a year. As opposed to the Japanese who manufacture many consumer goods products and have continued to run a vast budget surplus even throughout their recession. Of course, unlike the US, they actually have a strong manufacturing base and an highly educated workforce.

What do we produce as a country that will sustain our economy in the face of a real estate downturn? Here is a good article on the topic:

http://www.nytimes.com/2005/08/12/opinion/12krugman.html

[Emperor]

[ QUOTE ]
Since the Japanese save so much more money than Americans, then where is this money going?

[/ QUOTE ]

They don't save it they spend it. The cost of living there is higher than in the US, AND they spend it on social welfare programs like European countries do. These are the reasons why their economy, along with France and Germany's has ground to a halt.

[ QUOTE ]
I agree with you that it is not going into the stock market, but then that is plainly obvious. Americans were not investing in stocks in the 1930's either. I contend that the depressed markets are the result of the contraction of credit and deflationary monetary conditions even in the face of negative real interest rates.

[/ QUOTE ]

Contraction of Credit? - NOT
Deflation - Maybe, I wonder how many people in Japan see the cost of goods going down? I doubt too many.

I really think the reasons are: 1. They grew overly fast creating a bubble 2. It burst when they out paced the world's demand for their particular markets, for the price they could provide them at. (As the Japanese got wealthy, they were unable to produce products as cheap as before) 3. They started taxing the rich, giving to the poor and encouraging people not to work.

[ QUOTE ]
The average US citizen curently has a ZERO percent savings rate. The average US worker has like 50 grand in their 401K.

[/ QUOTE ]

Eh? /images/graemlins/confused.gif

[ QUOTE ]
The last time I checked, we were running a trade deficit of several hundred billion a year. As opposed to the Japanese who manufacture many consumer goods products and have continued to run a vast budget surplus even throughout their recession.

[/ QUOTE ]

Oh Good Point! This is definitely a reason for their slump. While Americans run a HUGE and PROFITABLE trade deficit, by buying lowpriced goods from around the world, and then investing all of that leftover cash into more profitable returns.

Checkout Free Trade (http://www.freetrade.org) to see why running a trade deficit is AWESOME! It also shows how increasing trade deficits are a leading indicator of economic upswings.


[ QUOTE ]
Of course, unlike the US, they actually have a strong manufacturing base and an highly educated workforce.

What do we produce as a country that will sustain our economy in the face of a real estate downturn? Here is a good article on the topic:

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Well if you checkout Exports (http://www.export.gov/) You will see all of the wonderful things that the US exports... While demonrats believe that JOBS are at the top of the list, it is totally untrue. We export High dollar items. Airplanes. Nuclear Reactor components. Cars. Etc.

Do we risk outstripping demand for those items and running into the same problems that Japan has? We sure do. ESPECIALLY if we keep letting our government stamp each tax dollar into a nickel before passing it on to the "disabled" and the welfare mom's whom we encourage not to work. We may only have 5% unemployment but only 2/5 of the population is employed, and only 2/5 of those are employed at the same place for more than 6mos out of the year. This is an incredible burden on our society and economy.

[laserboy]

I do not disagree with you that the Japanese government has handled their depression with extremely poor fiscal and monetary policy.

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Contraction of Credit? - NOT
Deflation - Maybe, I wonder how many people in Japan see the cost of goods going down? I doubt too many.




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Maybe "contraction" is not the word I was looking for. Perhaps "destruction" of credit. When that many loans go bad, it is essentially equivalent to having billions of dollars sucked out of the asset markets. Furthermore it leaves the banking in shambles and unable to finance further economic expansion. As far as deflation is concerned, this is well documented. Japanese real estate, for example, prices have declined for 15 straight years.

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Eh?


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Bad news on savings (http://www.usnews.com/usnews/biztech/buzz/archive/buzz050802.htm)

Regarding the trade deficit, I trust Warren Buffett's evaluation of the trade deficit issue more than I trust yours or mine.

Why I'm not buying the U.S. dollar (http://www.pbs.org/wsw/news/fortunearticle_20031026_03.html)

Also I am not a "democrat". I am probably the most fiscally conservative person I know.

[squiffy]

With regard to savings, the average savings rate in Japan is supposed to be higher than in the U.S. A higher percentage of income. But the Japanese income may or may not be higher than in the U.S.

To the extent that Japanese save, they put their money in bank accounts, not on the stock market.

Also, there are 250 million or so Americans. Perhaps 100 million Japanese. So even if the American savings rate is lower, the total amount and percentage of savings invested in stocks is greater in America.

Some Americans do save and invest.

Also, even if an American and a Japanese earn the same amount, if the Japanese pays more for land and housing as a percentage of income than an American, because of crowding and overpopulation, the Japanese person actually has a lower standard of living.

I moved from LA to Fresno. I could not afford a home in LA. I could afford a 4 bedroom 1800 sq ft home in Fresno in a nice neighborhood.

The numbers never tell the whole story.

Chinese may save 50% of their income, but if they only earn $300 a year per capita, that doesn't make for a huge capital market or stock market, at least not based on individual investment.

You are reading a lot into my statements that I never intended.

In America, over time the percentage of savings invested in stocks has increased tremendously. Due to the rise of cheap internet trading, mutual funds, retirement accounts. Etc. These are all features of the American economy and American laws.

Many other nations simply don't have as well-developed a financial system and most individuals in many other nations don't have ready access to a liquid stock market.

http://www.kc.frb.org/publicat/econrev/pdf/2q94morg.pdf

In Japan, most people put their money in postal savings accounts at low interest. Much less common in Japan to invest in the stock market.

http://www.stat.go.jp/english/data/handbook/c04cont.htm#cha4_3

I am just stating simple facts.

A very high percentage of Americans own stocks, relative to citizens in most other nations. That's just true.

And a huge and growing percentage of American individual household wealth is being invested in the stock market. This isn't necessarily the case in other countries. The same shift might be happening, but our shift started a lot earlier and is much more significant in absolute terms.

You are drawing conclusions about things I never mentioned in my original post.

[squiffy]

This data is old from 1999, but gives some stats on percentage of American households investing in stocks.

http://www.americanshareholders.com/commentary/children.php

http://www.ici.org/shareholders/dec/news_99_icisia_equity_owners.html

Do you think in 1999 half of individual Japanese households some form of their wealth in stocks? NOT CORPORATIONS OR BANKS. Individual Japanese.

[laserboy]

OK I am just arguing with you over semantics then. I meant that the Japanese do invest, just currently not in the stock or real estate markets.

You are correct that in the US the current model of financial thought currently favors investing in the stock market (stocks always go up in the long run, etc.) and real estate market (real estate only goes up or sideways, etc.)and that in Japan most people currently favor investing in bank accounts. I contend that these trends will shift over time.