-- Posted Thursday, 18 May 2006 | Digg This Article

St. Michaels, Maryland

Thursday, May 18, 2006

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*** A whole nation of geniuses...a soft landing in the housing market?

*** Gold may have gotten ahead of itself...nothing fails like success...

*** How to be an "a-hole"...the stuff that Middle America is made
of...and more!

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Nothing lifts I.Q.s more than a property boom.

America's real estate bubble has created a whole nation of
geniuses...people who think they are smart because their houses have gone
up in price. And the smartest of them weren't content to merely watch
prices rise; they took advantage of them by leveraging themselves into
more and more expensive properties.

But now stocks are beginning to wobble. The Dow dropped 214 points
yesterday and leading it down were the building stocks. What they are
telling us is that the great bubble is over.

"I have a neighbor who asked me for financial advice," said a speaker at
yesterday's investment conference. "But I don't want to give him
advice...so when he asks me if property is still going up, I just smile
and say 'maybe.'

"I've watched him over the last few years. He bought one condo before it
was built. He flipped it and bought another one. And then, he bought a
whole bunch of them. To him, the secret of getting rich seemed so obvious.
All you do is buy beachfront condo at pre-construction prices...and then
flip them to someone else. And when he asked me about it, I'd just say,
'Well, I don't know how much longer this boom is going to continue.' He
must have wondered what was wrong with me. He was making a fortune. I just
didn't get it.
 
"But the last time I saw him, he told me that the condos he bought aren't
selling like he expected. I wish I could tell him 'I told you so,' but I
never told him anything."

There must be millions of real estate speculators, concentrated in the hot
markets on both coasts, in similar situations. They've stretched to buy.
Now they're stretched to keep up with maintenance, taxes, condo fees, and
interest payments. Their neighbors bite their tongues. "I told you so,"
they itch to say.

Don't worry, say the experts. The boom may have peaked out, but there
should be a soft landing.

"I'm not so sure," continued our speaker. "People say the property market
can't collapse, because houses are tangible and people have to live in
them. They compare housing to dot.com stocks, for example. The stocks can
fall 90%...or even disappear. That doesn't happen with housing.

"No, it doesn't happen the same way, but a much smaller decline in housing
prices can have a much bigger impact on people like my neighbor. Let's say
prices go down just 10%. That's not much. We could expect at least a
decline of that much. But a lot of people don't have 10% equity in their
houses. They've bought with zero-down mortgages - or maybe 5% - never
expecting to have to pay off those mortgages.

"Instead, they were counting on price increases, either to refinance or to
sell. If they are forced to pay a mortgage greater than the value of the
house, they are going to be in big trouble. And a lot of them aren't going
to make it."

What can you do to protect yourself? If you have a house you don't intend
to hold for a long time, this may be your last chance to sell at near-peak
prices. Otherwise, all you can do is to put your money where a U.S.
housing collapse won't hurt it.

Yesterday's speakers had a number of ideas: Japanese real estate,
Icelandic bonds, oil and gas companies, rare coins and other
collectibles...and gold!

"Gold is not really going up because it is becoming more valuable," said
John Doody, editor of Gold Stock Analyst. "It's going up because the
dollar is becoming less valuable. And that's a trend that is not likely to
stop anytime soon."

John showed us a chart.

"Look at this. Gold has gotten ahead of itself. It's way out of its
channel. It looks as though you can expect a correct back to $650 or so.
That would be a good thing...it would allow the gains to consolidate and
set the stage for another big run-up. How high will it go? I don't know.
It could go to $1,000 without any trouble. But if it goes to $3,000, a lot
of other things are going to be going wrong."

[Ed. Note: Want to play it a bit safer with the precious metals market?
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More news from The Rude Awakening...

--------------

Eric Fry, reporting from Manhattan:

"We believe we deserve our earnings, by virtue of the fact that we worked
hard to produce them. But the politicians believe that they deserve our
earnings, by virtue of the fact that they have already spent them."

For the rest of this story, and for more market insights, see today's
issue of The Rude Awakening:

I-Been-Hosed
http://www.the-rude-awakening.com/RAissues/2006/march/RA051806.html

--------------

More views from Bill Bonner and Addison Wiggin...

*** "Inflation's rising toll on consumers," reads a headline from the
Christian Science Monitor.

High energy prices and rising interest rates are, of course, taking a toll
on consumers. And now, "everyday items" have risen "more than expected."
The article reports:

. The pace of home-mortgage applications is down 15 percent, compared with
this week a year ago, as "for sale" signs stay up longer in a slowing home
market.

. Half of Americans have changed their vacation plans to stay closer to
home, according to an Associated Press/Ipsos poll out this month.

. Prices beyond the gas pump are also edging up. The "core" consumer price
index (CPI), which excludes volatile food and energy costs, surprised
analysts by jumping 0.3 percent last month, according to a government
report Wednesday.

The economic climate has become increasingly challenging to consumers: "
'an economic a gray zone' where the pace of economic growth may be slowing
even as the threat of inflation remains in the foreground."

*** One helpful reader posted this review of Empire of Debt at
Amazon.com:

"Bonner and Wiggin are a-holes. Not because everything they say is wrong
but because they seem to take glee in trashing America, its government,
and its people. No person, place or thing is perfect, but these guys would
have you believe their observations and pronouncements are, while us poor
masses don't know our A's from a hole in the ground.

"Before anyone buys this book do a little research on Comrades Bonner and
Wiggin; their various business's, web sites, newsletters, etc. Put a few
facts together and see how much you trust these two yahoos then. After
that anyone who buys this book and believes all the garbage in it, and
tries to preach it, is probably an a-hole also.

"On the other hand if you have always wanted to be an a-hole then this is
a good place to start."

If nothing else, dear reader, we're providing a valuable public service.

*** The above instructions come at an opportune time. As you may recall,
we've purchased ad space on the back of a bus circling the Capitol
Building and in 10 of the metro stations serving the DC metro area.

On Monday we're sending a crew of folks down to DC with pamphlets and
bumper stickers. The sticker resembles a Washington DC license plate and
proudly sports the vanity plate Squanderville. Take a look:

Welcome To Squanderville
http://www.dailyreckoning.com/Squanderville.html

We're going to be accompanied by a film crew. Hopefully our helpful
readers instructions will find their way into a documentary on debt...a
sort of "how-to" on self-aggrandizing agitation.

*** Earlier this week, we were staying at the Inn at Perry Cabin in St.
Michael's, on Maryland's Eastern Shore. It is a small world. The Inn is a
delightful small hotel owned by the Sea Containers Corporation, which owns
a chain of luxury hotels around the world, including the Windsor Court in
New Orleans and the Cipriani in Venice.

Its headquarters are in the same building as our office in London. Alas,
nothing fails like success. A recent article in the Financial Times told
us that the parent business may "no longer be a going concern." Auditors
were examining the books to find out if the company is bankrupt. Go
figure.

*** We breathed deeply and tried to take it in. We stared. We wondered.
For half a century, we lived in America, but now, on this trip through a
corner of it, everything seemed familiar...and strangely foreign, too.

Nothing is nothing, until you turn it into something. Even the sights and
sounds of Middle America are nothing more than information without a
theory. We have one theory: the U.S. has been in a credit bubble for the
last five years. We saw the results of it in some places: hundreds and
thousands of new houses outside Annapolis, Baltimore, Pittsburgh, Reading.

On Kent Island, there are rows of new condominiums. A country is built,
transformed, shaped during a credit expansion. It is probably a matter of
luck when it happens to coincide with decent architectural fashions. What
goes up during a credit expansion lasts far beyond the credit cycle;
future generations have to live with it. Americans were lucky so much
building took place before the '29 crash. Architects still had some taste
and style. They were lucky, too, that their pre-'29 cities were not
destroyed in the war. Post-war architecture did more damage than bombs.
Paris was spared, but Caen was not so lucky. Blown up by the allies, Caen
was rebuilt by architects under the influence of Le Corbusier; it is a
disaster.

In America, the housing that went up after the war was cheap and ugly.
Later, in the '70s and '80s, it was not as cheap, but quite as low and
repulsive. Now, it is being replaced by the new housing of the 21st
century, which, though not great architecture, is at least an improvement
on what went before.

But out in the hills of West Virginia and western Pennsylvania, it is as
if the credit bubble never existed. The houses are about as dreadful as
they have been for the last 50 years. Typically, people let a respectable
'20s-era house fall to ruins and pull a mobile home up in front of it.
There they live in comfort and degradation; charm and dignity are as
absent from their lodgings as from a dentist's waiting lounge.

We sucked hard at the air...to try to understand. America has never been a
place with much culture, but the standards of everyday life seemed to have
slipped even lower than we remembered them. In vast sections of the
country, people don't seem to care what they look like. The motels and
restaurants are shabby. The food is often tasteless. These are not hard,
ambitious, critical people; they are nice, doughy, contented folks.

Mush is the stuff of Middle America. People are soft and mushy. They dress
in shorts, T-shirts, and running shoes - clothes that yield, rather than
insist. The starch has gone out of their clothes, their finances, and even
their conversation. They address each other with greetings as soft and
sweet as Krispy Kreme.

Their heads are full of mush, too. We listened to a talk radio show as we
drove down the Pennsylvania Turnpike. The issue was immigration from
Mexico.

Milton Friedman clarified the whole business years ago, the show's host
recalled. "You can't have open borders and a welfare state at the same
time," he remarked. "If you do, you'll be overrun with immigrants and your
welfare system will go broke." But this insight was lost on the mush
brains. Anyone who really believes in democracy should have to listen to
talk radio; a few minutes of listening to callers bellyache would cure
them. These were people who shouldn't have been allowed anywhere near a
telephone, let alone a voting booth.

Callers ranted about "protecting jobs" or "protecting our way of life." We
looked around. In some of the towns we went through, we wondered why they
would want to.

Pressure is mounting to seal the borders. The Chinese sell things too
cheap. Mexicans work too cheap. Besides, the Mexicans don't speak English.
In West Virginia, we saw whole towns that were almost abandoned - Thomas,
West Virginia, for example.

When the mines shut down, there was not much left. The shops are empty.
Windows are boarded up. Old houses are for sale for as little as $20,000.
It could use some Mexicans.

"A person could live very well here," said Elizabeth. "Property is
cheap...and some of it is very pretty."

We were looking out at a valley with green pastures, a swift-running
river, old forests, and a white clapboard house. Yes, you could live well
- as long as you didn't care about restaurants, museums, shops, and the
other amusements and refinements of civilized life.

But then, we were surprised. We went into the only restaurant still open
in Thomas. The place was practically deserted, but there, in the corner,
was a bluegrass band practicing for Saturday night entertainment. In a
minute, our toes were tapping. The fiddlers sawed away, and the sounds of
Appalachian mountain music filled the room.

We were enchanted.

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The Daily Reckoning PRESENTS: Mark Skousen has honored Benjamin Franklin's
300th birthday by compiling and editing The Completed Autobiography by
Benjamin Franklin (Regnery 2006). Today, we offer advice on personal
economics, business, investments, estate planning, and charitable giving,
all based on the study of a man Skousen considers the most "versatile
genius in all of history." Enjoy.

FRANKLIN'S GOLDEN RULES
by Mark Skousen
Compiler and editor of The Compleated Autobigraphy
by Benjamin Franklin (Regnery, 2006).

"Nothing but money is sweeter than honey."
-Ben Franklin

Benjamin Franklin made great contributions as an inventor, scientist,
writer, and founding father, but he is also offered valuable advice on
money matters. His is one of the greatest success stories in American
history, and much of his success in philanthropy, community, and public
office came from his experience and capabilities in the financial world.

Why pay attention to Ben Franklin? His is the first "rags to riches" story
in America. Throughout all his experiences, failures and victories, he
built a fortune that was never in jeopardy. By time he died in 1790 at the
remarkable age of 84, he was a self-made man, one of the richest in
American history. The Autobiography, published posthumously, tells largely
how he created his wealth. It influenced millions of Americans, both young
and old, who wanted to succeed in life, from Andrew Carnegie and Thomas
Mellon in the 19th century, to Warren Buffett and in the 20th century.

In his "Advice to a Young Tradesman" in his famous pamphlet, "The Way to
Wealth," published in Poor Richard's Almanac in 1758, Franklin wrote, "In
short, the way to wealth, if you desire it, is as plain as the way to
market. It depends chiefly on two words, industry and frugality; that is,
waste neither time nor money, but make the best use of both. Without
industry and frugality, nothing will do, and with them everything."

His most famous pro-saving adage, "A penny saved is a penny earned," is
remarkably profound. How can a penny saved be a penny earned? Assume you
earn $100 a day. If you have $100 in your pocket and you spend it, you
have to go out and do a day's work to get that $100 back. Another way of
putting it: With $100 in savings, you could take off a whole day of work
and still enjoy a day's income by drawing upon your savings. In sum,
saving is a source of earning power.

The more you save, the more earning power you build up. In addition,
savings earns interest, which means more earning power, compounded
returns.

Franklin preached throughout his life the virtues of "industry, thrift and
prudence" as universal principles of success. He made a point of working
smart and often working late hours to get ahead. Remember the refrain,
"Laziness travels so slowly that poverty soon overtakes him."

Undoubtedly Franklin would castigate today's Americans for indulging in
undersaving, overspending and excessive debt. "No revenue is sufficient
without economy," he warned. "A man's industry and frugality will pay his
debts and get him forward in the world.... Business not well managed ruins
one faster than no business."

We all know of millionaires who have gone bankrupt. Just because you have
plenty of income and assets does not mean you can't run into financial
trouble. Parkinson's Second Law, "Expenditure rise to meet (and sometimes
exceed) income," occurs all too often.

One of the most difficult things to do is to cut back when you have a
setback in income. But retrenching is better than going into debt in order
to maintain your lifestyle. When his printing partnership abruptly ended
in 1767, Franklin made the difficult decision to cut back consumption
(dining at home at only one "single dish"), and urged his wife Deborah to
do the same. It kept them out of trouble.

Franklin was also a successful investor. In 1743, at the age of 42, he
turned over his printing business to his partner David Hall, receiving an
annual income for over twenty years afterwards. He never completely
retired, however. He worked for the government as a postmaster and
minister to France. Nevertheless, over the years he built up a substantial
fortune, and relied on his savings and investment income to pursue a
gentleman's career in science, politics, and community service.

Franklin built his investment retirement portfolio by saving, avoiding
debt, placing well collateralized loans (bonds), and investing in rental
properties.

So, how did he manage his money? First, Franklin ignored the doomsayers
and profited from his prediction that America was destined to be a great
prosperous nation. An incurable optimist, Franklin was always bullish on
America, and life in general. At the end of the War for Independence, he
predicted, "America will, with God's blessing, become a great and happy
country." The United States, he said, is "an immense territory, favored by
nature with all advantages of climate, soil, great navigable rivers and
lakes....[and] destined to become a great country, populous and mighty."

He was critical of the doomsayers and complainers: "I saw in the public
papers of different states frequent complaints of hard times, deadness of
trade, scarcity of money, &c.," he wrote in 1785. "It is always in the
power of a small number to make a great glamour. But let us take a cool
view of the general state of our affairs, and perhaps the prospect will
appear less gloomy than has been imagined."

In his Autobiography, he told the story of an elderly man who repeatedly
predicted economic depression and a real estate collapse in Philadelphia,
and warned Franklin to sell his printing house and his real estate
holdings. Franklin ignored his advice and prospered. Eventually, he said,
"I had the pleasure of seeing him give five times as much for one [piece
of land]."

Second, Franklin continued to live frugally, even during his retirement,
which meant occasionally he had to cut back (as noted earlier).

Third, limit your speculative opportunities, so as not to jeopardize your
entire portfolio with so-called "guaranteed" investments. You are bound to
make mistakes. Franklin made many.

Fourth, diversify your holdings and limit your risks. Franklin made it a
point of having a wide variety of income sources, so that a loss in one
would not destroy his entire portfolio. In addition to earning income from
his role as minister and postmaster, he maintained 7 or 8 rental
properties; earned interest-bearing bank accounts in Philadelphia, New
York, London and Paris; investing in common stocks such as the Bank of
North America, which paid a sizeable dividend; and occasionally loaned
funds at interest to individuals and institutions.

His sizeable interest and rental income from bank accounts and real estate
saved him from several severe financial setbacks during his years abroad.

In 1767, while colonial agent to England, his long partnership in the
printing business ended.  "A great source of my income was cut off,"
Franklin wrote, forcing him and his wife to become more frugal in their
spending habits. He limited himself to a "single dish" when dining at
home.

In 1772, there was a banking crisis in England, but Franklin survived
unscathed. "I only hazard a little using my credit with the bank....Being
out of debt myself, my credit could not be shaken by any run upon me."

In 1774, Franklin suffered the most serious blow to his finances. As a
result of the Hutchinson Letters scandal (where he sent confidential
letters among British officials to America, where they were published),
Franklin was vilified in England and fired from his job as postmaster and
colonial agent, which amounted to a loss of £1,800 a year in income!
Frugal living and their sizeable savings and income properties saved them
from certain disaster. Late that year, his devoted wife Deborah died, and
he was forced to return home.

Franklin wrote and rewrote his last will and testament several times
before passing away in 1790. His will is quite interesting, and I
reproduced it in The Compleated Autobiography. Before he died, he engaged
in some estate planning, such as arranging the transfer of his son
William's farmland in New Jersey to his grandson (William, who as a
royalist opposed Franklin during the American Revolution, received nothing
in his father's will).

In his will, Franklin made a long list of his real-estate properties,
bonds (loans), shares, cash, books, printing equipment, and other assets.
His will describes Franklin's "fine crab-tree walking stick, with a gold
head curiously wrought in the form of the cap of liberty," which he gave
to George Washington, and the picture of King Louis XVI surrounded by 48
diamonds, a gift to Franklin when he left Paris. He gave the
diamond-studded picture to his daughter Sally on condition that she not
remove the diamonds. Within a few years, she and her husband removed all
of them to pay for a long trip to Europe!

According to the Wealthy 100, a ranking of the 100 wealthiest Americans of
all time, Franklin was worth at least $150,000, a considerable sum in
those days.

One of the most interesting aspects of Franklin's will is the creation of
a fund in Boston to finance young artisans. During his lifetime, Franklin
engaged in all kinds of fundraising activities for public causes, and gave
liberally from his purse. But here he created a fund with 1,000 pounds,
whose interest would be used to fund the education of young people. The
fund continued until recently. Franklin was living proof of Poor Richard's
saying, "Great almsgiving lessens no man's living."

It is estimated at nearly 50% of Americans die without a will. Don't let
it happen to you. And when you do your estate planning, be creative like
Franklin. The next time you update will, look for novel ways to give away
money to your relatives, and favorite charities. Surprise some people!

Remember these final words from Poor Richards: "A long life may not be
good enough, but a good life is long enough."

Near the end of his life, Franklin told friends that he wanted to be
remembered for "living a useful life," rather than "dying rich." It turns
out that he was known for both!

Regards,

Mark "Be Free" Skousen
for The Daily Reckoning

We thank Dr. Skousen for his insights into Franklin's fascinating life and
writings. The Compleated Autobiography by Benjamin Franklin, compiled and
edited by Dr. Mark Skousen, is published by Regnery and now available at
the link below. It isn't often that you get a chance to buy a first
edition of a book written by a founding father for only $18.45. It won't
last long. Buy it today!

The Compleated Autobiography by Benjamin Franklin
http://www.amazon.com/exec/obidos/ASIN/0895260336/dailyreckonin-20/

Mark Skousen is the editor of Forecasts & Strategies, now celebrating its
25th anniversary, and it remains one of the most successful investment
newsletters in the nation. For more information, see here:

Forecasts and Strategies
http://www.markskousen.com/visitor.php?offer=10252
-- Posted Thursday, 18 May 2006 | Digg This Article

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