Thursday, February 19, 2009

Tuesday, February 10, 2009

The bigger the bubble the louder the POP!

When I hear Realtors harking "it's never a better time to buy" I can't help but think of used car salesmen or MLMers trying to pawn off their over supply of MonaVie fruit juice and Herbalife Vitamins. Asking a Realtor if it's a good time to buy is like asking an Evangelical minister if its a good time to donate to his church. "Of course it's a good time!"

There is a better time to buy. That time is when every single specuvestor* has foreclosed on their properties and have taken up real jobs, doing real work, creating real goods or services. There are certain time tested truths that you just can't escape. "There's no free lunch" ... "the piper must get paid" ... "easy come easy go" - are just a few among many that are going to return to their old glory as this bubble deflates completely.

A better time to buy is when it costs the same or less to own as it does to rent. Aside from the perceived value of calling oneself a "homeowner" and throwing a housewarming party to rub it in your friends' faces, there is no advantage to being a "homeowner". In fact there are way more downsides to owning than renting including -

  • Lack of mobility, which is important in a fluctuating job market.
  • High maintenance costs.
  • Property taxes, which are buying less and less services as cities go broke.
  • Interest, which is usually more than the purchase price after a 30 year mortgage.

The long term appreciation of real estate (and by long term I mean 50+ years) is roughly 1% adjusted for inflation. You can get a better return on your money with plain old Treasuries. Real Estate only goes up - that is if your time horizon was from 1997 - 2006. Locking yourself into a piece of property does not guarantee perpetually growing equity. Supply and demand, and the availability of credit rule home prices. As demand increases you would expect price to go up with it, which may be true before builders spot the trend and scramble to apply for permits and erect new McMansions by the dozen. By the time builders have caught up with demand the equity that had ticked up in your nest egg is suddenly squashed by over supply.

Detractors protest "but they're not making any more land!" Have you looked at a map of this country? There is enough land here to last us for 5,000 years of nonstop development, and when that runs out builders can always build up. Builders are equity killers and they will always return when the time is right. And if you want to get technical - they actually are making more land. Below is a picture of a development in Dubai.

Net worth is not equated by the size and zip code of your 6 bedroom mansion. Net worth is computed simply by subtracting your liabilities from your assets. Who is living the better life? The man on the hill in a six bedroom custom home now worth $1.2 Million with a mortgage of $1.5 Million, or little old me with money in the bank, no debt, a car paid off, and a rented bay front condo? I'll keep my problems, thank you very much.

The first 2 pictures above I took while walking around Downtown San Diego and La Jolla. The video below depicts what a real economic downturn looks like and could be a clue as to what our future could hold here if things continue to spiral out of control at the rate they are today.

*specuvestor is my tongue-in-cheek word for Speculating Real Estate Investors

Website Counter


Top Blogs

Saturday, January 24, 2009

InThain in the membrane!

How is it the CEO of a multi-billion dollar company in 2008 saw an economy so promising that he went on a shareholder funded interior decorating frenzy in his Manhattan office costing a cool $1.2 Million? John Thain, the recently ousted CEO of Merrill Lynch did just that. If you were in denial about the coming recession last year than you need to have your head examined and I have a section of the Brooklyn Bridge to sell you at a bargain.

One could understand how maybe a few mere mortals might have missed the warning signs, but how could the Masters of the Universe not have seen the tsunami of financial sewage that was headed toward this economy? After all, these are the people at the helm of the ship with a bird's eye view of the inner workings of the ponzi scheme we know as banking.

Stories like these (of which are in abundance these days) drive home the sad truth about our doomed economic system. People that rise to these levels in business are more often than not grossly unqualified for their responsibilities - which include protecting the meager wealth of those who actually earn it through legitimate work. Cronyism and access to influence rule the day while good business sense and prudence have found their way onto the endangered species list.

Rather than hiring CEO recruiters and "chasing talent" with multi-million dollar signing bonuses, these companies would have been better served heading down to the janitor's office and offering him a $10,000 raise to trade in his overalls for an Armani suit and take over the big chair in the top office. The janitor knows crap when he sees it, and would have likely called "Bulls***" at some of the questionable contracts and toxic assets that somehow ended up on the books of these banks. In fact if we put monkeys behind these CEO desks and trained them to push YES or NO buttons, odds are the economy would be in better shape today.

A very strange and precarious system has evolved in this country while the middle class was distracted with NASCAR and Desperate Housewives. Somehow bankers have managed to hijack our savings and tax dollars. Talk about a slap in the face - on both cheeks. TARP money that was intended for consumers to borrow and hopefully create some kind of bottom to the freefalling housing market, is being used to pay obscene bonuses and to purchase troubled banks in other countries. The money wasn't intended for the likes of Bank of America to go on a shopping spree and expand their pool of working class victims to prey on. It was meant to keep the soup lines from growing longer.

The only thing stimulated by this TARP package are the palates of CEO fatcats who are still enjoying their daily steakhouse dinners while the rest of us try to hang onto our jobs or file for unemployment.

Somehow the average Joe has been led to believe that slavery was abolished in this country. Nothing could be further from the truth. Slavery is alive and well. It has just morphed itself into a more cunning a malicious being. Back in the day your average slave had a roof over their head and food on the table. That's more than can be said for an entire class of people today whose dismal pay might cover housing or food - but not both - and so are aggressively encouraged to take on crippling credit card debt or obscenely priced Payday loans.

The bankers rule us - plain and simple. The politicians claim to be on our side, but since the bankers have them in their pockets they are little more than puppets on strings - talking the walk but not walking the talk. When politicians get brave and try to take on the bankers their careers somehow manage to vanish into thin air, as ousted Governor Spitzer found out the hard way. Who do you think was able to follow the money trail from Spitzer's bank account to his call girl's Louis Vuitton purse?

Karl Marx would roll in his grave if he knew what has happened to his vision. Socialism flourishes today - but you have to be rich to enjoy it. The modern uber wealthy financiers, drunk on their own misplaced confidence, took enormous risks with their money. But when things went south they somehow managed to foist the downside onto the rest of us chumps and escape with mountains of taxpayer cash. Ain't life grand?

Hopefully sooner rather than later the middle class of this country will put down the remote control and pay attention to the scam that is taking place right under their noses. It's time to call these financial witchdoctors to the carpet. Maybe we ought to take a lesson from the French and dust off the ol' Guillotine.

Website Counter


Top Blogs

Thursday, October 30, 2008

Halloween is going to suck this year ...

This comic was emailed to me by a friend today. It captures our current situation perfectly. There is no candy for us this Halloween - unless of course you are a big bank or insurance company.

Our infinitely wise government adhering to their Trickle Down ideology has decided to ration all the candy this year to our obese and fiendishly selfish older brother in hopes that he will distribute it fairly among all of us younger brothers and sisters.

Like parents too busy with grownup stuff to see to it that all the kids are looked after fairly, they favor the first born by default because of his tantrums and threats to run away from home and disrupt the family holiday plans.

Yes, the candy jar is empty this year. Big Brother stuffed his gourd before we had a chance to nibble a piece. He also had to make sure he paid off his schoolyard bully friends with bags of gold chocolate coins in order to maintain his status on the playground.


For more Johnny O rants visit my online radio show at

Website Counter

Free Counter

Monday, September 22, 2008

Welcome to the U.S.S.A. - Thanks Hank!

Meet Hank.

Hank used to run Goldman Sachs. Worth approximately $700 Million, he recently cashed out and took a cozy job looking out for the good old boys as Secretary of the Treasury - a job handed to him by our infinitely wise President, George Bush.

Hank was one of the guys who engineered the biggest housing bubble of all time. See back in the day when you wanted to buy a crash pad you would go to a bank. The manager would be real concerned about your ability to pay them back so they did a lot of careful homework about you. They were on the hook for your debt for 30 or so years until you serviced the loan completely, and so they had a keen interest in your ability to repay.

One day, some bright financial engineers figured out a way to buy your loan from the bank and package it with a bunch of other loans, sell them off to foreign investors and pocket a tidy fee for their troubles.

Suddenly your bank didn't care whether or not you could pay them back, since the sucker foreign investors were on the hook for your debt, and not them. Then the party began in earnest and mortgage lending was cranked into high gear. Out of nowhere came highschool dropouts making six figure incomes peddling loans to anyone with a pulse.

Housewarming parties became trendy, as did home equity lines of credit used to bankroll the new Hummers and flat screen TVs.

Through companies such as Goldman Sachs, trillions of dollars were pumped into the US housing market and handed over to SpecuVestors. This was a new breed of pseudo sophisticated investor, busy managing their new real estate empires between gigs as waiters and taking time out to watch Flip this House.

Home prices shot through the roof and hardworking suckers like you and me saw their home owning aspirations vanish into thin air. All the while CEO's and high ranking banking officials pocketed hundreds of billions in fees and bonuses.

Now that the bottom has fallen out of the housing market, and these loans are going bad by the boatload, Hank Paulson has decided to bail out his obscenely well paid banking cronies and has handed over close to one trillion taxpayer dollars to ensure their elaborate Ponzi scheme stays afloat. We have in essence socialized the banking system and rewarded shady bankers for their bad policies - all without a single voter's ballot being cast.

There are many that will say it is crucial to do this in order to prevent a financial collapse. I don't buy it. All it is doing is maintaining the status quo - protecting people who made incredible amounts of money preying on the unsophisticated working American, who just wanted to buy a humble abode and hopefully raise a couple of ankle biters. There needs to be a radical overhaul of our banking system that doesn't include printing trillions of dollars and handing it to the bankers. The collapse is happening anyway, and will continue irrespective of the bailout. Welcome to the 1930's.

Are you upset that house prices went up more than double in less than a decade? Thank Hank.

Are you even more upset that you got suckered into buying one of them with a toxic mortgage? Thank Hank.

Are you shocked at the plummeting value of your recently purchased McMansion? Thank Hank.

Do you wonder why the cost of everything is going up? Thank Hank.

Has your IRA or 401K account been annihilated? Thank Hank.

Is it tougher to fill your tank? Thank Hank.

Yes, let's all thank our lunatic Secretary of the Treasury who has just taken us that one step closer to socialism. We will soon have to change our address to the U.S.S.A - The United Socialist States of America. Guess we'll just have to reprint the money - shouldn't be too difficult!

Website Counter

Free Counter

Tuesday, June 10, 2008

A Dark Cloud Over Sunny San Diego

As I sit here at my favorite cafe on the boardwalk sipping my daily triple shot Americano, I am once again reminded how lucky I am to live in such a beautiful part of the world. Having spent the first half of my life in the dreary climate of Ireland, I am forever grateful for the pleasant weather of coastal Southern California.

Though as the sun warms my face this morning, I can't help but shake the feeling that something gloomy is gathering on the horizon. I have been a regular at this cafe for well over a decade. I have had more conversations with the other locals here than I can remember, and have discussed every possible subject imaginable. A topic that has dominated much of our java time over the past five or so years has been that of real estate.

I grew up in the bar and nightclub business first in Ireland and then here in San Diego. My father owned clubs in both countries. I worked in his bars through school and University, earning a degree in International Business and Finance. After my dad sold his last bar and retired I took a job running another club which I still do today. I intended to leave the bar business and get into Real Estate finance, so I obtained my license and began training part time in a local mortgage shop.

Prior to my first experience in the business I had always imagined mortgage operations to be staffed by sophisticated people with a strong sense of business ethic and professionalism. My opinion soon changed drastically. As I trained in the mortgage office I began to see a grim reality that had eluded me for quite some time.

I have been a renter since the day my father invited me to leave his house at 17 years old. I always knew I wanted to own a home and so early on began a quest to get a degree, a good job, and to build my credit score. My dad always hammered home the importance of good credit.

At 21 while bartending and going to school I discovered my passion for adrenalin. I started skydiving and immediately fell in love with the sport. Right away I had to have my own gear and so in order to purchase a parachute I plonked down my shiny new credit card that I had signed up for on my college campus. Who needs to save when Visa offers instant gratification? I needed to establish a credit record and so this seemed like the perfect opportunity to kill two birds with one stone (and hopefully not myself while skydiving).

For the next year I paid my credit card bill diligently. The statement would arrive. I would open it, cut a check for the amount due, and mail it out the same day. I was very proud of my financial diligence. However one day something caught my eye on the bill which made me sick to my stomach. I had been paying the minimum payment every month, about $96. By my naive calculations the balance should have been closer to $4,000 rather than the five grand I had started with. I hadn't taken Finance 101 yet so I didn't quite grasp the notion of compound interest. My balance had barley budged from a year earlier, though I had paid the bill on time each and every month.

As I studied the bill closely the realization hit me all at once. They were charging me just a couple more dollars than the interest accrued each month. My minimum payment was $96, but my interest charge for each month was $92. So in effect, in order to reduce my debt by $4, it was costing me $96.

In comparison to the average American's debt problems this may seem insignificant, but to me at that moment, I had never felt so cheated in my life. $96 was a day's pay for me after taxes. I had to sweat for a full day each month and turn it over to some credit card executive in return for 4 lousy dollars? How is this legal I wondered? Why did my college allow these crooks onto campus to prey on suckers like me? Why were there no mandatory classes on personal debt management required in order to sign up for a credit card?

It soon dawned on me that the credit industry thrives on the naiveté and financial ignorance of saps like me and college campuses are more than happy to take fees and donations in exchange for permission to cull their herds.

I estimated that it would take me close to ten years to pay that balance off if I continued with my current payment schedule. I was under the impression that Abe Lincoln had already done away with slavery. I made a decision that day to suck it up and triple my payments to the credit card company until the balance was paid down. I canceled my cable, went to Costco to buy up as much Top Ramen as I could afford, and cut out all other non-essential purchases (except for the occasional skydive). I made a promise to myself that I would never again pay interest unless it made financial sense to do so. So far, after a more than a decade, I haven't paid a red cent in interest.

A wise and successful man made a comment to me once that has stuck out in my mind ever since. He told me there is one major difference between the wealthy and the destitute. "Rich people earn interest," he said with a smirk. "Poor people pay it."

Throughout my early schooling I had learned about the old English Fuedal system. Back then you were either born into the upper class or you weren't, and if not there was no chance of escaping your class. English Nobility owned land by birthright and the rest of the population had to work in servitude for the right to stay on the land. As the Brits began to expand and colonize the world, they brought with them their sense of ownership and superiority. One of their first stomping grounds was Ireland where they systematically stripped the Irish farmers of their land and turned them into tenants. If the farmers could afford the rents then the English Nobility would raise the price. The U.S. suffered similar English oppression for quite some time but finally managed to shake the monkey off their back on July 4th 1776.

The United States has approximately 44 million Irish descendants. The Gangs of New York is a great film that describes the influx of the Irish to New York as they sought to escape British exploitation. In 1845 a profound event took place that changed Irish history forever. This was known as the Great Famine and it took the country by surprise, but it technically wasn't one.

A true famine is when a country's main food supply is interrupted, much like what is happening today in third world countries as the price of rice jumps through the roof. After the English had taken full control of Ireland they exported all of the Irish agricultural products for English consumption, except one. Back then the British considered potatoes unfit for consumption. To them it was pig food, so they let the Irish have at it. Potatoes weren't the main food source for the Irish, it was the only food the British wouldn't rob from them. When a fungus broke out in the potato crops in the Fall of 1845 it spread like wildfire throughout the entire country destroying the only remaining food source for 9 million people.

Today the population of Ireland is just shy of 4 Million people. Between 1845 and 1849 the population of Ireland fell by about six million people. The Brits stood by and watched an entire country starve to death. Those that chose to flee the country risked everything aboard the "Coffin Ships" bound for Ellis Island. Most of these ships either sank or suffered outbreaks of the Plague. The surviving immigrants were met with less than a warm welcome on the streets of New York.

About fifty years later the remaining Irish people staged a few bloody uprisings against their oppressors. The majority of the country was reclaimed as the Republic of Ireland except for six counties in the north. This became known as Northern Ireland where the word terrorism first became part of the mainstream media lexicon. Without going into great detail this struggle has continued for over a century, tough thankfully in recent years it has become non-violent. A famous U2 song called Bloody Sunday refers to a brutal attack on Northern Irish Catholics by the British soldiers during a civil rights procession in 1972 killing 13 people. Powerful movies such as Michael Collins and In the Name of the Father describe some of the struggles that have plagued the region for so many years.

My point with this digression into history is that there will always be oppressors and the oppressed. Like many young people I had assumed that feudal and class systems were a thing of the past. However, the more I studied finance the more I realized that the class system hasn't gone anywhere, it has only become more complex and oppressive, yet it is still centered around one main theme - ownership.

The great thing about this country is that unlike many other countries, with the right education (either academic or real world), daring, luck, and calculated risk, you can actually break free from your class and move up in the world. Back in 19th Century Ireland if you were a tenant farmer paying rent to the English Nobility, you were going nowhere fast.

Today I look around and see people unwittingly signing up for similar servitude. The modern American culture is based on debt and over-consumption. The desire to please Mr. and Mrs. Jones is ubiquitous, and much like the fungus that once spread though Irish potato crops, it is robbing the American public of its last resort to eat - savings.

The average American Jane and John Doe are completely financially illiterate. They treat credit like it was money in the bank and measure their ability to purchase big ticket items on the size of the lowest possible monthly payment, rather than the ultimate long term cost. The American Dream of home ownership is becoming a nightmare as countless "homeowners" realize just how badly they were screwed by the "nice Realtor they met at the cocktail party".

The fact that your average Joe is clueless about personal finance is no accident - it is that way by design. The controlling upper class - the people that actually own everything - are on an endless mission to further entrench their status and create a deeper divide between the classes. The more financial illiteracy, the more secure they become.

Many people are familiar with the works of Sigmund Freud, the famous Austrian father of psychiatry. His work had massive influence in the world of mental health though many, if not most of his theories have been debunked. His not-so-famous, yet much more influential nephew was a man by the name of Edward Bernays. The Bernays family came to the United States in 1892. Edward graduated from Cornell University in 1912 and made his fortune off the backs of the working man, and has had a direct hand in how we feel about ourselves today.

What he saw in the people of the United States was a large population of people he could influence and take advantage of. He recognized that people are ultimately selfish and discovered that he could manipulate that selfishness for profit. He made millions of dollars consulting American corporations how to extract the savings from the American working class.

Bernays called his method of social persuasion of the masses "engineered consent" and posed this question in his book: "If we understand the mechanism and motives of the group mind, is it not possible to control and regiment the masses according to our will without their knowing about it? The recent practice of propaganda proved that it is possible, at least up to a certain point and within certain limits."

The propaganda he refers to is that used by Adolf Hitler to convince an entire class of otherwise upstanding citizens that genocide was an acceptable endeavor. In Hitler's book Mein Kampf he wrote about what he liked to refer to as The Big Lie. He said if you repeat the Big Lie enough times they will soon believe it - much like The Big Lie spewed by the National Association of Realtors that property values always go up. They don't.

Back then working Americans did not purchase consumer goods. They bought only the essentials and saved their money diligently. Bernays discovered methods of marketing that would appeal to their sense of "Self" and convince them to purchase goods that would at least make them appear to be above the working class status. Bernays personally midwifed Mr. and Mrs. Jones. His techniques worked brilliantly bringing him huge consulting fees from corporations looking to pillage the working man's savings accounts.

Bernays was the first to conceive the notion of product placement. He paid fees to directors of early motion pictures to place his clients' brand name products in their films. He came up with department store fashion shows, and hired spokes models to train working class women how to dress in designer clothes. He is also single-handedly responsible for every woman smoker in the US.

Prior to his time it was taboo for women to smoke cigarettes. It was considered a male symbol of independence and power. Cigarette companies realized they were losing a huge segment of their potential market and so tracked down Bernays to secure his services.

In order to pull off this feat and rake in massive fees he had to come up with something clever. He convinced a group of upper class socialite women to stage a protest against this male "oppression" and monopolization of the cigarette. Before the annual New York Easter parade he coached them to march in the parade and upon his signal reach under their dresses, pull a cigarette from their garters and light it up in public defiance against their male counterparts. He also tipped off the media anonymously, telling them he heard of a planned demonstration of defiance against men by upper class feminists. The press ate it up like paparazzi at a Britney Spears court appearance and plastered the images of the smoking Divas in every newsstand across the nation. It took about ten years for the market share of smokers to reach 50% women. American lung surgeons are grateful.

The above examples are meant to be illustrative of how the American Public have been treated like pawns by the elite ownership class. These people know we want to feel better about ourselves and have convinced us that we can, if only we consume.

I always wondered why the tallest buildings in every city I have ever visited are banks. What do these people do? They don't actually add anything to society. They don't produce food or widgets. They simply transfer wealth from one class to another. The more I studied finance the more I realized it was simply the mother of all multi-level-marketing pyramid schemes. The central bank creates wealth out of thin air, or more accurately, robs it from the lower classes through inflation and then charges people down the line in order to use it. Talk about adding insult to injury. It lends it to other banks at interest who then lend it to consumers at an even greater interest rate.

To me interest and tax are the same thing - an unrecoverable expense with no return. There is one caveat to this however. A citizen in good standing can't avoid taxes - but he can avoid interest.

Banks do serve a crucial service in an advanced economy. They provide a vehicle for savings that can be utilized for capital growth. It makes sense for a business to borrow money for expansion, only if the return on the borrowed capital is greater than the interest paid. This is borrowing for the purpose of production which is imperative for any growing economy. What this country has witnessed over recent decades however, is a massive spike in borrowing for consumption which is a sign of a weakening economy. If there are no savings then where do the entrepreneurs go for business capital?

The manic pursuit of the American Dream has ultimately fractured this economy. Millions of people signed 30-50 year debt contracts with the expectation that real estate would continue to appreciate ad infinitum, liberating them from their factory and office jobs. This was an obvious recipe for disaster to anyone who made the effort to do a little analysis. You don't become wealthy by strangling yourself in debt. How can an entire class of people rise in status all at once while adding no value to the economy? On whose backs are they riding?

Statistics say that American home ownership is at an all time high as if that is something to cheer about. What the stats leave out though is who actually owns these homes. To own something means you have inherited it or paid for it outright. Having a 5%-10% stake in something doesn't make you a owner, it makes you a speculator. And when it costs 6% in fees to the shady Realtors to unload it, one is hardly left with a pot to piss in when all is said and done. And that's assuming the property value didn't drop 20% during the the time it was "owned".

The modern God of investing, Warren Buffet, says it best: "The two greatest threats to a man's wealth are liquor and leverage." Betting a 100% of your wealth on 10% of a fluctuating asset is risky business, especially when meeting your Realtor over drinks! Another gem to drop from his mouth goes something like this: "Its when the tide goes out we can see who's been swimming naked."

Warren Buffet rose to the top seat on the Capitalism Totem Pole by using a contrarian philosophy. When the masses are rushing into a market he slips out quietly, and when they stampede out, he swoops back in and scoops up their assets at rock bottom prices. He recently dethroned Bill Gates as the wealthiest man alive by following his own gut and making sound and sensible investments. When asked about his investment strategies he once used the example of his investment in Gillette. He figured 3 Billion people shave every day and it just makes sense to own shares in the company.

One of my favorite books is by Don Miguel Ruiz called The Four Agreements. His book is a guide to the Toltec philosophy of the ancient Aztec culture of southern Mexico. Throughout the Catholic "Crusades" of South and Central America, Ruiz's ancestors kept the philosophy secret until recent years when Don Miguel decided to share it with the world.

His book talks about the "dream" of the planet and how it misleads us. We have all been domesticated to work toward the same dream. In order to break free from the herd we must create our own dream and strive for it independently. You cannot achieve your dream by listening to the noise of other people and being swayed by their partially informed opinions. "When you are immune to the opinions and actions of others, you won't be the victim of needless suffering," he teaches. The book is an excellent read and I highly recommend it.

It became clear to me that something was terribly wrong with the American Dream when I read a story of an undocumented strawberry picker, whose pretax income was $15,000 per year. He actually received a mortgage for a $750,000 house. What bank would do such a thing? Was the manager smoking some homegrown or what?

Upon further investigation I discovered that the bank managers weren't stoned at all, but giddy from excitement about the scam they were pulling off with the help of their pals on Wall Street. See they knew all along that Pablo the strawberry picker couldn't pay them back. They didn't care. They had already passed off the mortgage to the Wall Street investment bankers, who then packaged and dressed it up with similar loans - smeared some lipstick on the pig if you will - and sold them off to unsuspecting saps in far away countries. Our entire economic system was behaving like a strung out frat boy who knows he can't pay his credit card bills, and so maxes each card out as much as possible before anyone notices.

To get a grasp of this financial system, picture for a moment Pablo the strawberry picker hunched over in a field, hard at work. On his back rests a large inverted pyramid of debt. As long as he keeps picking the strawberries and making his interest-only-adjustable-mortgage-payment, then the portfolio his loan was sold into keeps performing and retaining value. This portfolio, filled with a thousand similar strawberry-picker type mortgages, is then put up as collateral to take out let's say a billion dollar loan from an even bigger bank, in order to lend or invest again. The middlemen rake in the huge fees and enjoy strawberry cheesecake after their steak dinners.

The ultimate purchasers of this debt were foreign investors who had no idea the portfolios were riddled with bad debt - loans made to marginally employed people who were coached to lie on their mortgage applications by the shady loan officers.

One would expect some oversight in the most "Advanced Capitalist Economy in the World." But alas the political landscape in this country has set the stage for what is yet to come. The fox was left to watch the chickens. The companies that had a hand in rating these "Structured Investment Vehicles" otherwise know as packaged bunk mortgages, had their other hand in the cookie jar. The relationship between these companies that had been enabled by the deregulation of the banking system is nothing short of corruption. And who was responsible for this deregulation? None other than Sen. Phil Gramm who is currently John McCain's economic adviser and the intended candidate for Treasury Secretary if the country votes Republican.

The story gets even more interesting. You would think the alchemists on Wall Street would pay attention to which batch of Kool-Aid they had laced with arsenic. But no, they were so busy raking in the mega bucks they lost track of it all and bought up heaps of this toxic debt themselves. So in 2006 when Pablo's back finally broke under the pyramid of debt, a chain reaction ensued that is nothing short of awe inspiring.

Pablo stopped robbing Peter to pay Paul, probably because Peter was broke too. His mortgage went into default along with the mortgages of his strawberry picking compadres. The portfolio these loans were packaged in stopped performing and became almost worthless in a very short period. The banks that had loaned out a billion dollars on these portfolios demanded instant repayment which triggered a domino effect in the banking system that is still playing out while I write this.

In a very short time one trillion dollars worth of wealth evaporated from the credit and housing markets. Somehow I can picture Dr. Evil having to put both pinkies to his mouth while saying that number. By 2008 the trillions had mated and multiplied.

The investors that had been shoveling cash into this Ponzi scheme pulled out and suddenly discovered financial prudence. The free money train was finally derailed putting a stop to the $550,000 for a condo-conversion, no-money-down loans. Suddenly strawberry pickers and part time bartenders could no longer apply for loans by clicking banner ads. House flippers and condo converters were left holding the bag wondering if they'd missed a crucial episode of Flip This House. Sign spinners kept spinning for a while, but the moths stopped coming - the flame had gone out.

When I drive to work in Downtown San Diego I look at all the cranes desperately trying to finish their projects ahead of the others so they can be the first to hit the market before the bottom falls out completely, if it hasn't already. I wonder how long it will be before we start calling it "UpsideDowntown San Diego." Lock boxes hang like clusters of fruit on the side gates of once sold-out condo buildings. Distressed sellers jockey for the attention of the occasional buyer who is out surveying the carnage, more for entertainment than anything else.

Yes there is a dark cloud looming over San Diego. I think about those people who moved from the beach to the suburbs 3 years ago in order to jump onto the property ladder. They competed with 9 other buyers to land a two bedroom track home for $600,000 out in the middle of nowhere. About now their adjustable mortgage has completely reset, their neighbors have been ousted by the sheriff, and their painfully long commute to work has just gone up 25% in gas expense - that is if they are lucky enough to be employed outside the mortgage business. Back then even my barber had traded in the scissors for a mortgage calculator. How long can this continue?

Rising gas prices are not the result of evil oil men with dark sunglasses. Oil is a global commodity and we must compete for it like everyone else in the world. Contrary to popular opinion, the world revolves around its axis, not the United States. Gas prices are going up because the dollar is falling off a cliff. The Central Bank has kicked the printing press into high gear creating more fictional wealth out of nothing - which robs working people of purchasing power through inflation - all so they can try to keep the credit orgy going, until at least the sun comes up. The Fed can even come up with heaps of money to rescue the crooked bankers that caused this mess in the first place. That's right - taxpayer bailouts for Investment Banks such as Bear Stearns who drank all the toxic Kool-Aid they could stomach. Socialism still thrives after all - but you have to be rich to enjoy it.

Of course it is imperative to restore the integrity of the credit markets with these bailouts, but why must the bill be delivered to John and Jane Doe? Why can't these bankers offer up some of their obscene bonuses they earned while changing the rules of the game? Because as always, the upper class elites are looking out for each other, not the average person.

So what are average people to do? How do we play this game if it is rigged. The answer is simple - don't play by their rules.

Using credit to pretend to be well off is insanity. Historically Real Estate hasn't appreciated much more than the normal rate of inflation. Whenever there is a spike in demand for Real Estate the builders rush in and supply more inventory, putting downward pressure on prices. Sure we are not making anymore land, but there is an enormous amount of land in the US that has yet to be developed - and we can always build up.

There was a brief period, lets say between 2002 and 2006, when owning property was a profitable venture - though for many it was by sheer accident. Prices shot up as mega investors throughout the world injected large amounts of cash into the US credit market like strung out heroin junkies on the verge of overdose. Suddenly even the trash collector was qualifying for a 3 bedroom house down the block.

People flocked to the Church of Donald Trump Learning Annex seminars in order to learn how to leverage themselves into the American Dream. Rich Dad had us thinking in terms of multiple streams of income so that we wouldn't end up like Poor Dad. If you were one of the lucky ones that timed the market, got out at the top and are renting through this collapse then you are one of the few beneficiaries of this economic disaster - which will likely spill more historian's ink than the Great Depression.

Today, in San Diego, renting is the only thing that makes any sense for the average person, and day by day as property values continue to plummet this realization is coming home to roost for all the speculators of yesteryear. It has been a liberating experience to watch as these people - who were once smug in their decision to take out massive mortgages, and took delight in ridiculing people like me for our trepidation - finally come to terms with their situation.

Rent and interest are the same thing. If you haven't settled down with a family, or don't intend to stay put for at least 10 years then purchasing a home makes no sense. Rents are at about 3% of property values. Mortgage rates are at about 6%. Renters are enjoying a 50% discount on their lifestyles. The remaining savings enjoyed by renters can be invested in conservative growth funds and not be exposed to the risk of swinging house prices.

Until sanity returns to the Real Estate market I will stay on the sidelines and continue to enjoy my coffee on the beach. It's a simple life - but right now I bet there's an army of strapped speculators that would give anything to trade my problems with theirs. In life there is no free lunch - sooner or later the piper must get paid.


Till next time ...