Forecast

Real Estate. We are in the midst of an inflationary depression. On one side we have the ravages of debt. On the other, an uneasy coalition between the printing press and the psychology of a people.

The government will continue printing dollars to support the economy. Debt which pushed up asset values will now cause them to deflate as people pay down their debts instead of buying. The over-leveraged will continue to experience pain and their defaults will further damp asset values. The government prints dollars under different names but its key effort is to replace the personal spending that is now devoted to saving.

The rise of gold is unremarkable. Against copper, gold has risen about 40% since the beginning of 2007. Against oil, gold has risen 60%. Against stocks, of course gold is up 120%.

I'm not sure exactly how much gold has risen against "real estate," but with housing prices roughly down about 30% nationally, and gold up around 100%, we can all guess the relevant math.


Of course we are looking at values versus their peak, but that is exactly the point. The point in the past which we pick for measurement is arbitrary; we can only make decisions in the present. We are looking for the point at which we collectively hit our debt maxima, and we are guessing the point at which the government will target for suitable valuation.

Of course, this assumes that the government has any agency in the matter, which it does, but only indirectly.

My biggest mistake in the past 2 years has been trusting in the efficacy of printing dollar bills. It turns out this is an extremely blunt instrument. The government can no more guarantee asset values.

Our collective debt will hold down "real estate." But "real estate" values hold a reflexive power over broad swathes of the economy. The government will thus target a price level based on real estate values.

In this process, the government will anchor the values of all other goods. Tangible, fungible goods will attain a steady state value. Tangible but subjective/discernible goods, another. Subjective paper goods will suffer against common paper but against gold most of all. Gold, the most subjective of goods.

Regardless, under the best of scenarios, we will see "real estate" values depreciate by the scale of each buyer's dreams... assuming these dreams are rooted and leveraged in paper.

One way bets... Vallejo, CA

Amidst a financial crisis of the worst kind, let's put things in perspective. For at least a decade, my fiancee's grandfather, Grampa Moe, was convinced that the "bad times" were coming. He prepared for one scenario, a repeat of the Great Depression. This required land, a house, several watercraft, 30 pressure cookers and ample stockpiles of gold and silver. In light of recent events, this seems extraordinarily prescient. If he were alive today (he got tired and frustrated waiting so long for it to happen) he would tremendously enjoy his vindication and his transformation in his family's eyes from eccentric to genius.

But history will not repeat the past because we have in our employ Chairman Ben Bernanke, the foremost scholar on the Great Depression, and possibly the most creative, trenchant, and able authority to sit on the Reserve Board since Marriner S. Eccles presided over the New Deal.

Grampa Moe prepared for the crisis in broad strokes. But eight years into a recession which has now reached its crisis phase, it is time to make some refinements to his strategy.

The gold and silver he stockpiled has trebled in value. The pressure cookers are most likely rusted. And while the house has fallen in price, its value is unchanged. If five years from now when the crisis abates and life returns to some semblance of normality, the gold and silver will fall and the value of the home will rise again.

In this situation then it seems prudent to sell the metals now while they are extremely valuable, in the hopes that everything will eventually be okay. Under no circumstances could it possibly make sense to sell the home at its extremely distressed price, because after all this is Monterey, California.

In the Dust Bowl where did everyone go? California. California, the most fertile state in our nation, the epicenter of our innovation, is gift from God which appeared to its immigrants literally on a golden platter.

With that in mind lets turn our attention to the focus of this installment of "One way bets..." Vallejo, California.

Vallejo sits at the mouth of the Sacramento river, on the border of Napa County, in the North of San Francisco Bay. It is a 45 minute ferry ride to the Ferry Building in San Francisco, surely the most pleasant commute in the entire Bay Area. It is filled with charming Craftsman-era bungalows and is a short 10 minutes away from the new 300 million dollar cancer research facility at Turou University.

It is currently in the embroiled in the largest city bankruptcy in California history and is one of the largest casualties of the sub-prime collapse with thousands of foreclosures citywide. Houses are down in many cases 70% from their peak in early 2006. With all of the foreclosures, rental rates have gone through the roof as people struggle to find adequate housing. In this climate, it is easy to find a bungalow for a hundred thousand dollars which, at a 6% rate, require monthly payments of $600. With rents averaging $750-1000, this is a steal even if you assume the house sits vacant for a few months every now and then.

Prepare to kick yourself in 15, in 30 and again in 45 years if you miss this opportunity now.