海角大神

Cash will get more valuable

As inflation subsides, so will prices, increasing the value of the dollar

Cash is still king.

Cash is king because non-cash is a commoner and a loser鈥�it鈥檚 losing its value. An article in yesterday鈥檚 Financial Times, for example, tells that:

鈥�US inflation expectations at lowest point in year.鈥�

In other words, forget inflation. Forget price increases. It鈥檚 cash鈥�cash鈥�cash.

Cash on the barrel鈥�cash in hand鈥�cash and carry. You got cash? You da king!

People expect cash to be more valuable. And if we鈥檙e right鈥�it will be more valuable.

Stocks, for example, fell Wednesday. The Dow dropped 179 points.

And gold. It lost $34.

Another article in yesterday鈥檚 financial press told us that 鈥渋t鈥檚 a great real estate market鈥�if you鈥檙e rich.鈥�

Why? Because the rich have cash. They鈥檙e the kings, queens and jokers too. And now they can use cash to buy other assets at a discount. They get more for their money. When inflation subsides so do prices. And nowhere have they ebbed more than in the real estate market.

A friend sent us an investment opportunity鈥�a 12-unit apartment building in Florida, a block from the beach. What does something like that go for? Well, in the glory days of the bubble in real estate, it might have sold for $3 million. Today, it鈥檚 available for $750,000 鈥� with owner financing at 5%.

Let鈥檚 see鈥�if you can get $800 per unit per month鈥�whoa鈥�this could be a good deal. Because you can probably cover the cost of operating and maintenance and still get better than a 5% yield. If that is true, over time, you get the building for free.

But the problem with real estate is that every deal is different. Every toilet backs up in its own unique way鈥�and every roof leaks in a different spot. If you don鈥檛 know what you鈥檙e doing鈥�don鈥檛 do your homework鈥�and can鈥檛 manage a property, including collecting the rent from people who don鈥檛 have much money, you probably won鈥檛 do very well.

Here at The Daily Reckoning we prefer the public markets, where the tenants don鈥檛 give you hard-luck stories and the paint doesn鈥檛 peel. But what we see in the public markets is a lot worse than what we see in the real estate market. Where can you get a yield of 5% outside of housing?

All over the investment world 鈥� except for US government debt 鈥� yields will probably go up. Cash in king. But cash is probably going to become even more powerful. In real estate, for example, the bad news is not yet fully priced-in. People assume that prices will hit a bottom and then begin going back up again. They figure they just need to buy at the right time and all will be well. But as we keep pointing out, markets are more like cats than like dogs. They play with their prey鈥�killing them slowly while having some fun at it.

Real estate has already been whacked hard. It鈥檚 down 30% to 50% depending on where you look. But is that all there is? Is that the end of it? We don鈥檛 think so. The trends that worked so happily together to boost real estate to bubble levels have now become surly and uncooperative.

• Household income is going down, for example. It is almost back to 1990 levels, erasing 20 years of gains. Who wants to 鈥榤ove up鈥� the real estate ladder when his income is going down?

• And the rate of new household formation is going down. Instead of setting up new households of their own, the young鈥�and not so young鈥�are moving back in with mom and dad. The unemployment rate for young people is 20% 鈥� near Great Depression levels.

• Population pressure is easing. The rate of immigration, for example, is also going down. There are reports of illegal immigrants returning home in such numbers that there are now more leaving than coming. Besides, with so few jobs opening up, who wants to go to all the trouble to sneak into the country?

• Most important, the Great Correction is far from over. We鈥檙e expecting a long period of stagnation, de-leveraging and depression. Prices don鈥檛 go up in a credit contraction. They go down. What we鈥檝e seen so far is probably just the beginning of a long trend that will probably take prices down another 50%.

But wait, we know what you鈥檙e thinking. At today鈥檚 levels, houses in America are not over-priced. They鈥檙e about in line with the very long term trend. They鈥檙e about where they should be. And at today鈥檚 ultra-low interest rates 鈥� mortgages are below 4% 鈥� housing is a good deal.

Maybe so. But Mr. Market doesn鈥檛 care. Just as he didn鈥檛 mind pushing up prices to dizzying heights he also doesn鈥檛 mind pushing them down to dreary lows. He鈥檚 an equal-opportunity deceiver. First, he made people think that housing always goes up. Now, he鈥檒l make them think that it always goes down. And when he鈥檚 finished, you鈥檒l be able to buy a house for about half today鈥檚 price.

Of course, then鈥�you won鈥檛 want to. Because you will have learned an important lesson that you can pass on to your children: 鈥楧on鈥檛 buy a house. Rent. It鈥檚 cheaper.鈥� Then, perhaps house prices will begin to rise again.

In the meantime鈥�and perhaps for a long time鈥�cash is king.

Regards,