Some "experts" are saying that this will peak next year. I guess that depends on how one defines "peak" in this context.
Allow me to fold my "Oil imports are in terminal decline" argument in with Real Estate is not done getting trashed just yet. While Oil imports are down 10.4% this year from 2008, imports during the most recent 4 week period are down 19.3% when compared to the same 4 week period from last year.
Maybe that is a one off, an outlier, a sigma 6 event... or maybe it isn't. In fact, the last 4 weeks Oil imports have been lower than I posted would be the worst case for 2010... that is, if the rate of decline remained unchanged. If total petroleum supplied to the US economy does in fact fall by 30%+ from 2006 to 2014, said supply constraint would bite deeply into gasoline supplies necessary for commuting - something that has not happened yet (while total petroleum supplies have fallen over 10% peak-to-date, the effects have been felt almost entirely in distillate fuels for commercial applications such as trucking, air travel, and industrial consumption). In other words, both residential AND commercial properties at either end of the commuting distribution model would go to ZERO value. After all, what is the value of a property you can't get to?
It then follows that a significant write down on the mortgages on these properties is in the offing, over and above the mainstream consensus of write downs coming due to the slow pace of loss recognition. This also means that the need for ANY new construction, as well as the need for a single new car, is ZERO - which does not bode well for "job growth", now does it?
This is where it gets tricky. The above described scenario is very deflationary. Maybe. Yes, the contraction in debts written off is certainly deflationary - but does the money supply contract faster than the GDP contraction? If not, that would be inflationary, wouldn't it? See why you can't get a straight answer from anybody on this issue? And I am giving you the simple version.
In the 1930's people did not have enough money for food while farmers were dumping milk, slaughtering pigs, and sowing grain into the dirt in an effort to force prices high enough so that they could farm profitably. This was due to the extreme contraction in credit and money supply. This is no exaggeration.
While "Tech" has diversified the U.S. economy somewhat, the chant "Housing-Autos, Housing Autos, Housing Autos" still plays in the collective head our economy. We built our economic system based on the expansion of debt to fund these 2 industries, industries that will not exist as we knew them in an era of Oil supply contraction. So what are the banks going to lend against? Will we once again wind up with folks without enough money to buy food while farmers cannot earn enough to keep farming? Wait! Isn't that what is happening RIGHT NOW?
Its all about Oil imports. Either they continue to decline, or they do not.
9 comments:
Fantastic analysis. That is the reason I am so concerned about the farm land being a necessary investment right now. My opinion is that the people who are advising buying farm land are only half right. You will need to buy land with cash, not credit AND have enough cash/gold to pay for taxes for a long time in the future or you will lose the land either to the bank or the government. I happen to believe that we are looking at a hugely deflationary environment in the future. In that case the ability to sell farm produce to fund local and state taxes is not guaranteed.
Lets see if I can illustrate this dillema:
1. You buy farm land now at a high current price. You may need a loan or not but the taxes are assessed on the currently high cost basis.
2. Fuel crisis comes and now everyone is out of a job and they are sneaking over to your farm on nightly basis stealing everything that is not nailed down including potatoes out of the ground.
3. You can hire as many people as you want but you don't have money to pay them except in food.
4. No one has any money to purchase your produce. They are hungry but you are not able to help everyone.
5. The government needs cash so they go after the people who are farming the land since they know where you are and they know you will give them your last dollar because you are desperate to keep the land. And if you don't pay they will give it someone who will pay the back taxes.
Or you keep your cash in your pocket and wait. When everyone is out of the job and the farmers lose their land you take it over for back taxes but on a lower cost basis so your tax burden will not be so high.
What do you think folks? Where am I wrong?
Best regards,
Chuck H.
Chuck:
I am not so dire as you. Maybe I should be.
I have traveled extensively in the third world of South and Central America. For the most part, poor folks grow their OWN food, and work as merchants, laborers, cooks, bakers, childcare, etc... for hard cash.
Much as colonial America worked.
Also, although it is my contention that Oil imports are in terminal decline, I am not SURE of anything.
The doomers were worried about fuel and fertilizer supply to the farms. At first I thought they made some sense, but after noodling it for a while I came to the conclusion that that would not happen if there was a single barrel of Oil left.
Even food transportation is small change in energy consumption.
The issue will be economic and political - at least in my opinion.
Given all of that, I still think that mega cities absolutely, positively are the worst place to settle for the next 20 or 30 years. I will flesh that out in a future post.
If you believe that society will somewhat collapse because of the fuel crisis then why would you think for a moment that your fiat dollars with nothing backing it besides trillions of debt will be worth a damn?? I find it comical that people will be hiding in dollars right now waitin for that deflationary crash.... Guys it has already happened! Were you quick enough to accumulate quality assets for half off?? The markets is telling you that global investors are losing confidence in the green back and fiat currency is nothing more than a confidence game. Have you looked at gold lately?? I could be wrong but thinking we'll have one last hoorah to buy vital assets on the cheap with our green backs sounds too ridiculous.
The issue of food security will be a personel issue as it has been for a long time. With 14% struggling to put food on the table in 2008, I would say thats the start of that very personel and looming disaster, on a larger scale. Food pantries are overwelmed and unable to keep up. No family farms to fall back on. Food prices spiking. I.E. turkeys last year went for $.39-$.59 a pound, this year the average is $.89-$.1.49 per pd. We may eat good this year, many won't. Next year who knows?
Peace
Anon@ 6:40:
I never said I was sure of anything. I write what I believe the data shows, and that does not always work out as a great forecasting tool.
In the final analysis it is your decision that control the quality of your life.
And did I do everything perfectly correct? NAFC. In every transaction, their are 2 parties, and only one of them is "correct". It is hard to be perfect when every decision has a 50/50 probability built in - especially when you make many decisions.
Good luck.
Hmm. Well to anon who thinks that I am hiding in cash. I am not. I am hiding in PM's. And I got a frigging bunch of it too. Hope you do too. I am just not ready to go into land just yet. I will wait until it's cheap before I get loaded up on that. I believe in land and I believe in people who work on the land but I don't believe I will make a good farmer myself. What I would like is to buy a large farm and lease it to a farmer who will run it for me. A boy can dream.
I actually have a 1.5 acre lot on which I can grow enough food to meet most of my family's needs so if I am wrong about land becoming cheaper in the future I will be fine no matter what.
Toodles,
Chuck H.
Yea, I read that EIA report last week and thought my eyes were deceiving me. It is hard to make any concrete conclusions from one anomolous report, but it certainly doesnt look good. We live in extremistan as Teleb says.
what is the value of a property you can't get to? Well, it still has value as a home, as shelter surely? I cant imagine the value to be Zero, at least not until imports get to zero. Mind you, I just got a flashback of the pages of unsold properties in detroit: http://news.yahoo.com/s/nm/20091025/us_nm/us_usa_housing_detroit
We are in strange, transitional times. I think it is possible to get an idea where things will eventually end up (much higher oil prices, lower dollar values, very high unemployment, lower house and non-essential asset values but higher ag. land values, higher food prices) but there will be some people still with jobs and undiminished buying power at the same time as some desperate, lost-everything families with less than nothing. How they interact will determine interim values for everything, and you can have inflation AND deflation at the same time; they're not mutually exclusive. Add gov't interference and 'help', and bankers playing games with the markets, and you'd be are a brave man if you bet on values in the short term.
Meanwhile in Europe some big companies (incl. American co's) are buying farmland in Eastern Europe, and China is buying farmland in Africa, so THEY think food production is worth investing in!
I think its great that China and whoever are investing in Farm Land now but they probably have plenty of cash for it right now and can make more if they need to. I need to be extra careful and would rather wait until credit is pretty much dried up before making my purchases. I will be purchasing with gold and these bozo's are purchasing with borrowed money so it is not fair for me to compete with them right now. Because they have the advantage of other people money while I am paying with my accumulated wealth. I better wait until other people are not lending money anymore and the people who borrowed the money are broke and losing their land. Then I will be buying and I can wait as long as it takes because I have everything I need right now. I am a happy guy! I hope you guys are also happy. Enjoy the show.
Best regards,
Chuck H.
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