Housing Prices Will Fall by 90% - Templeton - Stool Pigeons Wire Message Board

Not a bad discussion of inflation and deflation although Gary often goes off in the weeds on economic matters. I am curious to know what he has his doctorate in.

HOUSING PRICES WILL FALL BY 90% -- TEMPLETON
By "Scary Gary" North

John Templeton was one of the great investors of the
twentieth century. He began in 1937. He made billions of
dollars for his clients. He created a family of mutual
funds that consistently outperformed the stock market.
Then, at age 80, he sold his companies for $440 million.
That was in 1992.

He now does what very few extremely rich men ever do:
he is giving away his fortune, to the tune of $40 million a
year. The general rule is this: "Rich men know how to make
money. They don't know how to give it away." This
aphorism does not apply to Templeton.

In 1972, he created up the Templeton Prize for
Progress in Religion. He gives away a million dollars each
year to one winner. I have known two of them personally.
Based on their achievements, they both deserved the money,
and they both proved this by giving the award money away.

Templeton was the perfect investor for his era, which
began in the Great Depression. He is very smart. He
graduated at the top of his class at Yale University and
won a Rhodes Scholarship to Oxford. He looked around him
in 1937, and he saw enormous pessimism. He bought low, and
later sold high. Here's how, according to his Web site:

When war began in Europe in 1939, he borrowed
money to buy 100 shares in each of 104 companies
selling at $1 a share or less, including 34
companies that were in bankruptcy. Only four
turned out to be worthless, and he turned large
profits on the others after holding each for an
average four years.

He continued to do this. Here were the results:

Templeton launched his flagship fund, Templeton
Growth, Ltd. in 1954. Each $100,000 invested then
with distribution reinvested grew to total $55
million in 1999.

http://www.templeton...leton/index.asp

A SILVER LINING IS MOSTLY DARK CLOUD

He is now a bear. To say that he is a bear barely
does him justice. He has looked at the economic
fundamentals, and he sees a bad moon rising.

The economic problem of problems is debt. Americans,
both as individuals and as taxpayers, are deep in debt.
America is addicted to debt. Americans are betting their
economic futures on the productivity of consumer debt.
This is an unwise bet, says Templeton.

In a recent interview by Robert J. Flaherty of
Equities magazine, Templeton went into detail about what he
sees for the American economy in general and the two
markets that have attracted most Americans' investment
capital: stocks and real estate. Most Americans believe
that the stock market will always go up. They also believe
that real estate is a sure thing. Both assumptions are
wrong, Templeton says.

As you read his opinions, bear in mind that he made
it, and made it big, by riding the stock market boom from
close to the bottom to 1992. He missed the 1995-2000
bubble, but he also missed the bear market that followed.

He was interviewed in 1999 and 2000 by the same
publication, and both times he was bearish. If readers
then had heeded his warning, they sold out close to the
top. But, of course, most people didn't agree, and could
not all have gotten out at the top if they had agreed.

He is still convinced that there is great downside
risk to both the American stock market and the housing
market. I agree with him. But not many other investors or
investment analysts do agree with him. Here is his take on
the stock market.

"The stock market is broken, and it will take
some time, maybe years, to repair it. Mass
media, especially TV today is so short-term that
few in its audience grasp the lasting damage and
corrective impact which will continue to linger
from the greatest financial crash in world
history."

Linger over this phrase: "the greatest financial crash
in world history."

Here is a man who made it big personally and who made
tons of money for those who heeded his advice. He is very
rich. He is not driven by money, which is why he is giving
it away. If he were to keep his opinions to himself and
concentrate on public relations, how could he lose? "Rich
man gives away a fortune!" That's always good public
relations. He would go down in history as a giant.

But here he is, saying things like this, predicting
"the greatest financial crash in world history," as if he
were some screwball newsletter writer looking to sell a
subscription.

If he did not firmly believe his forecast, why would
he go public? Why not just short the stock market
privately and be done with it? I look at the money he
could make by keeping quiet and shorting the market, and I
conclude: "This guy is serious."

"It would be unlikely that the bear market is
over when the American stock market is only down
about 30%, when in the biggest boom ever, it had
been up 10 times over where it had been years
earlier. . . . Following such a large increase, a
30% decrease is small."

WHEN YOUR CASTLE IS HEAVILY MORTGAGED

If the stock market is headed lower, how will real
estate not follow suit? It didn't in 2000-2002, but this
was a mild recession, not "the greatest financial crash in
world history." Templeton thinks that large-scale
bankruptcies lie ahead for home owners, meaning mortgage-
paying debtors.

"Every previous major bear market has been
accompanied by a bear market in home prices. . .
This time, home prices have gone up 20%, and this
represents a very dangerous situation. When home
prices do start down, they will fall remarkably
far. In Japan, home prices are down to less than
half what they were at the stock market peak."

The example of Japan seems applicable. The peak came
in December, 1989. The Nikkei approached 40,000. Real
estate prices, fueled by easy credit and a highly
concentrated urban population, soared to astronomical
heights. Example: membership at a top-name Tokyo golf
course cost over a million dollars, and each 18-hole round
had a course fee of $4,000. This was why Japanese golfers
bought up a golf course in Hawaii -- where prices were high
by mainland standards -- and would charter a 747 for a
weekend.

But it was a bubble, and it did not last. Liquidity
disappeared in the 1990's. People who had thought they
were rich found themselves saddled with heavy mortgage
payments. Their equity disappeared. They became net
debtors.

The Japanese are heavy savers. Americans are not.
The equity cushion in Americans' houses, at least those
Americans under age 55, is minimal. I agree with
Templeton: "A home price decline of as little as 20% would
put a lot of people in bankruptcy."

Templeton's bugaboo is debt. He told Flaherty the
following:

"Emphasize in your magazine how big the debt is.
. . . The total debt of America is now $31
trillion. That is three times the GNP of the
U.S. That is unprecedented in a major nation. No
nation has ever had such a big debt as America
has, and it's bigger than it was at the peak of
the stock market boom."

Bigger, indeed. The U.S. government is running an
annual deficit now approaching $500 billion. The mild
economic recovery should bring in increased revenues in
fiscal 2004, but Congress has just passed a Medicare law
that is going to cost -- minimum -- an extra $40 billion a
year, permanently, assuming that seniors will not sign up
in numbers beyond what the statisticians have assumed.
Always in the past, the statisticians have underestimated
the costs of federal welfare programs. Like B'rer Rabbit
dealing with the tar baby, the government's first punch is
never its last. Meanwhile, the economic cost of our
occupation of Iraq just keep getting higher, an estimated
$2 billion a week. Templeton continies:

"Think of the dangers involved. Almost everyone
has a home mortgage, and some are 89% of the
value of the home (and yes, some are more). If
home prices start down, there will be
bankruptcies, and in bankruptcy, houses are sold
at lower prices, pushing home prices down
further."

How far down will this go? At this point, Templeton
achieves what I did not expect any self-made multi-
millionaire to do: he exceeds my pessimism.

"After home prices go down to one-tenth of the
highest price homeowners paid, then buy."

That means a loss of 90%. He thinks that the U.S.
housing market is worse than the NASDAQ in March, 2000.

In case anyone wonders, I rent. But I'm not waiting
to buy a home at ten cents on the dollar. I'd settle for
60 cents.

IS TEMPLETON A RELIC OF ANOTHER ERA?

Templeton made it, and made it bigger than most, in an
era of inflation, debt, and easy mortgage money. He knew
how to make the system work for himself and his clients,
and not just the American system. He is best known as the
first major fund manager to go offshore, beginning in 1939,
after World War II had broken out.

It may be that he is warning people that they can do
what our parents did, but not at today's prices and level
of debt. He may be saying -- I think he is saying -- that
what goes up must always come down. To do what he did, you
must start at the bottom. He got into stocks in 1937, but
he started his first fund in 1954, which was basically the
beginning of the stock market boom, which peaked in 2000.
He rode it all the way up, and then he warned people that
the game was over -- right at the top.

What he is saying, loud and clear, is that there will
be other smart men who will do as he did. But to achieve
this, the markets must get back to where they were when he
was starting out.

Getting from here to there means that the dreams of my
generation and those behind me will be smashed on the
shoals of de-leveraging, i.e., bankruptcy. Debt and
monetary inflation created the present investment universe.
To argue that the price of capital will fall back to those
earlier levels is to argue that there are limits to
monetary inflation.

Here is where I part company with Templeton. I
believe that civil governments can do only a few things
efficiently, but debasing the currency is one of the things
they do well, after centuries of practice. In the social
division of labor, government has a monopoly on currency
debasement. The Byzantine Empire kept its gold coins
stable in gold content for over a millennium, 325 to 1453,
with only one minor devaluation after 800 years. No
government in history has ever matched that record, or
wanted to.

Of course, if we get into what Greenspan calls
"cascading cross-defaults," we could see Templeton's vision
come true in a matter of weeks. In a system of fractional
reserve banking, such a scenario is plausible. That's why
you should have currency, including $1,000 in junk coins
(not silver), in reserve. But this probably won't help you
much in a true lock-up of the banking system. The collapse
of the division of labor will put you at too much risk. To
bet on this scenario, you should be in the country with
food in reserve. You should, in short, live as I do. But
few people will or can.

If you are going to pick a scenario to live with --
and you must -- then pick one that says that the central
banks of this world can keep the digital printing presses
going, and will. They can make credit available, and will.

This means that future Templetons will sell their
companies at age 80 for $4 billion or $40 billion or $400
billion. It means that monopoly money will depreciate,
just as it has. The dollar will unofficially go bust in
order to keep voters from officially going bust.

Eventually, though, there will be a day of reckoning.
Ludwig von Mises predicted this back when Templeton was
just starting out. There will be either a massive
depression after the central bank ceases to inflate
(unlikely), or else what he called the crack-up boom, where
mass inflation destroys the division of labor economy by
creating monetary chaos and therefore bad economic
information.

THE RACE TO INFLATE

We now learn that the bureaucrats in Europe are
worrying about the appreciation of the euro. The dollar is
falling, as I have predicted repeatedly. It is falling so
rapidly that the Eurocrats are worried about the rising
price of European goods for America, aka The Mouth.

What to do? According to Andrew Evans-Pritchard,
Bill Clinton's thorn in the flesh, the Eurocrats are now
talking about the age-old favorite policy, which never
works for long, currency controls.

The European Commission is examining the legal
basis for 1970s-style exchange controls to stop
the euro surging to destructive levels.

A team working for Pedro Solbes, economics
commissioner, claims Brussels may lawfully impose
"quantitative restrictions" on capital inflows,
clearing the way for a crisis response if the
dollar continues to fall.

The document, drafted last month on the orders of
Mr Solbes's director-general, Klaus Regling,
concludes: "Should extremely disturbing capital
movements endanger the operation of economic and
monetary union, Article 59 EC provides for the
possibility to adopt restrictive measures for a
period not exceeding six months."

In short, bureaucrats never learn. The Bible has a
choice phrase for the inability of boneheads to learn from
experience.

As a dog returneth to his vomit, so a fool
returneth to his folly (Proverbs 26:11).

These people think they can change just one thing. In
this case, the thing they think they can change is price
flexibility in the capital markets. Like someone suffering
a fever, they plan to solve the problem for putting a legal
ceiling on the temperature registered by the thermometer.
In biological affairs, we recognize such an approach to
cause and effect as the product of the fever: delirium.
But in monetary affairs, this is The Latest Thing. In
fact, it's the same old stupidity.

If you plan to ride a bicycle, don't solder the handle
bars to the frame. If you do, you will either fall over,
run into something solid, or go over an embankment.

Similarly, don't try to put restrictions on capital
flows in order to fix a price -- in this case, the price of
the dollar vs. the euro. A price reflects supply and
demand in a free market system. Buyers and sellers can
make deals that they think are mutually beneficial.

This freedom is what bureaucrats resent. But to
abolish the movement of capital in the name of stabilizing
the mutual price of two currencies will create black
markets and a shortage of capital -- in this case, euros
for dollar-holders to buy in order to invest in Europe.

This is a European assault on Europe's future -- its
capital markets -- in the name of overcoming a falling
dollar/rising euro situation.

The document, drafted last month on the orders of
Mr Solbes's director-general, Klaus Regling,
concludes: "Should extremely disturbing capital
movements endanger the operation of economic and
monetary union, Article 59 EC provides for the
possibility to adopt restrictive measures for a
period not exceeding six months."

In short, the Eurocrats don't want holders of dollars
to sell them for euros and then invest their newly
purchased euros in Europe's capital markets. Why not?
Nobody admits the truth. This proposed policy is one more
revival of mercantilism -- state-directed economics --
which promotes the export of goods by altering the exchange
rate of currencies.

Mercantilism promotes exports (a small segment of any
nation that is larger than Hong Kong), either by debasing
one's currency through monetary inflation or else by
restricting foreigners' legal access to one's currency.
The bureaucrats create a two-tier market: one for
foreigners who want to buy your exported goods (good!), and
the other for them to buy your domestic capital (bad!).
Adam Smith refuted this view of state-run economics in
1776. Bureaucrats simply do not learn.

As a dog returneth to his vomit, so a fool
returneth to his folly.

Evans-Pritchard provides evidence that this is one more
case of tampering in the name of exports.

Industry leaders in Germany and France say the
euro has crossed the "pain threshold" and risks
aborting the euro-zone's fragile recovery.

Which industry leaders? His article doesn't say, but after
350 years of mercantilism, we know: exporters.

Of course, this is not to say that there are not
critics of these controls on capital. No, indeed. There
are plenty of members of Team B, the inflationists. Don't
put controls on the flow of capital, they say. Instead,
debase the euro. Do what China does. Inflate!

Strong factions within the French and German
governments want the European Central Bank to
counter the "easy credit" policy of the US
Federal Reserve with aggressive monetary
expansion in Europe.

Faced with stubborn resistance from the
anti-inflation hawks at the ECB, they are instead
eyeing exchange rate policy as a means of
imposing their will.

Here is what nobody in power recommends: stabilize the
euro, allow the free flow of capital, and allow currency
exchange rates to move in response to supply and demand:
dollars vs. euros. In other words, allow economic liberty.
To which the Eurocrats reply: "What? Are you mad, sir?"

It is widely assumed EU law guarantees the free
movement of capital but, after combing through
the treaties and court judgments, EU experts have
concluded that this "absolute freedom" can be
limited in an emergency.

"Among the actions that can be undertaken when a
member state experiences serious balance of
payments difficulties, Articles 119 and 120 EC
provide for the possibility to reintroduce
'quantitative protective measures' against third
countries."

CONCLUSION

Templeton predicts default through deflation. I
predict default through inflation. In both cases, the game
is the same: stick it to the creditor, good and hard.
Stick it to the evil capitalist. Fact: there are more
debtors who vote than creditors who vote.

The game of "choose our default" will go on. There
will be time outs. The Eurocrats are talking about a time
out of six months. Then what? They have no idea, other
than this one: the free market cannot be trusted.

There is a race among central bankers to see which bank
can debase its currency the most efficiently. This race
began in 1914. There is no central bank that seeks to
stabilize its money supply and allow its currency to appreciate against rival currencies. Currencies that appreciate are not appreciated by central bankers and exporters.

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