Bernanke and Inflation

For those who think I criticize Ben Bernanke too much in this blog, read this article.

Does the Fed Chair ever buy gas, shop for groceries, or check commodity prices in the newspaper?

I have been warning about inflation in my newsletter and this blog for years.  Well, it's here and it's only to get seriously worse, especially for people on a fixed income (like retirees) and investors of all types.

Do a news search for "inflation" and you will see virtually the entire world warning about what's coming.

Mr. Bernanke's own Fed Presidents see inflation.

The ECB sees inflation.

The commodity markets see inflation.

The World Bank is warning about inflation, especially with respect to food prices.

Everyone from Bullwinkle, Boris, and Natasha sees inflation, except, of course, Mr. Bernanke.  Read his testimony before the House Budget Committee just two weeks ago.

Here is his prepared statement to the committee.

These are Mr. Bernanke's words:

On the inflation front, we have recently seen increases in some highly visible prices, notably for gasoline. Indeed, prices of many industrial and agricultural commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply. Nonetheless, overall inflation is still quite low and longer-term inflation expectations have remained stable. Over the 12 months ending in December, prices for all the goods and services consumed by households (as measured by the price index for personal consumption expenditures) increased by only 1.2 percent, down from 2.4 percent over the prior 12 months. To assess underlying trends in inflation, economists also follow several alternative measures of inflation; one such measure is so-called core inflation, which excludes the more volatile food and energy components and therefore can be a better predictor of where overall inflation is headed. Core inflation was only 0.7 percent in 2010, compared with around 2-1/2 percent in 2007, the year before the recession began. Wage growth has slowed as well, with average hourly earnings increasing only 1.7 percent last year. These downward trends in wage and price inflation are not surprising, given the substantial slack in the economy.

So, after we factor out precisely the two items that are rising the fastest in price, food and energy, the two essential items people buy and use everyday and the foundation of the U.S. economy, prices are stable.

(This would be like someone saying "Except for the fact that my wife sleeps with the mailman, her boss, and the next door neighbor she's completely faithful to me and our marriage."

And, of course, "longer term inflation expectations have remained stable."

The gold market doesn't agree with Mr. Bernanke.  Today, gold investors are in the middle of a rally that is the strongest for six months.

What more can I say?  Res ipsa loquitor, Mr. Muckle.

Feds to Probe Creative Real Estate

After years of ignoring the obvious, Federal officials today have confirmed that they will be launching a formal investigation into the shadowy and nearly always crooked world of creative real estate, or more precisely, the gurus who claim to be real estate investment geniuses and can teach you to be the same while at that very moment they are broke and headed into bankruptcy.

Want a current example?  Read about Foreclosures.com guru Alexis McGee, the foreclosure expert who is losing her own home to foreclosure because she can't pay her own mortgage.

I have known since my early days in real estate the duplicity and scams that are legion in this industry.  Get-rich-quick schemes preaching instant millions in real estate have been, and are, common.

But aside from a scant few prosecutions and Federal Trade Commission actions, the gurus that sell these courses have done so with impunity, scamming the general public out of billions of dollars each year on essentially worthless home study courses and seminars that teach virtually nothing worth knowing.

The criminality and depravity of some well-known real estate gurus are without comparison.

Take, as just one easy example, convicted foreclosure rescue fraud scammer Joe Kaiser.  For years after the Washington State Attorney General sued him for 300 counts of fraud and $3.2 million,  the website CREONLINE.com run by JP Vaughan sold Kaiser's home study courses, praising him as a "master investor" and financial genius.

Here is how he is CURRENTLY described on CREONLINE nearly THREE YEARS after his conviction.

Joseph M. Kaiser is a highly successful real estate investor who is a real doer. He is proud to be out, pounding the pavement nearly every single day, looking for the next bargain property to add to his investment portfolio. Joe started investing in real estate in the mid-1980s and soon found his niche in foreclosures and lease options. He is the master at tracking down motivated sellers. 

Joe Kaiser has been banned from the real estate business for life in Washington State.  But that did not stop CREONLINE from selling his products until this blog forced them to cease.

Despite the fact Kaiser is broke, owes the State of Washington $4 million, is banned from real estate for life, and has defrauded hundreds of homeowners, CREONLINE still continues to promote him as a master investor.  Once again, here is yet another CREONLINE article where Kaiser is giving real estate advice to new investors!

Remember this is on CREONLINE's website live today, not cached.

But I'm just getting started here.

At the very time of Kaiser's Washington State conviction and while CREONLINE was happily making a profit selling his wildly overpriced courses, Kaiser was also under FBI and Washington State police surveillance related to the kidnapping of his nephew.

James Anthony Kaiser, Joe's brother, was being sought for having abducted his son and law enforcement authorities from around the United States believed Joe Kaiser was providing his brother with money and even harboring the fugitive.  Given my blog postings on Joe Kaiser at the time of his state conviction, I was flooded with law enforcement requests for information on Joe and Jim.  Not only did I provide these agencies with everything I could find, I personally urged Joe through numerous email exchanges to cooperate with the FBI---which he did not.

Thankfully, the child was returned to his mother after Jim was arrested in Florida.  But that's not the end of this story.

Jim Kaiser is once again a fugitive, this time for failing to pay child support.  And once again the law enforcement focus is on Joe Kaiser who has a history of providing money to his brother when he needs to go on the lam.  To add insult to injury, Joe Kaiser maintains a blog for his fugitive brother claiming this all has been a huge misunderstanding.

This analysis just scratches the surface on Kaiser.  Also, notice I'm only reporting on the gurus who have had their names in the media like Kaiser or McGee.  I could write about two dozen others who pretend to be real estate millionaires and financial wizards when in reality even their own staffs write me complaining about the fraud occurring in their offices and how disgusted they are to go to work in the morning.

I welcome the new Federal probe.  It is long overdue.  Not only will I openly tell how this industry really operates but also how it harasses and intimidates its critics with illegal means as disgusting as their guru home study courses are overpriced and worthless.

Buying Real Estate All Cash

The Wall Street Journal yesterday had a great article on its front page above the fold on how all cash real estate buyers are hitting their local foreclosure markets in large numbers.

This is very true since the current mortgage underwriting process is very tight.

But what this article does not say is WHY would anyone want to buy real estate with all cash.  While you can certainly get a small discount paying all cash for a property, the notion of having an LTV ratio of ZERO on a piece of property is not just financially imprudent but sometimes dangerous.

First, the best reason to invest in real estate is leverage.  Other investments will provide you with greater cash flows, liquidity, and less active management.  Real estate leverage is the sweet spot of investing.  Have you ever heard the old expression that most millionaires have made their money in real estate?  Leverage is one of the prime reasons why.  Paying cash means no leverage.  The idea of paying cash and then refinancing later has merit but think of it this way.  If you can't get purchase money financing on good terms, what makes you think you can get it after you purchase?

Second, having so much cash tied up in a single property is dangerous.  It's a liability target in case you ever get sued.  The market risk of putting lots of your financial eggs in one basic is inherently risky.  It's hard to diversify when most of your liquid assets get put into highly illiquid real estate equity.

Third, and most importantly, I don't believe we are at a market bottom anytime soon.  Real estate prices are continuing to fall in Seattle, for example, where, incredibly, one-third of all homes are now underwater.

33%.  That's massive in a place with a thriving economy like the Pacific Northwest.

And the trend is towards future price declines.  So why buy now?  To be blunt, isn't the tight mortgage underwriting telling investors something about the perception of market risk?  I would not be writing 30-year mortgage paper at 5% when the risk of high inflation is in the air and the value of any real estate equity not so great at the moment.

Buy and Hold Real Estate Strategy

I am not a fan of buy and hold (or buy-and-hold) investment strategies of any kind.  They are unremarkably average in every way being the most passive approach one can take towards equity purchases in either the stock market or in real estate.

But this blog site offers some excellent advice on the approach.  I want to thank Dave of Portland for sending it to me.

I think the advice the author's give in their "Three Rules" near the end of the article is so important to remember, and to be blunt, many real estate investors don't.

But even for those investors remembering the rules, the fundamental weakness of buy-and-hold investing is the necessity to PREDICT the future in order to sell at a profit.  Look at the author's three rules.  They all involve making current guesses about future costs and market conditions.  Very hard to do, even 50% of the time.

Contrast this with a more moderate cycle trader in the real estate market, buying with a short 12-24 month window from open to close.  This means far fewer unknown factors about the future since the deal has a short fuse.

Buying long means knowing long.  Knowing short in the market is often too difficult enough.  Plus betting on market price appreciation over the long term as an investment strategy assumes there will be some in the long run, a bold assumption at that.