Investment Advisers are Insane

Last night I was trolling the Internet, and came across some contrarian economist doing an infomercial plugging his new book, offering a free copy in exchange for accepting a “free” subscription to his three $99/year (each) investment advice publications. He’s allegedly one of the only economists who predicted the bubble bursts in 2008, and he’s predicting an even bigger collapse in 2013. Sorry to be so vague about the guy and his book, but I really wasn’t impressed.

(His name is Bob Wiedemer, author of Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown, and the site I stumbled on is here. Apparently his book is currently in the top five business books on Amazon.)

Nothing he said really surprised me. Personally, I think the situation is a whole lot more dire than even he thinks. Yes, he’s talking about a 90% stock market devaluation, 50% unemployment, and 100% annual inflation for three years — seriously alarmist stuff. But he thinks we’ll weather it, and eventually bounce back to “normal.”

I don’t. I think we’re going to have to find a whole new paradigm for our economy: a shift entirely away from growth capitalism and usurious banking. I do think it will take longer than three years, though, so maybe he’s right about the short-term.

Two mad prophets shouting at each other over a crystal ball. I know.

But what stuck with me was his “investment” advice regarding buying a house, which made zero sense to me, even under his assumptions. That has chafed in the back of my mind all day like a rock in my shoe.

Here’s his advice: don’t buy, rent. His reason? The housing market hasn’t hit bottom. Invest the money instead.

I’m trying to figure this out.

This is of some practical concern, because Marta and I feel kind of crowded in this townhouse, and as we get older, the stairs are going to eventually become a problem. They are already a problem when we have elderly guests, and we’re getting more of those all the time. We’d like to move to a “flatter” house.

So let’s work the numbers.

We can get a nice 4-bedroom house right now for around $300,000 (to use very round numbers). Assuming we put $50,000 into a down payment, and get 5% interest on the mortgage (I’m just using the defaults that showed up on the web-based mortgage calculator) we have monthly payments of around $1600/month.

To rent an equivalent house, we would pay between $1300/month and $2000/month, from a quick scan of rental listings in the area. Let’s assume we find a bargain at $1300 that isn’t a rathole.

In three years, we’ll have spent $46,800 on rent, and to show for that? Absolutely nothing. We walk away with $50K gone forever (round numbers).

In the meantime, we’ve been aggressively “investing” that $50K down payment we never made on the house we never bought. Since we’re going to throw away $50K on rent, we have to make an additional $50K off our $50K investment in three years, just to stay even. That’s 100% return on a financial investment in three years, which is about 26% a year. In this economy?

Day-trading, maybe. More like day-dreaming.

But in an economy where the DOW drops from 12,000 to 1,200 over three years?

That’s ridiculous.



Why are we doing this, again? Oh, yes, we’re waiting for the housing market to hit bottom. Hopefully the $300,000 house will drop to $250,000. Then we break even even if our investments suck: we’ve thrown away $50K renting, but the house prices came down to meet us. Maybe they’ll even drop a little more, and we’ll get a bargain. Maybe we’ll be lucky, and our $50K in investments won’t tank, like they did in 2001 and in 2008. Maybe they’ll even make a little money. Maybe, maybe.

An awful risk to take, based on some guy you listened to on the Internet.

Now let’s add in the effect of the 100% per year inflation this guy is predicting. At 100% per year, after three years, the dollar is worth 1/8 its current value. Think rents will go up under those conditions?

You betcha. That’s what makes it inflation: market prices rise as the dollar becomes worth less. At the start of our fourth year renting, our new lease will require $10,400 per month in devalued dollars.

On the other hand, if we’ve locked in a 30-year mortgage, our house payments will be exactly the same every month for the next thirty years.

That’s $1600/month to the bank, compared to $10,400/month to the landlord, just three years from now.

My income will rise with inflation, assuming my skills remain useful. Probably not enough to stay even with it, but let’s say I can increase my income by a factor of four while general prices rise by eight, meaning I’ll lose half my real income. That means the $10,400 rent will feel like $2600 today, while the $1600 payment will feel like $400 today.

So renting, my housing payments will effectively double in three years. Buying, my housing payments will effectively drop to one fourth in three years.

Let me make this PERFECTLY clear:
Rent: my cost doubles in three years.
Buy: my cost is cut to one quarter in three years.

In the next-to-worst-case, I can’t budge my income, so $1600 still feels like $1600. Just imagine what that $10,400 is going to feel like.

By the way, since the landlord has been doubling my rent every year with each new lease, I’ll have ended up paying him nearly $110,000 at the end of three years. To break even, my $50K investments now have to make an addtional $110K, or the $300,000 house has to drop to $190,000, or some combination of the two.

But house prices are not going to drop with 100% inflation. They’ll rise. Fast.

That $300,000 house will sell for $2.4M in three years. That won’t make me rich, because it’s not real value, it’s the dollar becoming worthless. It will cost $2.4M to buy an equivalent house; a Big Mac will cost $28, a dinner out for two at a Denny’s will cost $300, and a tank of gas will be $400. Groceries will be $4000 to $8000 a month.

So let’s assume that the housing market hasn’t hit bottom: maybe that house will only fetch $2M instead of the $2.4M it’s “worth.” Hell, maybe it loses 60% of its value and only fetches $1M. We’re dealing with catastrophe, why not?

But I only owe $250,000 on the thing. If I decide to move, I can sell it for $1M, pay off the loan, buy another equivalent house for $1M, and put 75% down. I end up with the same $250,000 debt, minus bank fees and moving costs.

If I’m renting, I’ll be out $110,000, but I’ll gain back whatever I managed to make by “investing” that $50K I never spent on the house I never bought. To break even with the buying power I get from holding a mortgage on a house, I’d have to turn that $50K into $750K (for that down payment when I finally decide to move at the end of three years), and that’s assuming that the housing market is going to lose another 60% of its value. If it loses only 20% of its value, I’d need to clear — let’s see — $1.7M?

I’m sure those $99/year investment advice publications will tell me exactly how to turn $50K into $1.7M in three years, while the stock market is melting down and inflation is completely out of control, with half the population out of work. Of course they will.

This “economist” is bat-shit crazy, and his investment advice is bilge.

But he’s crazy like a fox. His book is apparently selling so well that he’s been able to give up his day job.