I came to US as a graduate student in 1978. I started working in Silicon Valley in 1980. I heard friends who have been here earlier saying that, housing is moving up faster than my savings as an engineer. So I did not eat for 2 years, and saved $50,000 as down payment to buy my first 4-plex for $255,000. I figured that, if housing price moved up 10% a year, with 20% down payment, the leverage would give me 50% return on my investment.
That investment strategy has been working well for me , but I have always been wondering about one thing. My father worked his whole life in Taiwan, but he only managed to buy a $100,000 house. I only worked 2 years in US, but I bought a $255,000 house. Why?
The answer is this: The US government is smarter. Economy growth relies on capital, but capital can be created by “credit”. My father in Taiwan must accumulate his savings of a whole life to buy a house because there was no “credit” available. Me, an US immigrant, can buy a house in the value of 5 times the money that I really have.
Indeed, I was only an insignificant individual who rode the wave of a primary trend. The seed of that primary trend was rooted in 1971, when Nixon discarded the gold standard. Without gold standard, US government can create more money ( as credit) than it really owns (gold).
That was a wonderful trick. Just like any good trade skill, the whole world learned quickly. During the mid 1980’s, , many nations, including Taiwan, also learned about this “credit” trick and created their own economic boom.
The US enterprise also learned this trick and applied on their business. During the heated peak of the telecom boom, some companies , including the likes of World Com and Lucent, started to “lend” money to their customers to buy their products. See the pattern? You do not have money to buy? Fine, use credit to buy!
The tech bubble busted in 2000. Basically, the trick was played to the end…the borrower finally maxed out.
In the mean time, the housing bubble continued. In 1980, I thought I was privileged to buy a house 5 times the value of my down payment. In the year 2006, I heard from my tenants that they can buy a house without any down payment. That reminded me of World Com and Lucent in year 2000.
Finally, the housing bubble also busted, this time, it is the US financial institutions that went down the drain. That is the final death of the “credit “ trick: the banks went bankruptcy.
Wait! The US government is coming to rescue. After all, the US government can print all the money it wants. So the US banks , and hence the US economy were saved. Everything seems to get back to normal again….Until last week.
Greece, Portugal debt fears rattle the world financial market again! Who would be the next? Spain? UK?
See? So many sovereign nations…as bad as the US consumers , they have been living on credit as well!
Richard Russell claimed that the credit economic boom started from 1980 was coming to an end. That trick is over. Here is his “RELUCTANT” prediction of the DOW…after all this credit mess settled.
He was reluctant to tell his number, because people would tag him as an old confused fool. However, he has been an consistent bear since the year 2000. He believed that the year 2000 was the peak. He believed the boom from 2003 to 2008 was just a bear market correction. He has been dead right so far.
Now here is his DOW prediction.
If you have high blood pressure, I would suggest you to sit down, take a deep breath, before you see his DOW prediction at the end of this bear market.
DOW: 1000. ( MJ note: this was the DOW in 1980, when the credit bubble started)
hhh
Posted by: john james | May 23, 2011 at 09:43 AM