 Hello everyone, this is Mike Adams with a commentary on personal finance. This is being written in December 2005, and I'm seeing some major warning signs out there about the housing bubble. I'd like to share these with you and give you a brief history of my financial predictions.
In 1998, I began loudly warning people about the approaching dot-com bust. I had analyzed the situation and knew the bubble was going to burst. There was no doubt in my mind, because I looked at the fundamentals of these internet companies' finances... the internet startups that had stock prices in the billions of dollars but had sold no products, had no revenues and had no customers. You don't have to be a genius to figure out that bubble was going to burst, and something very similar is happening today in the housing market. I'll explain all this later.
The model of the dot-com bust
First, let's get back to the dot-com market, because, in hindsight, it was easy to see that it was a bubble about to burst. Think about what you were doing in 1998, 1999 or 2000. You were probably invested in the stock market. You thought you were doing pretty well. You thought you were building up a huge retirement. Everybody was getting rich, at least on paper.
I remember one financial quack at the American Enterprise Institute (a conservative "think tank" group) who wrote a book called Dow 36,000, predicting the Dow was going to hit 36,000 and everyone would get rich. People said, "The rules are all going to be changed, because the old rules of profit and loss and needing customers don't apply anymore." They said, "It's the new economy with the internet!" The fact is, it wasn't the new economy. It was just a new version of an old scam -- the bubble market.
We saw the same scam many times throughout history. We saw it in the railroad boom in early American history. There was a stock market bubble with the railroad expansion. People said railroads were going to make everybody rich. They poured all their money into building the railroads, and some cities had three or four different railroad lines (all redundant, of course). Before long, the railroad bubble popped, and people were left penniless.
Of course, much the same thing happened with the dot-com bust of 2001. Billions of dollars disappeared overnight. Well, it really didn't disappear, because it never existed in the first place except on paper. I didn't lose a dime, but a lot of people I knew lost a whole lot of money because they didn't listen. They thought the rules had changed and everybody was going to get rich selling each other increasingly expensive pieces of paper. How's that for an economy? It's insane. You can't get rich by trading pieces of paper with your friends and writing larger and larger numbers on those pieces of paper. That was pretty much what was going on during the dot-com boom.
People didn't want to hear the truth
All this time, I said, "It's going to crash." I was about three years early on the warnings. Some people at the time said I was completely nuts. They said I was a doomsayer. I was a doom and gloom person because I predicted the stock market would return to normal. They said, "You know, you're ruining the whole thing, Mike. You're such a pessimist. Why don't you have some optimism in this country? Why don't you talk about everybody getting rich, instead of the stock market crashing?" I said, "Because I'm looking at the fundamentals here, and it seems very obvious to me that this cannot continue." It can't continue when you have hype about a company like Excite at Home -- remember that company? It had a market capitalization of well over $1 billion, but during the crash, the stock value dropped 99.8 percent. I looked at that company, and I said, "Do you know what? Their stock is so overpriced, we would have to expand their sales to every planet in the solar system. Every planet would have to have 10 billion people on it. Every one of those people would have to buy their services to justify their current stock evaluation."
I put two and two together and concluded, "I don't think there are people on Mars who have bandwidth. I don't think Pluto is populated by people who need Internet services. In fact, I don't think everybody on Earth has Internet access. I don't even think most of the people on earth have computers. So, this doesn't make any sense. The stock is going to have to correct."
Sure enough, it did. At the time, all the financial cheerleaders were demanding, "Put all your money in the stock market! Mortgage your home and use that money to buy stocks! You'll be rich! None of us will ever have to work again! None of us will have jobs anymore; we'll all get rich off the stock market!" That was the thinking of the day. It's just another version of the old stock market scam. People get taken by the same scam generation after generation because most people can't do math, and a lot of people want to believe they can get rich with no effort.
Why it's time to bail out of the real estate market
The same thing is happening today in the real estate market, and there are some very clear signs that are telling me it's time to bail out. Let me explain...
Let's go back to the dot-com market. When does it make sense to invest in a company? It makes sense when you get returns on the dividends. If you invest $100 in a company, and you get $10 back every year on dividends, then you basically have a 10-year return on $100. That's reasonable. But if you invest $100 and you get a dividend of 10 cents, and the only reason you invested the $100 is because you thought you could sell it for $200, then it's no longer an investment. It's speculation.
That's where you don't even care about the fundamentals of the company you're investing in. You don't even care what they sell. You may not even know what they sell. You don't know anything about their products, markets, inventory, human resources or ethics. You're just there to speculate. You're there to double your money. Sell high, and buy low. That's what people were doing in the stock market, and the same thing is happening in housing now.
Why do people buy houses under normal economic conditions? They buy houses to live in them. You buy a house because you need a place to live, or because you really enjoy being a landlord, which is a thankless job, by the way (those of you who are landlords know that). You might buy houses as an investment vehicle, hoping the monthly rent will cover the cost of the house while you are building long-term equity in the house. In other words, the renter is paying your mortgage and allowing you to build long-term equity. So, you figure on gaining something over the long haul, like 20 or 30 years. These are normal, sane, housing investment ideas. You either buy a house to live in it, or you buy a house to rent it out to people.
In a sane, normal housing economy, that's the thinking that's going on. But today in the United States, especially in key cities, there's something amiss. Increasingly, people are not buying houses to live in them, nor to rent them out. They are buying them for speculation. They're buying them because they are anticipating a price increase. They're buying houses for the same reason they bought stocks during the internet boom. They don't even care what it's for. They don't care if the house is a place to live in. It's just a way to double their money.
What are the signs that this bubble is about to burst, and more importantly, what's going to happen after the bubble bursts? I'll save all of that for you in part two of this discussion. I'll give you the signs, what's likely to happen and what you can do to protect yourself from the inevitable financial fallout. I'll also tell you about home loan recalls. You may not know about this: the bank can send you a letter and recall your home loan and require you to pay tens of thousands, or even hundreds of thousands of dollars, because the housing market is rapidly plummeting. I'll cover all that in part two.
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Related Articles
• Warning signs of the housing bubble crash (part two)
• The Coming Financial Collapse of America (and Why Today's Market Bloodbath is Only a Small Taste of Things to Come...)
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