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Something Doesn't Feel Right

August 1, 2005

It was a July summer evening in La Jolla, a weekday night, and our favorite restaurant had an hour and a half wait to be seated. So, we went to an alternate restaurant. It was full, but able to seat us. The economy, on the surface looks like it'sbooming. La Jolla was a bustle. Early in the day I was reading about the layoffs at Kimberley-Clark, Hewlett-Packard, Eastman Kodak, Ford and others. Earlier in the month, candidates for the mayor's job in San Diego were debating bankruptcy as a viable option for the city. Dinner was enjoyable in La Jolla, we laughed and talked. And, in order to avoid sounding negative, I refrained from declaring "something doesn't feel right!"

Perhaps it was the recent terrorist attacks in London and Egypt that set me on edge. On the other hand, could it have been the comments by Federal Reserve Chairman Alan Greenspan that the inflation levels are relatively benign? Benign? Housing, fuel, medical, and food prices have been increasing at a hefty pace. A business publication declares a robust economy, but in a two-inch column on page five, there are reports that the trade deficit is now running close to $700 billion a year. That's $700 billion more going out of the country than coming in. This same publication forgot to mention the National debt, approaching $8 trillion dollars, and the budget deficit expected to be $350 billion.

As I write this column, a group of Americans, frustrated by the lack of security on our borders, have decided to organize a "border watch" on the U.S. Mexican border in the San Diego area. It is estimated that 1.2 million people cross our borders illegally each year. Experts fear that our insecure borders make us very vulnerable to another terrorist attack. In fact, there is one thing that has total agreement amongst terrorism experts. It's not if there will be another terrorist attack in the U.S. but when.

Terrorism, debt, budget deficits, deceptive statistics coming out of Washington, and a real estate bubble that is worldwide . . . and poised to burst . .. did I mention that something doesn't feel right?

The reality of where we are as a nation (economically and with our national security), and where we hope we are, are on opposite ends of the spectrum. We hope that all is well, and that Jennifer and Brad will stay together. We hope that 9/11 was a one time event. And we hope that this is a robust economy that will last indefinitely. Let's see if these hopes square with reality.

The Real Estate Bubble

My brother's friend sold his business in Orange County and had some extra cash to invest. He called a real estate agent in Phoenix and said "buy me three houses." The agent complied and bought him three houses. Considering the amount of agonizing I go through just to buy a pair of socks, I found the story to be incredible. But, I've told the story to others, and everyone has responded with "oh, yea! This is common practice now."

As houses have reached unaffordable levels - a starter home in San Diego starts at a half a million dollars - financiers have become quite creative. Option Adjustable rate mortgages, interest only mortgages, no money down mortgages, and "no need to qualify" mortgages are now the norm, not the exception. Interest only mortgages account for 20% of all new mortgages up from 5% two years ago.

According to a survey of home buyers released last November by the National Association of Realtors, 25% of those polled were able to get a mortgage with no money down, versus 18% in early 2003 and virtually none in the late 1990s.

Where is all of this heading? In July 2005, Alan Greenspan stated in testimony before congress that for some who have these "exotic mortgages" (interest only, etc.), on the expectation that prices will always go up, "there is potential individual disaster."

California experienced similar "creative" real estate financing products in the 1980's real estate boom, they ultimately incurred a default rate that was three times as high as conventional mortgages when the local economy went into recession in the early '90s.

We seem to be living in a casino society, where speculation travels from one bet (investment) to another. Manias come and go - like the dot com boom of the nineties - or the real estate boom experienced in Japan in the late 80's. In all speculative manias throughout history - a peak is reached, and then comes the fall. This real estate speculative mania is no different, but it is larger. It is worldwide (Europe, Australia, new Zealand and parts of Asia), with pockets of rampant speculation, sitting on a very shaky credit foundation. According to the Economist magazine in a June 2005 article, "this looks like the biggest bubble in history." Enough said.

Debt, Debt and More Debt

Americans like to do things in a big way. Take debt, for example. The U.S. government's debt is so large that approximately 17% of its budget per year goes toward servicing that debt. In other words, approximately a half a trillion dollars ($411,910,000,000) a year goes toward paying interest on the U.S. debt.

The average American consumer's debt hit a record $2.1 trillion in 2005, according to the most recent figures from the Federal Reserve. The typical U.S. household carries $9,200 in credit card debt (according to This unprecedented amount of debt is apparently taking its toll. Personal bankruptcies for the year ending 2004 were at an all time high of 1.5 million (both chapter 7 & chapter 13).

During good economic times - which we appear to be in now, some debt can be healthy. But economies are like living organisms that expand and contract. For each expansion there will be a contraction. The contraction is often a reaction to the type and duration of the expansion. Economic expansions driven by high amounts of very risky credit and unprecedented debt will inevitably lead to equally dramatic contractions.

When the economic slow down begins - and there are early indications that it has begun, we will have two bubbles to deal with, a real estate bubble and a credit bubble. Did I tell you that something doesn't feel right?

Good Guys versus Bad Guys

There is this battle going on inside of me concerning terrorism. It goes something like this. There are two forces that live in my internal world. The good guys in this inner conflict are confident that all is well. They tell me that as each day passes the nation is a little more prepared to deal with terrorism. These good guys assure me that since 9/11 we have done everything possible to assure that we are not attacked again. Unfortunately, the good guys only show up on rare occasions. The bad guys, on the other hand, are my constant companions. These little devils dominate my thoughts when it comes to terrorism. They are more often than not chanting a certain mantra, it's the same mantra that comes from every expert and so-called expert on terrorism: "it's not if, but when." If one does the math, as in how many people on this planet want to do us harm, and does the math on how many people cross our borders illegally (1.2 million in 2004), one can only conclude that . . . it's not if, but when! Did I mention that something doesn't feel right?

I don't think there has been a time in my life when the messages have been so mixed coming from the media and the government. These are good times and scary times. One can only prepare for the next economic down turn, and enjoy this current upturn. There are not a lot of other options.

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