Sunday, July 12, 2015

Stupid Not To Buy?

Hi John,

Always a pleasure to read your in-depth and insightful thoughts about economic matters.

I live in the city of London. I'm 29 years old. Currently renting a small room for ₤500. I've been living like this for the past two years and it's a little frustrating.

Now I can afford to buy my own flat but I don't know if its the right decision to make right now - or whether I'm better of renting instead.

I'd rather live rough for a few more years if that means I can afford a better life in my middle thirties. My friends, who are all owners, are telling me I'm stupid not to buy.


Hey Jim,

Your concerns are iconic. Working backwards they are the risk of failure to conform, whether forestalling now will yield better in the future (capitalism) and what to do at 29 about a little bit of frustration.

As to the failure to conform, you understand the only way to get ahead as an investor is contrarianism, and the stronger the pressure the more likely refusal to accede will pay off.  How strong is the pressure to follow the crowd?

I have only heard 3rd hand reports of the London market, and appreciate some of the subtle difference between USA and UK.  USA has regulation enforcement on imports, UK has importer compliance.  USA invades your office with guns and dogs and takes your computers away with you in handcuffs.  The UK calls to schedule an appointment where you visit and discuss options to get back into compliance, at your convenience. USA and UK by treaty have pretty much the same banking rules.  USA ignores them for the privileged set, UK ignores them for everyone.  Advantage UK.

But all this ignores the fundamentals: too much claim on too little productive capacity.  The valuation of the productive capacity among those who own it (billionaires and pensioners) is ridiculous, and no way everyone has what they think they have.  When this gets marked to market, there will be deflation, necessarily.  (The billionaires will be make whole on their notional value, the pensioners will have their nonexistent share "bailed-in" for their own good.)

Even with this heist, which is what happened the last four years in Greece, with the billionaire bankers off-loading Greek exposure onto euro-pensioners (and more created since no one objected) there is still all the ongoing obligations of national health, govt pensions, and programs to help homicidal juveniles to be nicer.  Now, there is no money for this, but there sure is more credit, as long as it can be demonstrated that paychecks, pensions and property can by ever more mulcted to borrow ever more.

Which brings us to the question: should you buy now that you can afford to?

You have a job (I am guessing) in a false economy and have saved up enough to make a down payment on a flat.  Interest rates are near a historical low (for a malicious reason) and the idea is real estate only goes up, as it appears to 29 years old.

May parents bought their home, which sells now for $1.25 million, for $10,000 in 1955.

It originally sold for $10,000 in the 1910s, went up to some $30,000 by the depression, and then there was no market at any price.  (The bottom of a market is not low prices, but no buyers.) After WWII the market returned, and my parents picked it up in 1955 for $10,000, as I said, By 1972 it was $30,000 again.  So it only took 42 years for the house to recover.    Your friends will see their prices return when they are in the 70s and 80s, after the next crash.

But that is not really how it works.    Even though the real estate prices crash, on the $500,000 flat upon which $100,000 was laid as a down, the $400,000 debt goes no where.  As the value of the property drops to $80,000 (on the way to no market), the debt on the 400K remains, as well and the "super low interest" which is constant, and is now more than you are earning in your new job. Bankruptcy!

We saw all this in rehearsal in 2008.  Next time it will be 10X worse.

So, let me answer you in all seriousness:

1. How do you define wealth?  Personal accumulation, or the degree to which you can access what goods and services you need with the money you earn?

2. I prefer the latter, and if you do, then you have a problem.  You go to the place where your seed corn (a home) is the cornerstone of your wealth, then that seed corn will need be eaten, by you or the State or both if you are lucky.  Think Ireland, corn laws.


a. you will not get through what is coming with the resources needed to position yourself to get a flat.  The coming challenges will tax your physical, mental, spiritual capacities.  Physical: Quit your gym and join one of the fighting arts where your mistakes cost you physically: judo, kendo, jiu jitsu, boxing, greco-roman wrestling (and some aikido dojos) anywhere you can expect to get bloodied.  Mental: decide if you are platonic or aristotelian.  Get your head together.  Spiritual: Join the religion to which you are called.  What is coming will tax you on all levels, and we solve problems on levels different than we experience them.  Spiritual problems are solved mentally or physically, physical mentally or spiritually, mental problems spiritual or physically. Get fully rounded.

b.  Take your down payment and put it in cash and gold and start a business.  Follow your passion (suffering) through to the joy you find in solving the problem (suffer) you experience, the unbeatable combination in business.

c. Get married and have kids.  Now.  You waited too long. When all is said and done, nothing in life measures up to that experience.  Do it, but marry someone who wants a family and is on board with the correct definition of wealth, understands that self-employment is life-style, and wants to create a family, not acquire a consumer item (the modern family.)

"A flat" is too small of an ambition for a human. Bugger all and go for it all.  The bad guys will not lose,  but you do not have to become coliseum entertainment for them as you fight over dwindling resources in the public square, to their amusement.  And you'll be in a position to provide your friends, who now have flats, employment when the are homeless and hungry.

Well, you asked.

Feel free to forward this by email to three of your friends.