timing: is it everything?

Sometimes, timing isn’t really “everything.” Now, of course, that all depends on when!


Do you know anyone who lost a lot of value in real estate or the stock market recently? In fact, do you know any investors in the stock market or Phoenix real estate who did not lose a lot lately?

Do you know how many people in Greater Phoenix recently became ex-millionaires? Do you know how many ex-millionaires are now bankrupt?

So, what happened to all that wealth? Here’s a simple answer: it was transferred form the former owners to the current owners. A more precise answer follows.

When a real estate investor owns a million dollar home with a $500,000 mortgage, then the investor owns half of the value of the home and the lender has claim to the other half, right? So, what happens when that home with a $500,000 mortgage falls in market value to be a $500,000 home?

Simply, the lender eventually owns it all. All that happened is that the investor allowed his or her half of the ownership of the property to transfer over to the bank. Got it?

It’s the exact same house. Some portion of the ownership simply was transferred from the debtor to the lender, now the sole owner.

How about for the stock market investor who owned lots of shares of a company that is now bankrupt? Oddly enough, the same thing happened.

The ownership of the bankrupt company was transferred from the shareholders to the creditors who owned the debt that bankrupt the business. Eventually, the creditors just own the business outright and the former equitable ownership interests of the shareholders have functionally been given away to the creditors. Their ownership interests are now junk: worthless paper. What they used ot own is now owned by the creditors.

The creditors in a business bankruptcy simply take over ownership from the prior owners (the shareholders) and have the right to sell (such as auction) the assets of the business. The shareholders get nothing. The creditors get everything. That is how bankruptcy works.

So, what happened to all that wealth in recent years? Again, it simply changed ownership.

Now the lender owns the entire “upside down” real estate. The borrower just lost their entire down payment and basically gave away to the lender any accumulated equity, plus exposing their other assets to any remaining debt balance owed to the lender.

Similarly, in the case of a bankrupt business, now the creditors own the entire bankrupt business- and if they are unwilling or unable to pump funds into a business that is losing money, how surprising is that? Would you invest thousands of dollars repairing a wrecked car when, for less than the cost of repairing it, you could just buy an equivalent car now… without having to wait for any repairs?

Why would creditors pump money into a business losing money, especially when they may already own (or soon invest in) other businesses that are not losing money, but increasing earnings and profits? Even if some creditors were to invest money into a business that has been losing money, that might not last long. The business might still fail.

Maybe you have heard of a company called AT&T. Do you know what the initials stand for?

AT&T stands for American Telephone and Telegraph. Maybe you think that they should have invested more in the part of their business that hasn’t made any money in quite a few decades: telegraphs. If you think so, then I know some people who would love to sell you some worthless companies at very high prices. (Oops, too late: the taxpayers already bought a bunch of worthless investments to rescue certain institutions from… the prior investment choices of those institutions.)

If you were surprised at the drop in real estate prices, the rise in fuel prices and other commodities, and then the drop in stocks as well as most commodities, consider that being surprised is not a sign of being clear in advance of the risks involved in prior trends. Being surprised is a sign of neglecting the reality off risk- and then finding out the reality of risk suddenly.

Consider that you had been confidently gambling and then you  just suddenly found out you were wrong. Do you have the honesty to admit that?

Maybe you think that the ex-millionaires are to blame “for everything.” Consider that they, just like you, simply invested with a little too much confidence in old trends… like telegraphs.

By the way, government bail-outs of the telegraph industry, if there ever were any, probably would not have kept it competitive forever, though such forced subsidies might have delayed investment in innovation and adaption. (Then again, as we all know, telegraph prices “always rise,” so be sure to keep your old telegraph equipment handy for the “inevitable” recovery of the telegraph industry.)

You may be interested to know that in 2002, I first read forecasts of the global lending bubble’s deflation. In early 2003, I first published explicit warnings with detailed explanations of the warnings. When the developments that I had been warning about first manifested in prices of isolated markets- such as in US sales of new homes only, or of overall residential real estate prices in Phoenix and Las Vegas, or of the housing sector of the US stock market- I had been monitoring those prices. I published alerts in mid-2005 that my prior warnings were now in the process of fulfillment.

In my published financial commentaries of 2004 and 2005, I had focused more and more on oil. I eventually specified rising oil pricing as the factor which would trigger a contraction in the economy of the US (and of the UK, EU, and so on). By 2008, oil prices had risen over 1200% in 9 years. However, in less than a year, oil prices plunged over 75%.

What happened? Simply, the bubble economies of the industrialized west were no longer able to support rocketing oil prices. The stock markets that had peaked in 2007 crashed in 2008- just as I had forecast- right after oil prices peaked and collapsed (along with other commodities, like silver, which fell “only” 60%).

Then, in early 2009, when most market stock market investors were getting nervous, I forecast a multi-month rally in stocks (as well as commodities) which would prompt a return of confidence to stock market investors- even more confidence than the tremendous concentration of blind confidence in 2007, right before the biggest drop in global stock prices in recent history.

Consider that confidence isn’t everything. (Timing might be, though.)
Thousands of once confident ex-millionaires in Phoenix have been enriching certain investors with unprecedented transfers of wealth. Who are you going to be?

“There is a tide in the affairs of men, which, when taken at the flood, leads on to fortune.” William Shakespeare, around 1599, in Julius Caesar, Act 4, scene 3.

January 11, 2010.

Gas prices in San Diego.  OMG!

Gas prices in San Diego. OMG! (Photo credit: slworking2)

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3 Responses to “timing: is it everything?”

  1. Judy Osmundson Says:

    Do you have bright ideas about a new economical model? They should be brought forth. As you say, it seems we should be talking about real worth, and real cost, not affected by inflation due to lack in any area. Do, do, do this. This would be a wonderful mission for you! ;))

  2. jrfibonacci Says:

    Judy, consider that from a legal standpoint ownership is a fluid principle.
    You may have heard something like “possession is 90% of the law.” Well, says who- and what about the other 10%?

    Further, like law, accounting is an art, not a science- a tool yes but an imperfect tool. Inflation is entirely a phenomenon of currency, and currency is an excellent tool for accounting, among other things, but that may be about it.

    For instance, worth is not an objective fact. An ounce of gold is not objectively worth 15 ounces of silver or ten cords of wood. Those ratios are established not by eternal mandate (or some holy ink in an infallible constitution), but by the choices of certain individual humans in a variety of circumstances, with some valuing this way and some valuing that- even the same person at different times- say with firewood tending to be more valuable in winter, right?

    It is the language and comprehension of people that is at issue, not the economy of the earth or the human body and so on. Economy is a state of nature. The varieties of language we may use about the natural economy of life, as well as how we interact with it, is also a fluid development.

    The economic model of the Austrian Economics school, as well as the model of socionomics, are what I have used to accurately predict and describe the phenomena of economic change in the last few years- changes that surprised so many people. The models that others are using may be obsolete, at best. But before we go making new models, let us acknowledge whether there are old models that quite specifically describe in advance the patterns of human action that we know as economics.

    I think what you may be requesting, Judy, is a new social order and/or political model that fits with a sustainable model of economics, such as the Austrian economics model (which is not Austrian for being dominant in Austria, but for being spread in Austria among economists, I think first in the early 20th century). So, be assured that a new social and political order is being brought forth, as well as a new prominence to certain patterns of human language.

    How will the new social and political order develop? It may develop from a redistribution of attention away from models and so-called leaders that breed the experience of confusion and surprise… and toward what nourishes clarity, courage, prudence and prosperity. This is as it has always been.

  3. Judy Osmundson Says:

    JR, those who can steer us to it, will serve us well! It should be relatively painless and fill in where there is a void… :))

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