timing: is it everything?
Sometimes, timing isn’t really “everything.” Now, of course, that all depends on when!
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.
- Shiller Q&A: Economist who foresaw bubbles is cautious (usatoday.com)
- Stock Market Deja Vu: Feeling Like 2011 All Over Again (business.time.com)
- Economist Robert Shiller remains cautious about housing market (seattletimes.nwsource.com)
- Stock index up 22%, investors flock to securities market (lookatvietnam.com)
- Stock Market Deja Vu: Why It Feels Like 2011 All Over Again (business.time.com)
- What happens when your bank fails (goes bankrupt)? | LearnBonds.com (learnbonds.com)
- IRA Financial Group Introduces the Solo 401(k) LLC Solution (prweb.com)
- Can a mortgage moneylender solve your financial problems? (sgmoneysg.wordpress.com)
- Cheaper by the dozen … houses, that is (msnbc.msn.com)
- The Difference Between Bonds and Stocks (learnbonds.com)
- What Happens When a Corporate Bond Defaults? | LearnBonds.com (learnbonds.com)
- Philadelphia real estate investor charged with $10 million bank fraud (philly.com)
- Realty investors (dreamhomesuperstore.wordpress.com)
- Daytona Beach Real Estate Investors Use Special Techniques to Build Rapid Wealth in Current Real Estate Market (pr.com)
- Q3 2011 insolvency figures – Is bankruptcy still an easy option? (cleardebt.co.uk)
- IRA and Real Estate Non Recourse Financing: Know Your Options (dreamhomesuperstore.wordpress.com)
- AHM went bankrupt, is Homebanc next? (christianpf.com)
- Business News: Doctor turned entrepreneur Jeremy Stone declared bankrupt (walesonline.co.uk)