Reality is an educational process, and there are lots of lessons to be learned from the last few years of financial folly. One is how useless most of the mainstream media’s stable of clueless financial writers are. Of course, we already knew that. Once again, the columnists who got it entirely wrong are skating blithely away from the mess they’ve enabled.

In a more perfect world, those who encouraged the public to believe the general housing market could rise at bubble rates forever would be laughed out of the financial publishing business. This, unfortunately, is not how it works. Nor has it ever.

My first taste of this reality came with the banking and S&L crisis in the late ‘80s. Writing regular columns for USA Today, I warned that policies were setting up a disaster. When the disaster happened, however, the financial columnists who had completely missed the boat were never called to the floor. Most were given raises.

The same thing will happen now. Most media will learn nothing. They’ll be on board for the next bubble, as well. Of course, the media are no different from the general public, so perhaps I shouldn’t be so hard on journalists. The cycle of boom and bust seems to be in our genes. As long as financial records have been kept, all the way back to the Phoenicians, a significant percentage of the population has bought high and sold low.

Regardless, Fed policies aimed at preventing failures in the financial sector will continue to drive the dollar down compared with other currencies. This ain’t rocket science. With the growth in dollars outpacing U.S. economic growth, supply and demand in the currency markets will make dollars cheaper. If I were giving shorter-term market advice, I’d be looking hard at sectors that profit from inexpensive dollars. Exports and domestic tourism are going to get boosts as currencies such as the euro gain purchasing power in the U.S.

Also, this is, obviously, the time to think about housing. Sellers are worried, if not desperate. I don’t do timing here, but we are surely closer to the bottom than to the next top.

Ironically, old-school value-based real estate investment is going gangbusters. It did so during the entire run-up and continues to do so during the collapse. You know what I’m talking about. You borrow the money to buy a property in a stable growing area, where profits from rental incomes are greater than the costs of ownership. Then you let renters pay for your asset until you want to cash out. Such purchases provide, by the way, one of the only real tax shelters left today.

Even in the current credit crunch, someone with good credit can borrow on property that generates more money than it costs. Don’t look at the price appreciation of a property when judging real estate as an investment. Look at the return on the cash you put in.

My philosophy is that you should never buy a house or other consumer durable expecting the price to rise. If it does, that’s fine, but the investment should make sense even if prices fall. If you can buy a house without having paid for it yourself, your return on actual “cash out” investment can be unbelievable.

Nowadays, the same crowd that rushed to buy when prices were high is rushing out. Many are convinced that with prices low, it’s time to sell. This is an old, sad story, but I suggest you take them up on their offer.

Until next time,

Patrick Cox
April 18, 2008

One of the Last Ways to Profit While the Pundits Slink Away Unscathed was originally featured in the Penny Sleuth.