Man oh man. What a couple of weeks for the market.

In my lifetime at least, I'm not sure we've seen this kind of pessimism. I've always read about the fear that can strike a market down but this is truly something. There are so many behavioral aspects to all this, and now international aspects to all this, that it's totally unpredictable. As Thomas put it to me in an IM earlier, it's not about finding the legitimate bottom -- it's about "finding the bottom of our fears." Sounds way more profound when I retype it, but yeah.. that's basically the situation.

I've had a few friends ask me about what I think the "other side of the coin" could be to the bailouts. Basically, I kept mentioning that its hard to know if it's a good idea or a bad idea when you have an incomplete picture of all possible scenarios. Government intervening is seen as bad not only because of the tax implications, but also because of inflation and the proverbial "moral hazard" (making people feel its okay to do something wrong, cause Unky Sam will save us if we screw it up.)

Well.. The "other side of the coin" for me is little to do with economics I guess. The fictitious wealth that's on the books has to come off. That's the way markets work. So, that part, no matter the bail out, is going to happen. I guess the other side of the coin has more to do with the social and geopolitical realities of the situation than anything. A bailout could mean a prolonged recession instead of a short, deep recession/depression. Who knows.

Look back to the 1920s though and the events leading up to the Great Depression. As an overly simplified summary, we were the nations largest creditor after WWI. We experienced "roaring" economic growth domestically and saw household debt levels more than triple in under a ten year period. When all the sudden sales couldn't meet growth demands (not enough people to buy the Ford's new car, for example) things started to get shaky. We started to call some of that debt, people started defaulting. Add in a crash here and there and we found ourselves in a depression (not our first, and likely not our last, when defined as a 10%+ decrease in GDP).

It wasn't just a depression here. It was a global depression, and as I understand it, at least partial reasoning behind things like the Marshall Plan post WWII. Our economies were then, and are even more so now, very much connected.

Much of the power that bad guys like Mussolini and Hitler found themselves with, came about because of the depressed economic realities their countries were faced with. Fascism promised a return to prominence and meaning. Look around at world affairs right now and assume the worst for our economy. Consider a global depression and the effects that it could have for people like Putin, Chavez, Ahmadinejad and others.

Consider that much of our political clout on the world stage, rightfully or not, has been lost over recent foreign policy.

Now, is a $850bn in tax payer money more expensive or cheaper than the potential World War that may come out of it, if history is, in fact, repeating? (big if, and yes, the Senate raised it to $850bn from $700bn but our media was too busy trying to make the stock market crash seem like 1927, which it was no where near, to talk about it, but I digress)

You have to make a couple really big if's to arrive at that. The great depression wasn't simply a bad time economically, it was a horrible time. Something our generation has zero concept of even remotely comprehending. It was a time when 1 out of 4 able bodied people were not able to find anything productive to do. That's likely a long, long ways off. But.. Again, without knowing if the doom and gloom is true or not, it's hard to know what is a good idea or a bad one.

Anyhow... I'm, I guess you could say, a cynical optimist. I don't think we're staring down the barrel of that (nor do most economists), but at this point I'm scared it'll become a self fulfilling prophecy. Hopefully countries will be smart enough not to start isolating themselves and putting up large trade tariffs and the like. We're way to interconnected, I'd think.

If you want to point political fingers about our current housing meltdown, it might be good idea to know a little background information.

Here's a start.

All signs seem to point to us being in a period of that which can not be spoken. Time for another economics rant ;)

The funny thing about wealth is, in an overly simplistic explanation, it's kind of like water energy [note: yeah, yeah.. i was tired as heck when i wrote it] -- its not really created or destroyed. It moves. People often say that building roads and infrastructure creates a better economy, and often, they're 'correct' for that particular area. But that doesn't mean wealth was created. The taxes to pay for the project came from other consumers who would have spent the money on other things -- the jobs created by the new infrastructure hurt the unseen profits of someone else (and probably a few unseen jobs because of it). The money spent in that new area came from money elsewhere, and hurt the unseen profits of where ever else it would have been spent instead.

I'm sure there are caveats to it, but most of the wealth creation that people reference are simply cases of inflation or speculation, mixed with cheaper products available from better production methods. The middle class, for example, has way more now than it did 200 years ago. Are they richer? Or has the quality of life provided by what would have been considered luxury items simply become more affordable? Having air conditioning doesn't really mean your rich these days, does it? And remember, inflation's a bitch. A millionaire in Rockefeller's day would probably need 7m+ to maintain that title today.

Housing is such a pressing issue because its effects on consumer confidence is immediate. Tons of "wealth" was created on the books over the course of the housing boom. In a more liquid market, that wealth would simply evaporate (i.e., the tech stock boom). In housing, people are a whole lot more slow to sell and the numbers are a heck of a lot larger than individual stocks. No matter how you slice it, that wealth absolutely has to come off the books. Price reductions remove the wealth from the books, and so does inflation. Inflate the dollar through tax rebates and federally back buy outs. The overall purchasing power of consumers is lowered, some more than others depending on the region (the numbers don't have to be adjusted in all regions equally, after all), but housing prices stabilize because in real terms, they become fair market.

The traditional scape goat, the federal debt, is another thing that I find troubling. The way we as a country become "richer" is by taking in more money than we're sending out. If other countries are moving their wealth to our country, and we're not moving that wealth to anyone else, we end up with a bigger piece of the world's pie. Right now we're not only spending more money internally than we're collecting in taxes, causing us to take loans from China and pay them interest, we are also importing more than we're exporting. Wealth is leaving the country at a fairly fast pace. Now, you can borrow money if the money is being used to expand the economy (and thus bringing in more foreign wealth/etc, at that point, it's an investment).. But borrowing money in a stagnant economy and not selling enough to cover our purchases?

All the sudden we find ourselves in a situation with increasing inflation with little to no economic growth -- aka, stagflation. (shh!)

While it's not a good thing, it's not necessarily "omg the worst thing ever!!1" either (at least, over the long run). It's certainly not the doom and gloom that the media makes it out to be. You may have seen the headline yesterday of "The worst June since the Great Depression!". That's technically true, but it seems to imply that bad months are unheard of. They're not. It was simply the worst June, and things aren't nearly as bad as they were in the early part of this century. Regardless, where the doom and gloom theories fall flat is that they make the assumption that people will refuse to change habits in the face of economic pressure. That, of course, is bullshit. We're the most adaptable creatures on the planet. Something tells me we'll drive smaller cars if we really, absolutely, have to.

We're going to see a ton of innovation come out of this economy. We're going to see housing stabilize and consumer confidence rebuild (stable prices at the expense of reduced purchasing power is still probably a good thing, given the circumstances). We're going to see alternative fuels and synthetic gasoline start pushing their way to the forefront like never before (it looks like OPEC can't get in the way this time, suckers). We're going to see out of work engineers put their heads together and create truly amazing technology and all sorts of derivative applications of that technology. This country is full of talented folks, we just sometimes have to be pushed a little bit. Things are ugly right now, but adversity may be the kick in the pants this country needs.

For me, all of this is fascinating. I love trying to figure this out and learning. If anyone thinks I'm wrong on any of this, share in the comments below, because, well.. let's just say it happens from time to time ;)

I've been trying to ride my bike more and more lately, exploring all the various side streets of downtown, delaney park, colonial town, etc. If there is one thing thats consistent, it's all the "for sale" signs.

I own a 1br condo up in DC that we're exploring our options on. The place rents out well since it's located in a really trendy neighborhood and in a great building. As you'd expect though, DC sales are fairly soft right now. When I bought, I researched the market considerably before making the move. I knew that we were obviously in a boom, but wanted to go past that and understand historic trends in the area. The information I've learned from buying, and now leasing (and maybe soon selling) is largely what I know about Real Estate.

Here in Orlando, the factors seem to be much different. In DC, space is at a premium and houses start at 500k and up. Orlando appears to be the opposite. We're a sprawling region with affordable housing (people may argue that, but compared to a lot of other places, its affordable). Condos up in the District (and really, any 'big' city) sell well because people can't afford houses (at least, in the neighborhoods they like). Of course there are anomalies (pimped out $1m condos, people into the 'lifestyle' thing), but ask most folks and they'll tell you they'd rather be in a brickstone. Here, great houses seem to be similarly priced and sometimes cheaper than condos in the same neighborhood. That blows my mind.

For example, there is a condo listed on MLS at the Vue (new building on Lake Eola) for about $440/sq ft. I believe it's two bedrooms, 389k or somewhere around there. Down the street from me (same area, Lake Eola Heights), there is a four bedroom house on a decent lot for sale by owner, for less than the condo at the Vue.

Hopefully, it's obvious why this strikes me as surprising. First, DC condo prices are between $400-$600sq/ft in most "desirable" neighborhoods (Georgetown, at the height, topped $1000sq/ft). Why the heck would Orlando condos rival DC's in price? Second, is that there are 4 or 5 new condo buildings going up downtown and plenty of units available in the 3 or 4 buildings that were recently built. There is ample supply, a high percentage of investors and tons more space to build new units when they are needed. Yet, somehow, they are more expensive then a house on decent land located downtown.

I can't possibly claim to be an economist or a real estate developer, but something just doesn't add up.. I've been tracking prices at the Waverly and watching them fall since I moved back in December. The only comparison I can find might be Miami during the 80s -- condo prices were cut in half by the end of the boom. That seems a bit drastic, but would it be possible to see 30-40% price reductions?

Any thoughts?