Cheap Parking – Money, Economy And A Storyline

I don’t give investment advice. I don’t even listen much to investment advice. But I do like sticking a litmus probe into some cavity of society and taking ph reading. So I wrote this several weeks ago and withheld it. I didn’t want to jinx the market.

You see, in my quest to understand money and credit, (for a story I’m working on here) I bought some shiny stuff. Silver and Gold, and then I added up the reasons why I bought it, watched it go up in value to the dollar, watched it go down, watched it go up again, and sampled the emotional flavors of investing. I learned that there are three rules to investing, according to some ancient rite beamed to me when I first held the bundles of precious elements in my hands:

1. Invest in yourself first.

2. Remember you are dealing with people.

3. Buy low and sell high.

The first two I would navigate, but the third rule stuck in my head, like a tin nail.

Gold and silver, gold and silver, clinky, clink, clink. Way funner than stinky, old, paper bills. But then with coins, they want them kept nice and shiny, and you have to keep them in the tubes, or the little plastic sleeves. I peeled off one for my pocket—a shiny American Eagle – Walking Liberty, as they call them. (I got some from other countries too.) I liked the symbolism of the coin, the freedom, pay as you go, if you run out of cash you can take a slug out of the coin and buy a meal. There’s a certain sense of independence when you’re walking with 31.1 grams of bullion in your pocket. It made me want to show it off, to friends and acquaintances. They all wanted to examine it, feel the weight of pure Ag… silver. Ooh, they couldn’t touch the gold, not even me. It’s all super sealed from the mint and highly malleable. You can look at it through a little window in the container. Not as much fun as durable old silver. In fact, my kid asked to borrow five bucks. I showed him the one dollar coin made of silver and asked whether he wanted five dollars cash, or the coin. He said the coin, without hesitation. What a good crow.

But they were my experiment, so I waited around, played the charts, read the blogs, learned about preppers planning for the end of civilization, and gold bugs, and kinda floated around the community. Gosh, they are worse than stamp collectors.

Be like a postage stamp. Stick to one thing until you get there.
Josh Billings

Except when speculating, then these people became as emotional as ninnies. But I wanted the thrill of gold rush speculation, buying in when when everybody thinks it’s dirt and selling when everybody is raving how good it is. I was sowing little seeds, spreading it around.

Alas, the boom seemed quirky. The winds are shifting from a consumption lifestyle and acquisition paradigm to a liquid and production paradigm. Meaning, people ain’t got no money—the masses, the rioters—seem to be a little cash strapped. So I ditched half my metals. I’m waiting for the shiny stuff to go down another 10-20% then I’ll buy back in. I enjoyed holding it. The rush is too fun, better than lottery tickets.

Meanwhile, as resources and supplies lower in price, ie, the stock market equities are being auctioned and resources are in a slump, investors can pick up manufacturing companies cheap, pump out the stuff, and hire people, students for low wages. By election time, the economy will be ripe for some new money printing, and we can go back to speculating with borrowed money. I think that’s the plan?

Oh, I could go on and on about the cool things I gleaned about the Federal Reserve, and central banks, and why Canadians think money is looney, but I live in the now, so I want to write this now, except that I wrote this last month (I didn’t want to jinx the market) and here’s what my spidey senses told me then…

Disclaimer: this is all fictional character development thinly veiled as brainy crap.

My wife said something interesting, about the marketplace. I was asking her about guarding against competition, keeping my products innovative and unique, the better mousetrap, I was thinking. Anyway, she said all the competitors do is sow the market. It’s multiple exposures. People see the first one and they get the idea that they want it, then the key is getting the product to where they are buying.

When electric fireplaces first came out she wanted one! Hot damn, click a remote and fancy heat comes right atcha. She saw the device at Home Depot for $1200, though she waited until she could afford one, spending a lot less when the product availability exceeds popularity.

Something she said made me consider the contrasting elements in a product life cycle of a real estate boom. Why does everyone pile in at a high price? The natural flow of a product is shown through higher cost at introduction (junior exploration), efficient growth (building infrastructure), maturity and competitive pricing (paving over the place), then decline or reintroduction (exploitation of services have driven the region into decline).

So in a natural market, the housing first buyers, carving out the best property would pay the most, then others would be attracted creating efficiencies of scale, then the glow would wear off and prices would become competitive, and finally the re market would decline as other markets became more attractive.

Let’s look at some hypothetical conditions that may exist for demand to exceed supply, various sectors.

Market Conditions

– The demographics don’t wane, population continues to grow.
When a new ipad is launched there is also a boom, initial buyers will pay a after market premium to be first, but more customers keep buying and Apple is able to charge the same price without reduction until the next model comes out.

Limitations of space or availability of product.
If a popular entertainer comes to town, there may be limited seating so there is also a boom.

Buyers from outside the regional market purchasing inventory.
Resource discovery might attract investor interest and labor that didn’t exist within a region, resulting in a boom like the gold rush.

– Product features and quality are less important than holding inventory.
When precious metals are in a bull market, the numismatic quality is less important than the volume of bullion. Likewise when precious metals turn sharply to a bear market, the premium paid for numismatic value declines if the owner is urgent to sell the metal.

Buyers will borrow funds without the intention of taking full ownership to defer profit until the rate of appreciation allows resale. This is speculation and follows the model of the futures market forecasting product supply and demand. Anticipating shortages or appreciation can prompt buyers to borrow and bid for a product, gambling that it will be worth more in the future. This can cause a boom.

– Trade route. Some distribution channels are the market need. Place is place and location is location. Lemonade sells great when the paving crew goes through town.

Renewal post decline. Gentrification and infrastructure upgrades such as inground services, transit, health and safety. Buyers expense improvements into the features and qualities of the resale house.

These are a few of the reasons that might also be attributed to any boom or bull market. Then what would happen if the opposite occurred, a bust or a bear market? How many of these factors would affect the demand if there is available supply?

Let’s speculate.

Population. That’s the size of the market from which the buyer pool emerges. The population may remain the same, but the amount of qualified buyers might reduce.

Availability reflects many factors, but if there is indication of low cost alternatives, there’s a perception of available inventory. The buyer takes their time.

Outside buyers, foreigners, tourists are a fickle breed and their motivations diverse, but if the influence is price, then their goals and methodology must be considered. What are the outstanding attractive market conditions? Usually it’s obvious, but sometimes it’s a cultural thing. Appreciation, availability, product features or a good travel route? If multiple conditions slump either at home or abroad, foreign buyers may reduce their membership in the buyer pool.

Some can borrow the money to have it now and sell it later. But this opens up a big can of chance, with oxen and forest creatures, re the long paragraph to follow. Holding inventory while borrowing and paying carrying charges until the sale of the asset can be profitable, if the product price appreciates or subject to inflated valuations. This leverages the profit into the future and requires some market analysis. So it’s speculating. However, to make large gains, a buyer might have to borrow, and borrow large, to purchase title to the investment. This greater leverage allows the buyer to achieve greater gains with smaller price increases. However, a small depreciation can also affect the investment yield negatively by tens of thousands of dollars. This tactic tries to time market conditions in order to borrow based on speculated outcome, like a mortgage in a housing boom. The strategy can get a return if prices are increasing and the carrying costs are low. When sales are slow and there’s lots of inventory, then it’s better to be a saver/lender and let someone else pay the carrying charges. Then interest rates pay what inflation does not. In a boom, banks are buyers, holding product inventory as collateral. When the boom dies, banks become lenders and charge high interest because they view money being a greater asset than the product. This is the way credit cards work. They don’t care what you buy, they just want the money. Your need to buy is greater than theirs. Until recently banks have worried less about the amount of money borrowed, because they had assurance that the asset would appreciate. It was easy to sell and easy to buy—a bull market. The bull market peaks when it’s easy to sell, but it becomes harder to buy for the majority of people in buyer pool. A bear market occurs when it becomes hard to sell and hard to buy. Then it’s a standoff between those who can carry the costs until prices rise again. If it becomes hard to sell but easy to buy, then depreciation has run its course and we are on the way up again. The product life cycle may intensify the bear market, scary. Now, banks have been trimming costs and showing reluctance to buy without increased assurances. They’ve re examined insurance instruments and opportunities to market people’s debt as a trade-able asset, like selling your accounts receivable on the stock market. Is this a strategy to maximize cash profits and minimize holdings? These movements suggest less interest in asset buying, and more interest in the money lending.

End of long paragraph. Next sour market condition…

The remoter the area the better the reward be. “Are we there yet?” What makes the location of a boom unique, desirable, convenient, or endowed with features specific to its physicality? A boom region must support at least a few of the market conditions, availability, appreciation, low cost to carry, indiscriminate or wild bids on inventory, an active investment market with foreign capital participating in the buyer pool.

Gentrification, renewal. Are people spending to renovate and resell? Are people digging up antiques in the attic and looking for liquid cash? Are banks advertising that they lend easy money? That means they are willing to buy assets that back up your debt. If banks talk more about savings accounts and high interest rates, then they are lenders and not as interested in the asset backing.

Soooo, let’s work back up the list: if the region becomes less desirable; if banks become net lenders instead of asset backers/buyers; if foreign investors respond to negative market conditions in multiple locales; if there is ample supply; or if the buyer pool shrinks; or if the buyer pool can’t get credit to speculate; then substantial losses could occur with small changes in carrying charges or depreciated outcomes.

Eek! Depreciation, deflation, horror! Apparently, this is not good if a person made a lot of promises about repaying borrowed money. You don’t want to get caught with debt when the economy is entering deflation.

But is it that bad? Not really. Some of my fondest friendship bonding experiences occurred in deflationary periods. The house parties, conversation as an activity, window shopping, learning to play music. In a period of deflation, cash is hard to come by, and shoppers are shrewder. The buyer pool exhibits more reluctance and this hesitation increases the carrying costs and ultimately the debt of the seller. Look for foreclosures, some socio-desperation, and rash decisions to gain liquidity or finalize a contract.

How to hedge? Buying land below appraisal that is being discounted early. The buyer could lock in at current low interest then slowly improve on a property which has depreciation already factored. The early discount buyer could then save at a higher interest rates while enjoying lower borrowing rates from the era just preceding. Then resell when prices appreciate, combining bargain property gains and high interest savings to purchase a larger property.

This is now entering a time to wait out a period of high cost and depreciating values by lending at higher interest. Unless the govt people stop printing money. Then it’s low, slow across the board. No money, no job, no stocks, no resources, because money becomes the thing everyone wants. Enter the underground market.

With the accumulation of debt, and the hard time to sell said debt, market will begin to show increased stress and dejection—difficulty selling and difficulty buying. This brief period of market stasis, will end when urgency to sell suddenly challenges any appreciation with fire sale prices and foreclosures, speeding the banks transition to lending from net asset buyers. Without quantitative easing in additional money creation, the value of money may increase greater than the value of assets and commodities. Essentially, commerce would reach a lull as consumers were forced to pay bills or stop spending until they returned to fiscal health. Prices may reduce significantly within a boom region or sector until reserve capitalists snap up inventory at low cost and hold for future valuations. Or the slow saving members of the buyer pool have an easier time spending.

We are currently experiencing a transition as future members of the product buyer pool are not meeting the qualifications for the recent volume of inflated asset valuations.

Let’s look at a similar ripple in silver AG. The metal, as a commodity, derives sixty percent of it’s valuation from industrial use. This commodity valuation is good when inventory is low and demand is high, as in 2011, however in 2012 inventory is now high and demand is slowing. Does silver have demand? Currently, cash is the reserve currency do to it’s proliferation. But if the amount of cash is increased, it will lose value against specific assets which are representational of stored wealth, such as metals and silver. This however won’t happen until the dollar depreciates, or the awareness occurs. Currently, cash is hard to come by (its harder to buy) and prices are high (its harder to sell). I would now recommend that the capabilities of the domestic buyer pool are reducing while sellers must ask appreciated prices, thus we are entering a bear market.  

The affects? A mature stage in the product life cycle. Those sellers who cannot carry costs will encounter some economic strain to price competitively unless they can find a buyer who can afford their ask. Again, prices will not be affected until a bear market enters a declining product life cycle, however this can come on unannounced, like a big silent sneaky bear. Reserve capitalists, including some foreign buyers, will go discount shopping and absorb some of the prior increases in inventory. Take housing, an increase in a need for cheap rentals is met with an increase in cash short landlords desperate for cash flow. Ancillary investments such as recreational toys and fun assets may be liquidated. Likewise, various commercial, consumer and industrial collateral might be liquidated.

The bear market will be evidenced by flea market style negotiation as sellers attempt to flog depreciating assets… depreciating not just because of lower value in the market place, but also because in the boom, quality and features were not as important as simply holding inventory. When prices were high, everybody was willing to pay just to have some action. Now, people want to make sure it’s worth it.

Aah deflation. Some of my best times. You’ll notice the little things, like signs that used to advertise ‘Parking Available’ now read ‘Cheap Parking’.

~~~

Next, an update to this update, and soon… Chapter One of Little Miss Liberty

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