Tuesday, June 27, 2006

This Babe is Betting Big that Bernanke goes on a Bender

We recently had a conversation with a woman who just started dabbling in the real estate market. For purposes of this note, she will be referred to as Jane.

Jane is a legal secretary in Los Angeles and doesn't strike one as the type that would, say, belly up to a Vegas crap table and lay a grand down on one throw of the dice. Yet, Jane is making a big bet, much bigger than a grand, that Ben Bernanke will bail her out of a stupid investment.

Jane bought a loft, for investment purposes, in downtown Los Angeles. It's a small loft. We have actually lived in residences that had bigger bathrooms than the size of this entire loft unit. Whatever she laid down for this dog house, Jane confessed to us that her monthly nut--mortgage payment, real estate taxes and common fees-- amount to about $2,200 per month. She has owned the loft for three months. It's still not rented.

At first she tried to rent it out for $1800 per month. She is now down to $1400 per month and still no takers. Welcome to the final stage of the real estate boom. Jane is dead in the water on this baby. Who the hell loaned her the money for this nutty investment? She is paying out of her own pocket the monthly $2200 hit. And while all this is going on, Ben Bernanke and his brigade are still raising interest rates. The real estate market is slowing already, before any further hikes. The next hike will destroy the value of this loft. It will tank in price.

Jane may not understand, but you need to keep your eye on the Fed before making real estate investments (or most other investments for that matter). The Greenspan years at the Fed will someday become known as the easy years. Easy money, easy times. We don't think Bernanke will get off so lucky.

When the Fed is flooding the markets with easy money, it bails out a lot of people who make stupid stock market investments and stupid real estate investments. Tough times are tough for even the shrewd. Jane is not in the shrewd camp. Her investment is going down the tubes, unless of course Bernanke loses his mind, goes on a days long bender, walks back in the office about a week later, and in a tequila fueled craze cuts the discount rate, cuts the reserve requirement and cuts the Fed funds rate, just because it feels good. Not likely, but that in essence is what Jane is betting on.

What are you betting on?

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