time to panic? gas $4 a gallon by spring.

[Midway ®]

So is that a problem?

[RiversideGator]

Boy, I sure hope you are right. I am basing my entire investment strategy on your financial advice.

Did I mention that my favorite thing about you, Midway, is your smartass comments.   

BTW, I am investing in real estate right now.  I think it best to be a contrarian on these things.  Someone quoted Buffet before.  Here is another gem from the Oracle of Omaha:

"I will tell you how to become rich. Close the doors. Be fearful when others are greedy.
Be greedy when others are fearful."
- Warren Buffett lecturing to a group of students at Columbia U. He was 21 years old.

http://home.rose.net/~sea/quotes.htm

Also, I believe that Buffett is coming in and will be cleaning up soon when this debt panic reaches a bottom.  When he starts moving big time, you will know it is all over.

[Midway ®]

Thank you. I have a million of them.

As regards real estate, you are correct, but the market has not bottomed yet so you are a little early.

[RiversideGator]

Regarding the commodity and currency "investors", here is another Buffettism:

"If you're an investor, you're looking on what the asset is going to do, if you're a
speculator, you're commonly focusing on what the price of the object is going to do, and
that's not our game."
- Warren Buffett, 1997 Berkshire Hathaway Annual Meeting

[RiversideGator]

Thank you. I have a million of them.

As regards real estate, you are correct, but the market has not bottomed yet so you are a little early.

I buy multi-family properties and hold them, so market timing is not crucial.  The downcycles slow me down of course but I am not a flipper.  If you look around right now there are some incredible multi-family opportunities particularly in the Riverside/Avondale area where I live.

[second_pancake]

Simple. They default on their obligations, file for bankruptcy and liquidate their existing assets, if any.

And if they can't liquidate??  I'm in the business and there are only a handful of companies willing to purchase mortgage pools.  No one is biting because they can't get the loans to perform.

[Midway ®]

Then they default 100%, and the obligations are worthless.

[Midway ®]

I buy multi-family properties and hold them, so market timing is not crucial.  The downcycles slow me down of course but I am not a flipper.  If you look around right now there are some incredible multi-family opportunities particularly in the Riverside/Avondale area where I live.

The problem with that is the downward pressure on rents now are such that sometimes the cost of ownership exceeds the rental income, and if the asset continues to depreciate you can find yourself upside down on the investment.

[Driven1]

So is that a problem?

mitway...are you SERIOUS?  do YOU think it is a good use of public (taxpayer/YOUR) dollars to invest in mortgage-backed securities, where the mortgages backing them are so stinky that the banks can't sell them to anyone, ANYWHERE???    so stinky that many of them don't even have a market price because THERE ISN'T A MARKET FOR THEM!?!

[Midway ®]

? I don't advocate any of those things and did not say so in any of my posts. 

You must have misunderstood something.

[Midway ®]

That was a facetious comment. I guess a joke explained is not funny.

[RiversideGator]

I buy multi-family properties and hold them, so market timing is not crucial.  The downcycles slow me down of course but I am not a flipper.  If you look around right now there are some incredible multi-family opportunities particularly in the Riverside/Avondale area where I live.

The problem with that is the downward pressure on rents now are such that sometimes the cost of ownership exceeds the rental income, and if the asset continues to depreciate you can find yourself upside down on the investment.

Rents are only down on the large apartments as they are now in competition with the small homes now on the market which are owned by "investors" who were attempting to flip but got caught when the market downturn hit and are now renting them because they cannot sell.  The 1 and 2 bedroom apartments are renting for more than they were in 2006 and 2007 in my experience.

As for values, I didnt buy at the top of the market and I have always made fairly substantial downpayments, so I am not even close to being underwater.  This is, again, not a problem for the long term investor.  I bought my first property in 2000 and have never sold a property.  I may sell down the road in several years, but probably to do a 1031 exchange to trade up to something larger.  We'll see.  I try to take the long view always.

[Midway ®]

My feeling is that there is a lot more room for this to get much worse, and all at once when their house of cards begins to collapse.

- James Saft is a Reuters columnist. The opinions expressed are his own --

By James Saft

LONDON (Reuters) - Should we be more worried about the new crisis coming to a head in the financial system or that the United States is self-evidently in recession? Sadly, we don't have to choose.

Banks, starved of capital, are calling in their debts, turning clients, notably hedge funds, into forced sellers, as large swathes of the financial markets are caught in a vicious cycle of margin calls, fire sales and further price falls.

The Federal Reserve has tried to break the cycle, again, by offering another $200 billion to banks, on easier terms and for longer, but confidence in their ability to succeed has fallen.

Meanwhile, back in the real world, consumers and company managers have gotten the message and are firing each other as, respectively, providers of goods and services and wage earning employees.

Last week's U.S. payrolls data was grim indeed and the retail and consumption figures are little more encouraging. "The Fed's efforts to isolate the effects of the financial crunch from the real economy have clearly failed," said Lena Komileva, economist at brokerage Tullett Prebon in London.

"We are now seeing the materialization of this new relationship between the financial and real economy where both are now in crisis."

In essence, the negative feedback loop the Federal Reserve fears, with banking and the economy pushing one another downhill, is taking hold.

Payrolls in February fell by 63,000, falling for the second straight month and by the most in nearly five years.

At the same time, banks have become even more unwilling to take risks with their capital. They are asking borrowers to post more collateral against loans, even when those loans are being used to finance investment in supposedly safe instruments like U.S. Treasuries or mortgage bonds backed by Fannie Mae (FNM.N: Quote, Profile, Research) or Freddie Mac (FRE.N: Quote, Profile, Research).

This is forcing some to sell, driving down prices further, a process that risks blowups of leveraged borrowers. It will also certainly mean higher borrowing rates for already shell-shocked homeowners.

While it is impossible to know how deep the recession will be, it is reasonable to expect that investors, having seen the strength of the downward momentum, will try to front run it, betting on further erosion in house values, in mortgage and credit card debt and in the value of the banks themselves.

This is a very difficult set of circumstances for the central banks to fight, and indeed there is reason to believe that their actions are having less impact as the crisis grinds on. A note from Goldman Sachs on Monday saying that they thought it possible that the Fed would do an emergency inter-meeting cut supported asset markets, but not nearly as much as such a suggestion would have only weeks ago.

1929 AND ALL THAT

And while arguably some prices for corporate debt and mortgages are now at levels that imply a depression, much less a recession, there is no good reason to expect those prices to improve in the near term, even if you believe that 1929 is not at hand.

Jan Loeys, head of global market strategy at JP Morgan Chase in London, argues that prices now being paid for a range of assets are more a reflection of the liquidity crisis among banks than of the fundamental prospects for the economy.

"The recession needs to be more like a depression in order to justify current prices," he said.

But while cash deposit rates in the UK and Europe are still high, and while investors still don't know where the financial market bodies are buried or what the shape of the recession will be, a recovery is unlikely.

"You have fundamental uncertainty, as a result no one is willing to put any money down until they can gauge the contours of this contraction," Loeys said.

It may be going too far to argue that we are facing a recession that will be worse for asset prices than every other one in living memory bar the depression.

But some of the challenges facing markets and the economy as a result of the great debt unwinding are sobering. Friedman, Billings, Ramsey estimates that the current $11 trillion in U.S. mortgage debt is backed by $590 billion in capital, or about 19 parts debt to one part equity. They believe that is unsustainable and the ratio will end up around 6:1, as either banks attract about another $1 trillion of permanent capital or housing assets fall correspondingly.

The banks will get some of the $1 trillion, but not most, meaning that mortgage debt and housing has a lot further to fall. The impact of that on the economy, and the impact of the economic downturn that will result on the banks is, in a word, scary.

-- At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund --

(Editing by Ruth Pitchford)

To use a familiar expression, looks like the perfect storm.  I think a reliance on historical data for future projections may be unwise in this circumstance, because the world is so fundamentally changed.  But hey, maybe I'm wrong.

"Any opinions expressed here are solely my own and should not be construed as financial advice which should only be obtained from your licensed professional broker" There, I feel better now. Ha Ha thats pretty funny. Your broker will churn your account for you and generate trading commissions for himself while he loses all of your money.

[Midway ®]

Regarding the commodity and currency "investors", here is another Buffettism:

"If you're an investor, you're looking on what the asset is going to do, if you're a
speculator, you're commonly focusing on what the price of the object is going to do, and
that's not our game."
- Warren Buffett, 1997 Berkshire Hathaway Annual Meeting

Since you are a big Oracle of Omaha fan, there was a 3 hour interview with him on CNBC which I am sure they will rerun into the year 2035.

[Midway ®]

one word:

"Ultrashort ETF's"