A contractor told me proudly he was out of stocks since summer, because he bought a house. I suggested that house prices are currently correlated with stocks, and to the extent that most mortgages create leverage (ie, LTV 80% means if the house loses 20% you lose 100% - at least until Oh saves) the effect is amplified. Then I told him he needed an extraction, and he got mad and left.

Don't shoot the messenger?

Anyway he got me thinking about the definition of wealth. If you knew about a guy who made $100,000 per year, you might not be that impressed. Except if this happened in 1932 (that year comes up a lot now). 100K then was a lot of money, but not now. Maybe $100,000 will be respectable again soon.

Income is relative. Maybe net worth is too. Now everyone who owned stocks over the past year is worth less, and the same if you owned a house. Since most people own houses, and many own stocks, most got poorer. If you own a business it's probably worth less too.

But if you own stocks, a house, and a business, they still have worth relative to others - and ostensibly it is not zero (though the formerly low-risk concept of leverage has been revised). Now prices have to catch up, and lots of businesses don't yet understand that they need to cut prices.

It's amazing how powerfully emotion rules the mind. In 13 months the net worth of the world was about cut in half, and if you think about it, in reality how different is the world since then? Did an asteroid hit? Did Amadinejad invade Israel? No. People in many countries got carried away with house prices then got scared and stopped buying. Which pushed the leveraged upside down, foreclosures increased, counter-parties bellied up, and now everyone wants out.

Jeff Watson writes:

My son likes to watch a TV show on MTV known as Cribs when he's home from school. Cribs is a showcase of the big houses that rappers, pop stars, and others of that ilk like to buy and decorate when they get their big break. Generally, the houses have brand new furnishings and have been done in a very modern, minimalist, interchangeable styling. Part of the show is a tour of their garage, where multiple Hummers, Ferraris, Bentleys, and Escalades seem to be the cars of choice. They take you to their pool areas, which usually are very nice and expensive. All the houses have game rooms and private theaters, with state of the art equipment. My son was telling me how rich those guys must be to have all of those toys, and asked why we don't live like that. I pointed out the math to him, on an artist who has one or two hits under his belt, and grossed $10 million tops. Out of that $10 million, he has his agent and management fees taken right off the top, figure 25-35%. Then comes taxes which might be another 20%. Add the cost of a $5 million house, a million dollars worth of cars, another million in furnishings, then the salaries of their entourage, local taxes, utilities, and they're practically broke, or even have negative net worths. They are living for the now, on the expectation of their next deal, which may or may not appear. I pointed out to him that living really large on a shoestring isn't the way to exercise fiscal prudence. I also pointed that every performer whose house is showcased on Cribs has one striking similarity: a total absence of books anywhere in the houses, closets or even built in bookcases. I've never, ever seen a book in that show, and I've been forced to watch more than a few episodes. Evidently those performers never read, and one could postulate that reading is counterproductive as far as that type of success is concerned. In any case, my son learned a valuable lesson in thrift when I sat down and ran the numbers for him.

Vincent Andres adds:

Concerning the absence of books, it would be very nice if this observation were really specific to the houses showcased in such shows. I'm however afraid this observation is very general (and recursively, mainly because of many examples of this kind, the only cultural tap in so many houses is indeed just the TVs).

Entering a house is a bit like entering the owner's brains. Seeing no books, empty walls, … strange feeling. Intellectual faculties are outsourced, TV and the Jones are the spinal chord.





Speak your mind


Resources & Links