DOLLAR DOWN--REAL ESTATE UP

The joke continues. Friedman is wrong again. The falling dollar increases the value of your real estate!

Thomas L. Friedman writes a regular column for the NY Times. It is syndicated to my home town paper the Winston-Salem Journal. Friedman is one of those who cannot get over the re-election of Bush. As a result, he continues to hammer Bush on every perceived weakness. The funny part is that he apparently is so biased that he rants about strengths as if they were weaknesses.

The trick or mistake (decide for yourself if he misleads on purpose) Friedman uses is to connect two variables that should not be connected. This is the same mistake many folks make in regard to airline stocks. It is the same short-sighted view point. In review, the article I posted yesterday, reported that oil prices and airline stock prices trade together more often than not. The short-sighted view is that if oil prices go up, airlines will lose money.

Reality is that when the economy is strong, airlines fly more passengers; they charge more per seat enjoy dramatically higher gross revenues and buy considerably more fuel. The same is true for truckers and even individuals. We all consume more fuel at higher prices when we are making money. When the economy has been slow for a while, it takes a little time for the suppliers to catch up with the new demand. Therefore the oil price leads the airline index but again they mostly go up and down together.

Yesterday, I posed the following child’s riddle to illustrate the way folks are quick to connect variables incorrectly.

If a chicken and a half lays an egg and a half in a day and a half, how many eggs does one chicken lay in one day?

Friedman leaps forward to connect the falling dollar to falling real estate prices. He says: "If you see a continuing slide in the dollar...you could see a substantial, and painful, rise in interest rates." and "What Americans are counting on is having their homes retain and increase in value."

The implication is that the declining dollar is going to somehow devalue ones home. Wrong! When the dollar declines in value, your home appreciates in value.

Take the example of a wealthy individual who is thinking about buying a second home on the Mediterranean Sea or the Myrtle Beach Sea (don't laugh Europeans and Asians are buying ocean front condos at Myrtle Beach, S.C.). The price of a certain home in each location is the same. The buyer is already shopping around when the dollar declines 10% relative to the Euro. This fellow, American, Englishman or other nationality, will suddenly discover that he can save 10% on the Myrtle Beach property. He had better buy quickly because all "hot" markets adjust quickly. If the owner is smart, he will decide to keep some of the savings. For example, if I raise the price of my Myrtle Beach home by 5%, the buyer will still buy because he will still save 5%!

In the interest of full disclosure, my wife and I are in the process of retiring. We are in the process of selling 25 ocean front rental properties at Myrtle Beach.

Back to the bad connection, for 35 years, the dollar has fallen 7% per year on average, against the currencies of the developed world. Real estate prices have not fallen; they have risen for 35 years. (The chart I found quickly only goes back 35 years, see http://mwhodges.home.att.net/.)

The falling dollar is a simple phenomenon; a decline in a currency means a rich guy can consistently spend more than a poor guy. Someone of Friedman's ilk might respond, "Oh my, lions and tigers and bears, oh my, what if we spend all our wealth!" Bill Gates has the answer, how long will it take Bill Gates to spend all his money? Bill Gates has a personal trade deficit. He personally buys more than he sells. Are we all going to be better off if Bill becomes a hermit and spends no money? Are our interest rates going to sky rocket because he spends a lot? Bill is smart enough that if you try to charge him to much, he will cut back on how much he spends.

I saved the best for last!

Friedman says, "...and, we are importing too much capital..."
Wow! LOL!

He gives his reasons but there are no good reasons to whine because foreigners want to buy US Government Securities. Later on in the article he whines that Korea might stop buying dollars. Can you see another giant leap! His article implies that trade dollars will not be re-invested. Koreans are not buying dollars! Americans are using dollars to buy Samsung TV's. The Koreans simply prefer to "put their dollars in the bank to draw interest". As far as reserves held by Korea, I say, so what? If Korea buys Euros from France with dollars and France buys US Government Securities, I don't care. Like Greenspan has testified, these markets are arbitraged.

Reality is that Friedman is working over-time to prove that Bush is the wrong man at the wrong time. In trying to make the case, he connects economic variables in false ways and then expresses alarm at false conclusions.

The title to his article is SHRINKING DOLLAR: Global markets hitting us in pocketbook.

Totally false; the dollar has declined three consecutive years and the combined wealth of all Americans is currently sitting at an all-time record high. We are wealthier than we have ever been. The shrinking dollar is increasing the relative value of our assets. Friedman is anxious because a box of Belgian chocolates cost more now than four years ago. If the Belgian who sells chocolate wants to convert half a million dollars worth of Euros and use them to buy one of my three-bedroom ocean front condos, I am going to tell him, "Sorry, I need $559,900.00". Most Americans hold more value in real estate than we spend on Belgian chocolates.