Should you buy a home in a boom town? Probably not.
In the 1800's a lot of mining towns were founded out West, where gold was discovered and people moved in rapidly. Very quickly, stores, saloons, and houses were put up, often commanding staggering prices. And just as quickly, they were abandoned, once the mines gave out. Today, many are picturesque "ghost towns" and are often tourist attractions.
Is this just a phenomenon of the 1800's? Surely that sort of thing cannot happen in the modern world, right?
Wrong. It still continued to happen, over the years, and it is poised to happen again today.
My Brother once wrote an article for the Colorado Rocky Mountain News, about Parachute Colorado. A similar article appears here. Back in the late 1970's Jimmy Carter, in an effort to stem the energy crises (remember even and odd gas days - you could only buy gas every other day - it was rationed!) had the Department of Energy develop an Oil-Shale Project in Parachute, Colorado.
In an eerie precursor to today's oil-shale and oil-sands project, the Parachute project drilled a number of holes into a mountain of oil-filled shale, fractured the rocks (early "fracking" at work) and then basically set it on fire - creating a huge underground reactor that would yield oil from the shale. Or at least that is how I remembered it.
Ronald Reagan ran on a platform of ridiculing government works, and the oil-shale project was one particularly in his sights. As soon as he was elected, he canned the project, and everyone was laid off.
What happened to Parachute? Well, during the boom times, when everyone was hiring there, people bought houses or invested in the town. Once the project was cancelled, many just walked away from mortgages and obligations. There was no way these properties would be worth what they paid for them - not for decades.
Boom towns exist - even today. This is not a 19th Century phenomenon.
Today in the news, Elko Nevada is making headlines as one place in the country where there is a housing shortage - because of the boom business in gold mining.
And we are hearing similar stories in Montana and North Dakota - as oil boom towns spring up overnight. Wages are going through the roof, as are housing prices, to both rent and buy.
One story recounts how folks are living in RVs in the Wal Mart Parking lot. The narrative of the story is how awful this is. I disagree. Those are the smart folks.
Why? Because all booms go bust, eventually. Once the oil is discovered, the number of workers needed to maintain an oil field will go down. And prices will stabilize as our old nemesis, Supply and Demand kicks in, and housing prices drop.
And in the gold mining towns, things can go very badly in a very big hurry if gold drops in price - further than it already has. If Gold goes down to $800 an ounce, mines will close and people will be laid off - and entire towns will disappear off the map. Far-fetched? It happened to mining towns in the 1800's. It can happen today.
And what would $80-a-barrel oil do to these oil boom towns? Or even lower prices? Sounds far-fetched today, but it has happened in the past - with regularity. The laws of supply and demand dictate that prices are not within our control. Sure, the long-term trend is toward higher and higher oil prices. But short-term? You could see a decade of price declines - and that could be enough to sink the mortgage on your overpriced house in Boom Town USA (or Canada - for all you oil sands fans).
Just remember, we started this Century under $20 a barrel, and during the Clinton years (those were the days!) it went as low as $10. Ouch! That was not so long ago, was it?
And with each piece of good news for the economy - unemployment going down, housing bust recovering, manufacturing hiring increasing, world debt crises being resolved - the price of gold will get hammered, quietly, a little bit at a time. And perhaps the price of oil as well.
Should you move to a boom town for a high-paying job? Sure, if you need a job. But BANK that money and don't fall for the notion that somehow a boom town is a permanent thing. Once the price of oil - or gold - drops, mines and oil fields close in a hurry. Think hard before plunking down money and borrowing more to BUY a house in a Boom Town.
The temptation is strong, after all, you will hear stories about people "doubling their money overnight" in local Real Estate. But that is akin to buying a stock after it has gone up - the train has left the station, and you were not on board. And the guy who "doubled his money?" - well, he doesn't sell, for fear he won't be able to find a place to live, so he hangs on - and loses it all again, and then some, when the boom turns to bust.
Cycles like this occur in our economy all the time - and the recent Real Estate bubble (and current gold bubble) are cases in point. Boom Towns merely amplify these cycles. The big players in our economy are smart enough not to get their wienie caught in the wringer during these boom-and-bust cycles. However they are also smart enough to make money from them, by being the folks who sell you those houses, or gold, or oil, or whatever.
If you look at the history of Boom Towns - such as the Gold Rush of 1849 - you realize that the folks who made the money were not the workers or miners who struggled to eke out a living in the mud, but rather the suppliers and purveyors who sold them goods at inflated prices. Levi Strauss made his money selling blue jeans, not digging for gold. And many a dynastic fortune was made during that era - but not by the people in the mines, but by the people selling them shovels and food.
Who gets stung by these Boom-and-Bust cycles? Little people - folks who get their normative cues from the media and their clueless friends. Folks who think, "Everyone else is making money in the stock market! I'd better get in on this Facebook IPO! Everyone is making money in minerals, I'd better buy Silver and Gold!" But rarely do they make money. Most of the time they get wiped out and then are too ashamed to admit it, thinking that it was "their fault" that they got stung, and not that they were manipulated by a mass-media who lies to them on a regular basis.
Little people get run over, on a regular basis. And - God love 'em - they get right back up and jump into the "next big thing" without ever learning from their past mistakes.
And that right there is the simple secret to success in America - just don't be manipulated and just don't listen to what the mass-media is saying or what the great mass of humanity is saying. If you can look at things coldly and logically - and not let your opinions be swayed by peer pressure - you can come out ahead.
It sounds easy to do, but it usually isn't.
11 comments:
I notice you wrote quiet long articles lately.
Sometimes, less is better than more.
Good thing to have a family or child is you cannot do it more because of them.
That doesn't mean you have to have lots of children, but balance is important.
gHey I want to hear your take on future food prices, Monsanto and their patents, and what the future looks like for organic farming.
Sorry to treat you like a crystal ball vending machine.
Dispense wisdom now!
Here was my take on Roundup-Ready Corn. As a Patent Attorney, it disturbs me a bit that companies appear to be abusing the Patent system to extend their monopolies....
See:
http://livingstingy.blogspot.com/2011/02/corn-revolution.html
Sorry about the long format, I like to type...
I'm not a twitter guy, I guess.
Well, from my point of view I don't mind the length of the articles, as there is a lot of good points in them and they are worth reading. Then again I don't have kids yet, so I have more time ;)
And personally I find it a great help that you are out there reminding us not to give in to the "peer pressure" of the mass media, as it does require constant vigilance.
One thing I'd say though is I have the opposite view on the price of gold/oil. I say both of these commodities go up as the economy "recovers". Why? Because the only way we'll see the economy "recover" is through Bernake's money printing. Gold is viewed as primarily an inflation hedge, and all commodities go up during a period of inflation.
If we get a recession, gold/oil prices go down. If we get a "recovery", gold/oil prices continue their climb. This has been the trend for the last 40+ years. Why would it be different this time?
You might very well think that, but history says otherwise.
The last big gold bubble was in 1979/1980 during the Jimmy Carter "National Malaise" days. People thought America was kaput, and they bought gold. The price spiked to nearly $900 an ounce in 1980, and then fell, as the economy recovered, and did not hit that level again until 2005.
Think about this - if you bought Gold in 1980, you would just be breaking even - not accounting for inflation - 25 years later.
Now you know why I say that Gold can be a very, very bad investment!
Gold goes HIGH in times of financial panic, and goes LOW in times of financial stability - it is inverse to prosperity - the opposite of what you stated.
Similarly, the price of oil often is lower during good times - and often drives good times - such as during the 1990's when Clinton was President and the economy surged ahead, thanks to $10-a-barrel oil.
So, while you might think these commodities would go up in price during a recovery, it is not necessarily true, and in fact, may be characteristically the opposite!
You might want to research gold and oil historical prices. I am not sure where you are getting the statement:
"This has been the trend for the last 40+ years."
As just the opposite has happened. Gold tanked during the Reagan recovery and during the Clinton boom times (but peaked slightly during the recession of 1992 under Bush) It only went up during the recent recession.
Similarly, oil prices did not follow the pattern you describe over the last 40 years.
The Kitco historic charts are a fountain of good information:
http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx
Their "current" information, on the other hand, is little more than hype for gold. I would ignore that.
Oil does not follow any simple pattern, and in general goes up over time. But it does dip - and often in times of prosperity, not recession.
It all depends on supply and demand, which is the subject of my next post.
See:
http://www.ioga.com/Special/crudeoil_Hist.htm
Yes, perhaps what I should have said was that gold has been following inflation expectations for the last 40+ years.
Gold rose during the 70s due to inflation. Gold collapsed during the early 80s because Volcker killed inflation with his 20% interest rates. Gold again rose during the 80s as interest rates declined and inflation increased. Same from 2001 onward.
The only time this trend hasn't been followed was during the 90s. Austrian economists say this was because technology related productivity gains tempered inflation. Whatever.
Regardless, it seems to me the only way gold and other commodities are going to drop is if the Fed launches interest rates again like the did in the early 80s, and causes another recession.
I personally see almost 0% chance of that happening in the near future.
Try again.
Gold peaked at about the same time inflation peaked (I am guessing you were not alive in 1979?).
When Reagan took office, the economy recovered and gold sank precipitously.
It remained FLAT for nearly two decades after that.
Gold is not tied to the "economy" at all, but as a commodity, to the laws of SUPPLY AND DEMAND (see my subsequent posting on this).
In times of prosperity, people put money into equities and other investments that EARN money (creating wealth). It is only in times of uncertainty that people PARK money in gold, if they are uncertain about the currency or are afraid.
We've seen five years in a row of television shows hawking fear and hawking gold. And the people buying gold - at the retail level, are not the brightest bulbs in the chandelier. Many of them are tea-partiers, right-wingnuts and people who don't understand money.
Gold cannot earn, gold cannot grow. In fact, every day, the supply increases - dramatically. Eventually, like Fort Lauderdale Condos, the supply will exceed demand. Not by much, but enough bring prices down.
And when that happens, the afraid people who bought will panic and sell, and, well, gold will be worth as much as a half-finished high-rise in South Florida.
Your theories about commodities prices being tied to the economy are flawed - and in fact have no basis in fact whatsoever - no causal connection, and not even a correlation!
Supply and Demand is all it is. It has nothing to do with the economy per se, but the demand of people buying and selling it.
And the same is true for oil.
What would spike the price of oil would be Iran closing the straits of Hormuz - or a staggering increase in consumption.
I am betting on neither. Car sales are up in the US, but the most popular cars are smaller, more fuel efficient ones.
As our fleet gas mileage goes up, demand goes down, and prices will drop. Then, people think they can afford gas hogs and the process repeats. Supply and Demand. And that is why gas prices declined, in real terms, from 1980 to 2000, and then increased again.
Supply and Demand - small changes in these cause HUGE swings in price.
"Gold peaked at about the same time inflation peaked"
Yes exactly. So gold is following inflation expectations, not necessarily the economy; which is what I really should have said originally.
Yes, I am a youngin', was not alive during 1979. However based on my research I don't agree with this statement: "When Reagan took office, the economy recovered and gold sank precipitously"
What I've done is taken a look at the gold graphs you linked to, and compared them to this list of recessions:
http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States
So here we see that there was a recession from Jan-July 1980. Not surprisingly if you look at the gold graph, this is the exact
same time that gold tanked. Almost immediately after this recession ends gold begins it's rise again, going from $490 to $700.
Then we get another recession from Jan '81-Nov '82. And if you look at the gold prices, again gold declines during the entire
recession. After the recession is over gold picks up again going from $290-$500.
But it's even more interesting if you compare the Fed's interest rates to the price of gold. Take a look at this:
http://en.wikipedia.org/wiki/Federal_funds_rate
If you look at the interest rate highs and lows, there is a very strong connection. You see the interest rate spike in 1980, 1981.
Heck, even after interest rates are lowered again in 1985 you see gold take off again. Then in 1988-89 when the Fed raises rates
you see the gold price drop. There is a very strong correlation here. Yes?
So the question is, with the Fed's rates at 0%, why would gold respond any differently to interest rates than it did in the 70s, 80s, and 2000s?
I think you are exaggerating minor effects in the charts and finding selective correlation where you want to see correlation. And bear in mind that correlation is NOT causation.
I think you have to look at the REASONS people buy gold, not at coincidences between the price and other indicia.
And the REASONS are based on both logic and FEAR. People buy gold because they feel the currency is weak, and because they FEAR a financial meltdown. They also are GREEDY as they see the price spike, and then decide to get on the bandwagon.
Gold shot up in the late 1970's - after going through a similar boom/bust in the early 1970's. Back then, every Johnny Lunchbucket talked about gold - just as they do today.
Gold Kruggerands were the big deal - that at Tuborg Beer and Disco. And small time investors bought in.
And yea, they advertised "Gold Kruggerands, from South Africa" on television back then.
Then they lost it all, and the price tanked and stayed relatively flat until about 2005. It was a shitty investment.
COMMODITIES are tricky things to trade. Trying to come up for a "system" for gold pricing is about as illusory as one for pork bellies. It ain't gonna happen.
The people making money from gold are the producers and sellers. The schmucks buying it are the people who end up losing money on it.
Gold is a FEAR commodity. When the economy is uncertain, people buy it. When the economy (or more precisely, the CURRENCY) does well, people SELL it.
I think gold will reach a sell-off point when the economy recovers further.
I think it would have dropped more by now, but the Chinese bought a boatload last month, which stemmed the rapid drop we saw in December.
My bottom line is that it is a very risky thing for the small investor to invest in, particularly now that it has risen dramatically in price.
During times when the price is low, it is a crappy investment - it stays flat in value. IN times when the price is high, it is a risky investment, as it may drop in value. Either way, it is problematic.
If you want to invest in it, great. But don't put too much into it - if it tanks, it will take you out.
As the economy recovers, gold will decline. Fear will evaporate, and people will want to use that money tied up in minerals, not making any money (it doesn't make money until you SELL it, after all).
Once the selling starts, it will create what we call in Electrical Engineering, an "avalanche effect".
I would be very cautious in buying it. Diversify!
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