The Failed Intervention

The Daily Reckoning - Weekend Edition
April 23-24, 2005
Baltimore, Maryland

THE FAILED INTERVENTION: A MORALITY PLAY IN THREE PARTS
By The World Famous Playwrights At The Daily Reckoning

CAST OF CHARACTERS:

A.W. (a.k.a. Renter #1)
T.D. (Renter #2)
K.I. (Renter #3)
L.S. (Unwitting Speculator #1)
C.D. (Unwitting Speculator #2)
M.N. (Real Estate Investor)
A.P. (30-Year Fixed Rate New Homeowner) 
Chorus: Café patrons and waitresses

TIME and SCENE: Mid spring 2005 A.D., our great nation is
in the throes of a tenacious housing bubble. Whole cities
have been tantalized, wooed and seduced by this Siren song
of easy wealth; entire populations rendered giddy by
profits… on paper. Nearly every conversation heard around
the dinner table… across the bar… in a cab… is
focused on one subject: the housing market.

The scene opens in Café Hon, a locally famous Baltimore
eatery in the trendy suburb (sic) of Hampden, where big
hair and gaudy make-up are curiously in vogue and admired.
Seven colleagues from the Daily Reckoning's HQ are seated
around a Formica-topped table.

Lacking an additional 30-yr fixed mortgage holder, the
table less-than-fairly represents the breakdown of
mortgages nationwide: roughly 60% fixed rate, 40% ARM…
25% of all new mortgage originations in 2004 were real
estate investors.

LS (Unwitting Speculator #1) is closing on a house the
following day. Mere hours stand between her and the single
biggest financial transaction of her young life. Can those
stalwart pessimists (Renters #1, #2 and #3) lash her to the
mast in time to save her from the Siren's tantalizing tune?

We shall see, dear reader… below…

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         ACT I - A MORTGAGE BROKER'S WET DREAM

Renter #1: Hey, LS… I'm going to ask you one
question. Your answer will determine how much I speak for
the rest of this meal. Is your loan… an adjustable-rate
mortgage?

Unwitting Speculator #1: Not at all. It's interest only.

[A gasp is heard. Ominous Lon Chaney-style horror music
rises from the background.]

Renter #1 (face wincing): Why… why?! [Screams of horror
coming from the kitchen.]

Unwitting Speculator #1: What?! I was tired of throwing
away money on rent every month. I wanted to invest in
something real… and build equity. Besides, we're going to
sell in five years, anyway. So we're cool.

[Somebody snickers.]

Renter #2: That doesn't make sense. You are still throwing
away money. The only difference now is you pay a finance
company instead of a landlord.

Renter #3: And what if you can't sell in five years…
doesn't that make you nervous?

Unwitting Speculator #1: [muffled unintelligible remarks…
something about the location of the house…a leafy
street…children on bikes…speed humps… shiny happy
people… yada, yada…]

Renter #3: Answer the question. What if you can't sell?

Unwitting Speculator #1: Well… I am a little nervous.
(nervous laughter) We're risking a huge amount of money…
more money than I've ever known. But hey, you only live
once!

Unwitting Speculator #2: Oh come on LS, don't listen to
them. I have an interest only mortgage, too. [More gasps of
horror. Another burst of Lon Chaney music.] These guys are
all gloom and doomers. Remember, they work for the Daily
Reckoning.

[Renters' heads snap in unison to glare at Unwitting
Speculator #2]

Renter #1: And…what about you, AREN'T YOU nervous?

Unwitting Speculator #2: Nope. I try to take life one day
at a time. I don't look that far ahead. I'm doing okay
right now… and besides, in 5 years, I hope to be married.

[Unwitting Speculator #2 holds up both hands with her
fingers crossed. Smiles.]

All (in unison): Awwww.

Unwitting Speculator #1: Don't you know it's bad luck to
cross your fingers with BOTH hands?

                ACT II - UNSEEMLY PROFITS

Real Estate Investor: What about you Addison, why do you
rent?  

Renter #1: Well, we live down by the water… in the
neighborhood we want to live in… and to tell you the
truth, I just don't understand the market anymore. Let me
give you an example.

When we lived in the same neighborhood before moving to
Paris back in 2000, the house across the street went on the
market for $97,000. The price was so high, everyone thought
the owners were nuts. It was a different time. A friend
finally bought the place for $87k, gutted it and started
renting to college students.

We moved to Paris for four years. Last year, when we were
moving back, we looked for a place to buy in Fell's
Point… low and behold, we saw the same property on the
market. Guess how much?

All (in unison): How much… tell us!

Renter #1: $357,000. [Renter #1 moves his hands to his hips
in disgust. Nods around the table.] A four-fold increase in
just as many years!? Tell me, what market - any market -
can sustain that kind of growth?

Real Estate Investor: Hey, a lot of people I know would say
that's still cheap. Besides, it sounds like you were a damn
fool to move to Paris. You should have held on for the
ride. Still, I think you're right. The market is getting
frothy… that's why I just sold my Baltimore properties.

[Puzzled looks of intrigue.]

Renter #1: Yeah, that's probably a good move. You bought in
nice and early, and now you've sold near the top. Then you
put the proceeds into a resort property in West Virginia…
everyone knows that's an undervalued market.

[Fiddle-heavy blue grass music wafts from the kitchen. More
nods of agreement around the table.]

Real Estate Investor: Yup. The price is up already. We only
put ten percent down, but by the time of closing we had
accumulated enough equity, the bank said they weren't going
to require mortgage insurance. We'd already amassed an
additional 10% of equity!

30-Year Fixed: Hell yeah! We made over $30,000 on our house
before we'd even slept there!

Unwitting Speculator #2: Yeah… same here… my house is
way up already, so I have a good margin of safety. And when
I get married…

All (in unison): Awwww.

Renter #1: Hey, 30-year fixed, I know you've already made
money on your house, but what do you see in the future?

30-Year Fixed: I have a response, but first I'd like to
make a comment…

There are some neighborhoods that will always hold value.
[muffled remarks… something about the location of the
house…a leafy street…children on bikes…speed humps…
shiny happy people… yada, yada…]

Renter #1 (with much enthusiasm): Au Contraire! (after all,
that is THE motto of the Daily Reckoning…)

Baltimore is a case study of good neighborhoods gone bad.
Look at Druid Hill… beautiful row homes. Back in the '20s
F. Scott Fitzgerald and Gertrude Stein held garden parties
and entertained European royalty up there. Now look at it.
Hell might offer better refuge for a family of four.

On the other hand, in the '70s respectable folk wouldn't
let their children go down to Fell's Point unchaperoned. It
was a haven to bikers, ne'er-do-wells and urchins of the
night. Today, they're building spec homes on the water that
start at a million plus…

Renter #3: Too bad the harbor smells so bad…

All (sighing): Yeah…

[Pregnant pause. A moment of quiet reflection.]

Chorus: At this point, it's not clear what conclusion, if
any, can be drawn from the play.

When will the housing bubble burst?

Is it a bubble at all?

Or… will prices keep rising for five years, handing the
interest-onlys the last laugh; leaving the renters, humbled
once again with egg on their faces… and feeling like
chumps? Well, dear reader, this is what makes a market.

Still, the renters bumble on…

                 ACT III - THE INTERVENTION

Unwitting Speculator #1 (jolted with excitement turning to
Renter #1): Oh, that reminds me, can I have the day off
tomorrow? I'm closing on my house. [Turns to the table.]
Should I wear a suit?

30-year Fixed: Nah…you don't have to wear a suit for
those yahoos.

[Snickers]

Renter #1: Sure, you can have a day off. But I forbid you
to use one of these.

[Renter #1 holds up a pen. Renter #2 and Renter #3 smile at
each other.]

Renter #3 (smugly): Ahhh… No pens, no signing.

Renter #2 (smug and grinning): Yeah… no pens.

30-year Fixed (Gesticulating expansively, raises his
voice): Ah, don't listen to THEM… (mutters to himself)
for crissakes.

[Check arrives. Curtain falls.]

Regards,
Your playful playwrights at The Daily Reckoning

DISCLAIMER: Any and all events in this dramatic reenactment
are purely non-fictional. Any resemblance to real life is
intentional; not at all coincidental. Some liberty may have
been taken with the facts, but we swear it was in good
faith. We may have been embellished a tad for dramatic
effect. (Good luck, Lisa!)

AUTEUR'S NOTE: It goes without saying, if this reality play
had been written in 1999, the object of desire would have
been tech stocks instead of houses. For a more sober and
cautionary look at the frothy housing bubble, we reference
Dan Denning's opus:

Your House is Worth Less Than You Think                 

P.S. It might also be worth pointing out: The oppressive
nature of material goods in Western society is not
immediately obvious. But the oppression exists nonetheless.

After reading Mark Skousen's essay on the BOOK OF THE WEEK
written in 1937 (directly below) about the joys of NOT
working and NOT consuming… your editors squabbled over
who would get to read our comp'ed copy first. Tom Dyson won
out… he's now experiencing an existential crisis and
considering veganism. Beware!

--- Daily Reckoning Book Of The Week ---

The Importance of Living
by Lin Yutang

After reading Mark Skousen's essay of April 12, the
editorial staff of The Daily Reckoning have been clamoring
over the one copy of Lin Yutang's book we have here in the
office.

"The noble art of leaving things undone," reads the subhead
on the front cover. Superb!

The Importance of Living
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------------------------

THIS WEEK in THE DAILY RECKONING: A debut essay by Richard
Maybury, of the acclaimed Early Warning Report, an
interesting contrarian trade by Dr. Sjuggerud and some
excellent fare by Bill, Richie and the MoGu…

GLOBALIZATION AND ITS DISCONTENTS 04/22/05
By Bill Bonner

"Globalization is nothing more than the extension of the
division of labor across international boundaries. However,
in modern America, globalization means the rest of the
world sends you things you don't have to pay for…"
http://www.dailyreckoning.com/Issues/2005/DR042205.html

SMALL STOCKS, BIG TROUBLE 04/21/05
By Steve Sjuggerud

"Everybody loves small stocks. Investors feel that's where
the money is - and that you can't lose with small
stocks…which is exactly why the timing is perfect to bet
against them. Steve Sjuggerud explores…"
http://www.dailyreckoning.com/Issues/2005/DR042105.html

THE HOAX OF DEMOCRACY IN IRAQ 04/20/05
By Richard Maybury

"Iraq's recent election is seen as a success in the eyes of
most Americans. Richard Maybury wonders if forcing our love
of democracy on Iraqis was the right thing to do - or if it
will further separate an already divided land…"
http://www.dailyreckoning.com/Issues/2005/DR042005.html

THE GREAT WEALTH DECEPTION 04/19/05
By Kurt Richebächer

"The U.S.'s economic recovery since 2001, despite what
others may say, is practically non-existent. Dr.
Richebächer wonders if this quest for an economic rebound
has been abandoned - or simply delayed…"
http://www.dailyreckoning.com/Issues/2005/DR04-19-05

BUMBLING BABY BOOMERS 04/18/05
By The Mogambo Guru

"Although the Social Security crisis has caused countless
debates and much serious thinking, the Mogambo Guru points
out that this is by no means the country's biggest problem
- if it's truly 
http://www.dailyreckoning.com/Issues/2005/DR041805.html

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------------------------

HEADLINE, NEWS And INSIGHT: Chris Mayer is planning a trip
to China, and to prepare, he's been digging into obscure
research. Here's the lowdown…

LEARNING TO PLAY THE GAME
By Chris Mayer

"Making changes and improvements, implementing
administrative procedures - things that Westerners take for
granted as part of their jobs, were much more difficult to
achieve in China."
http://www.dailyreckoning.com/Featured/LearningtoPlay.html

------------------------
 
FLOTSAM AND JETSAM: In China alone, electricity demand is
150% higher right now than it was when China started to
boom in 1980. Worldwide, electricity demand is expected to
explode by another 85% before the year 2020… faster than
demand for any other kind of energy.

The following was inspired by a night spent in a 54th floor
hotel room overlooking Shanghai's "Time's Square"… when
the lights REALLY DID go out!

WHAT IF THE LIGHTS WENT OUT?
By Addison Wiggin

What would you do if the lights over your head right now
suddenly went out?

You might fumble for the switch. But what if you knew the
lights would never go on again?

What if you knew your microwave and coffee maker had just
stopped working forever…that you could never send another
e-mail…that the entire Internet had gone permanently
"offline"…or that you'd never be able to "power up" your
computer again?

If you were suddenly "unplugged" from the global electrical
grid…what would you do? What could you do? What could
America do with zero electric power?

How about China, India, or any other growing economy - West
or East?

Of course, it would be a disaster.

During a power storm, when the lights go out, we're sure
they'll come back on. Because they always have. We're sure
the lights will come on when we flick the wall switch.
We're sure the TV will work when we plug it in. Because
power has always been there. And that's the way it is.

But what if it…wasn't? Maybe you can't imagine it. And if
you were living right now in China, you wouldn't have to
imagine it. Because the threat of no power is already
becoming very real…

Outside the Forbidden City of Beijing, the lamplights burn
at half strength…or not at all. In Taizhou, the great
industrial city of the booming Zhejiang province, children
do homework by candlelight. In Shanghai, 500 factories are
ordered by law to operate only in off-peak hours…and
count themselves lucky to stay open at all!

These are real news events, happening already.

Last year, over 6,400 factories in China had to SHUT DOWN
because they didn't have enough electricity to run their
machinery.

Another 10,000 manufacturers had to ration power. Even
companies like Sony and Volkswagen had to cut back
production in their Chinese plants.

And It's Not Just in China. . .

In Manhattan, the skyline is dark…elevators freeze
between floors…hospital machines give their last
blip…and in the press rooms, computer terminals go
black…in California, the world's fifth-largest economy,
this happens over and over again…

Maybe 29 hours in the dark sounds like nothing to you. But
when it happened in 2003, New York alone lost about $1.05
billion…or around $36 million per hour. Workers couldn't
work. Tourists couldn't shop. Markets and restaurants
couldn't keep food cold. Even the marquees on Broadway and
the neon in Times Square went black. And it wasn't just New
York. In Michigan, where a few of America's cars are still
made, losses from the same power outage piled up to $691
million.

Municipal electric water pumps stopped flowing. Sewers
clogged, and streets were flooded. Over 400 flights were
canceled. Candles caused fires. Calls to 911 doubled.

And that was just one day without power. Imagine a week. A
month.

The Great Northeast Blackout of 2003…the rolling
California blackouts and brownouts that cost former
Governor Gray Davis his job…soaring electricity
prices…even faster-growing electricity demand…

It's bad enough when it happens in the United States. But
at least we have the capacity to bounce back already on
hand. What about when you're a growing economy with thin
margins for error? For instance, last year, China racked up
over 175,000 local blackouts!

Imagine how much that cost.

See, the thing is…you can't store electricity. You have
to use it as you make it. And if you stop making it, the
lights go out. It's that simple. Downed power lines and
aging power stations are one thing. They appear temporary.

But what happens when you just run out of resources to feed
the grid?

Of course, it's plain bananas to think any of the world's
biggest economies would tolerate a future with zero
electrical power. It's impossible. And simply not the way
this is going to work.

What we'll do instead is keep the lights on at almost any
cost…even if that's two and three times the expense of
electricity today. And the investment that will require
will be unprecedented in the history of the energy
market…

Regards,

Addison Wiggin
The Daily Reckoning

[Ed. Note: Get yourself into position before it happens and
you could find yourself inadvertently doubling or tripling
your money… before the rest of the investing world wakes
up to the full scope of this ever-rising demand!

The Great Global Electricity Crunch
http://www.agora-inc.com/reports/OST/WOSTF421

-------------------

And The Markets… (Courtesy of The Rude Awakening)

	Friday	Thursday	This week	Year-to-Date
DOW	10,158	10,219	70	-5.8%
S&P	1,152	1,160	9	-4.9%
NASDAQ	1,932	1,962	24	-11.2%
10-year Treasury	4.25%	4.30%	0.01	0.04
30-year Treasury	4.58%	4.64%	-0.01	-0.24
Russell 2000	590	599	9	-9.5%
Gold	$434.60	$433.00	$9.80	-0.7%
Silver	$7.28	$7.22	$0.27	6.8%
CRB	307.29	306.71	8.46	8.2%
WTI NYMEX CRUDE	$55.39	$54.20	$4.90	27.5%
Yen (YEN/USD)	JPY 105.97	JPY 106.94	1.80	-3.3%
Dollar (USD/EUR)	$1.3066	$1.3048	-143	3.6%
Dollar (USD/GBP)	$1.9146	$1.9072	-223	0.2%

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