Email to Investment Partner
“So, I have been spending time thinking about the 1920s and 1930s. From everything I remember reading the 20s were a time of great excess. Just like the present (well up to now). What concerns me is that a major factor in the crash of the stock market was that people were buying equities on margin. Basically, thinking that stocks couldn’t go down (and if they did they would be quick enough to react). Well, after this period (and the great depression), the government put regulations in place to make sure people didn’t have margin loans on equities for more than they could cover. Seems logical.
Fast forward to 2005. Realtors are telling home buyers that home prices never go down. MR and MRS Joe Blow are making tons of money off flipping houses. MR and MRS Joe Blow are buying the most expensive house they can afford (not afford) by taking out as much margin as they could. The margin was in the form of no money down, negative amortization ARMS, with no verification of income or assets. I even remember talking with you about it - people making 100K and buying $1,000,000 homes. It’s called margin and it makes you rich on the way up and kills on the way down. Well, just like in the 1920s the regulators were asleep during the party. They had effectively protected the system from a margin meltdown in the equity markets by putting protections in place decades ago. However, no one saw it coming with houses. Houses were no longer about making a home, but about making money.
Bottomline: I see an scary similarity between the margin meltdown of 1929 and the coming margin meltdown in housing.
Nothing kills like margin. And what we really have now is a major margin problem.”