Monday, November 19, 2007

Notes from Alan Greenspan's 2008 Forecast @ The Learning Annex

Notes from Alan Greenspan's 2008 Forecast @ The Learning Annex

I recently attended the Wealth Expo organized by The Learning Annex. Bill Zanker has signed Trump on to a 3-year deal, and he was the headliner of the show along with Tony Robbins and Alan Greenspan.

Alan Greenspan came on the satellite feed shortly after 8am on Sunday morning. It was an interview-style presentation, with NBC's Michael Corbett leading with the questions. Some of the ones that stood out for me. Based on my notes, the wording could be slightly modified ** means more than slightly. I tried to recap the message Greenspan was trying to convey, though there could be a bit of misinterpretation based on my memory.

MC - Who was your favourite president to work with?
AG - Gerald Ford, he will be missed greatly by me.

Reagan was great as well, and his policy advisors complemented the policy of the Fed.

MC - *Why is there a housing crisis?*
AG - In 2003, lower rates in Japan caused problems with deflation. The US does not want this to happen here. The housing bubble and condo bubbles are coming to an end. Long term rates ultimately affect the market. Housing bubbles are due to decreases in short term interest rates.

The difference between this bubble and many in the past is that the real estate bubble is the same everywhere. There needs to be a global solution to the problem.

The core reason why the bubble happened is due to consequences of the end of the Cold War, the rise of Market Capitalism, and production growth inflation.

There was an obvious amount of liquidity permeating the markets, and the low rate was creating problems, with a 5% growth in money supply year over year.

MC - How long will the softening of the real estate market continue?
AG - New homebuilders need smaller inventories. Vacant homes cause many problems for builders, including vandalism and exposure to inclement weather. Builders are creating fire sales to move inventory.

How low will prices fall before consolidating? We haven't even started.

(AG cellphone rings off camera. A warning from the Plunge Protection Team? )

If liquidation is fast, there is a possibility of prices flattening out in spring. (AG pauses, somehow I think he believes it is worse than that)

MC - With regards to the dollar decline & economy, why did the USD weaken?
AG - It was not necessarily a weakening of the US dollar as it was an increase in demand for the Canadian dollar. The last several years have gradually seen an improvement of the value of the Canadian dollar compared to the USD. The main reason is the huge demand for commodities in China and emerging markets. Spot exchange rates fluctuate with interest rates, and are cyclical. There is currently a major inflation concern. However, the weakening USD has no real economic consequences for Americans. (Huh?)

A large share of the US national income goes to the finance sector. Savings and capital investments are key spending trends. The US wastes almost no savings. (Wha?!?) China wastes much more.

New York is exporting finance to other markets, including deals in Canada, and Europeans are investing in the United States.

MC - What will be the effect of a new president on the economy?
AG - With the extent that globalization is taking over individual economies, the economic policies of the president and government are mainly relevant to internal problems and not the world economy. The cost of medicare will double in 25 years. With the current demographic trends, society cannot afford Medicare. There appears to be a 50% shortfall in the medicare system. The usual role of the president in foreign affairs has also changed.

MC - Should we invest rather than let our government handle our retirement?
AG - It is essential. The amount of retirement income must be increasingly private. With current social security funding, it is expected that supplements will be 40% less income than pre-retirement. Medicare is declining as the demographic population grows older. With economics and politics, there doesn't appear to be a solution to the medicare problem.

In 25 years, the US will still be a world economy leader. The world depends on the US. We are by far the current leader. The US must continue opening new markets, and maintain these open markets. It must avoid protectionism at all costs, as it erodes the systems and standards of a country. Medicare and protectionism are 2 major problems now and in the next 25 years.

MC - Who was the most interesting world leader you have met?
AG - Zhu Rongji - the retired premier of China. Quoting Deng Xiaoping, he said he practiced "Socialism with Chinese influences" which in my opinion was wrong. He practiced some of the purest forms of capitalism possible, even more so than in the US.

Rongji and Gorbachev were perhaps the two most significant economic personalities of the last 30 years.

MC - Social Security and Medicare - are they in trouble?
AG - Medicare has a huge shortfall. If there are no tax increases, there will be half the benefits that should be available.

Social Security is cash defined and not increasing. The 2% gap in funding could be closed and there are 5 to 10 proposals out to fix this. There are absolutely no suggestions for Medicare, and both Democrats and Republicans appear to be avoiding the issue altogether.

MC - With all of the stock market scandals, do we have policy changes to implement?
AG - We already have Sarbanes Oxley. Scandals and fraud, however, are human nature. Legislation will target individuals and individual situations, however there is no hope of keeping up with scandals or fraud.

MC - Is real estate one of the best investments?
AG - Over the long run, yes. There will be a testing period for real estate immediately ahead. It is difficult to get investment right now. In the short term, it is a bad investment. I am not sure how long this current market will last.

MC - In 2008, what do we have to look forward to?
AG - Buy my book to find out.

Later on in the evening, Donald Trump came on. I will try and recap his speech later, but these points really stuck out:

Trump's opinion is that we're in a recession. He thinks that could be a good thing for real estate investors, as it allows them to go in and offer money to the banks for discounted foreclosure mortgages.

The best investments are outside of the United States. Trump has 2000 acres of oceanfront in Aberdeen, Scotland. His friends keep calling him asking about investing there.

The banks are out of business - use Other Peoples Money (OPM) for real estate deals.

Green buildings are too costly and technology is not there yet to implement properly.

Banks are gone.

The residential market has dried up, and commercial will follow shortly. If you are being foreclosed due to an exploding mortgage, negotiate with your lenders, or sue the pants off them for improper financing.

Never give up. Always get even.

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