The 21st Century Pump and Dump

Tuesday, March 5, 2013 | 0 Comments

We usually think of pump and dump scams when we think of penny stocks, or I guess stocks in general. I remember a few years ago The National Inflation Association came under heat from precious metals expert and investor Peter Schiff over what he claimed was the pumping up and later dumping of penny stocks. The way a pump and dump works is pretty simple. Investors pick a stock and buy it at a very inexpensive price. Later using a variety of methods like a PR campaign, or advising their newsletter subscribers or investors to buy the stock telling while them it is the next Apple Computers or Google, they pump the price up. So the first guys in buy very low, they then use media and influence to have others start buying, and once they create a huge story around the stock and pump the price up they dump, meaning they sell. The last people who buy in are the ones that get crushed. Although this seems like a scam more related to stocks, it is my personal opinion and theory that it is happening right now in the U.S. real estate market.

Just think about my description about what a pump and dump really is. Doesn’t it sound all too familiar to what happened in the housing boom and then bust just about 5 years ago? And although it sounds similar to a pump and dump the last housing bubble I think was more organic in nature. What I mean is that the last housing bubble was caused because of government policies, Federal Reserve policies, and lastly big bank policies. These three players created the boom, and then created the bust. Of course the punch drunk investors and first time home buyers, and everyone else who used their real estate like an ATM, was to blame for the bust as well. At the end of the day it does come down to personal responsibility, doesn’t it?

I think the real estate market today has all the signs of a pump and dump. And this isn’t just a stock; this is the entire U.S. housing market! Sound crazy? Well some of our so called government leaders and some of the ego maniacs over the Federal Reserve and big banks are more than willing to move forward with a pump and dump of this scale. This is Enron, only a TRILLION times worse.

So why do I think there is a pump and dump underway? Well, let me present my theory. For starters we have multibillion dollar financial institutions and investors that usually have not been real estate investors jumping into the market in a BIG way. Take for example John Paulson, who runs one of the largest hedge funds in the world. Not only did he move almost half of his position into gold, over the last year he has purchased over 25,000 single family residential lots in California and Colorado. Warren Buffet is another very well connected investor who last August revealed he is investing big into the U.S. real estate market. News of this was blaring all over the media and was used as a sign that the housing market was now healing. But wait, what about the trillions still out there in toxic debt? Forget about it. IT’S HEALING! Blackstone group is another big firm that in the last year has purchased over two billion dollars’ worth of residential homes in markets like Tampa and Atlanta. These are just a few of the firms that come to mind. As someone who is an active investor in many metro markets across the country, I can tell you that the BIG money is pouring into real estate.

Now, what does all this money have in common, or at least most of it? Well, many of the players that run these firms have deep connections at the big banks and Federal Reserve. Perhaps they know what you and I already know which is that the Federal Reserve CANNOT raise interest in this climate. If it does that, the housing market would suffer as would the overall economy. After all, this is an economy that is fueled by cheap money and credit, the tell-tale signs of an end road scenario. So big money investors with contacts at the FED that haven’t historically been real estate investors are getting into the market big time. That alone doesn’t really send my spider sense into overload but it doesn’t just end there.

The Federal Reserve is doing everything they can to raise home prices. Not only are they keeping interest rates artificially low, they are also buying over forty billion dollars’ worth of mortgage backed securities. Between you and me, I think the number is MUCH larger and the FED is likely buying MBS from European banks as well who have yet to recapitalize their banks. Bernanke already revealed in past congressional testimony that he was helping bail out European banks. To think it is still not underway is simply not dealing with reality. Remember, this is the same guy who promised, and claimed under oath before congress, that he would never monetize the debt. Liar, Liar pants on fire. The FED is clearly pulling out all the stops to create another housing bubble as is the Federal Government. Last year they purchased over 95% of all newly originated loans. In addition, FHA in the last year has started up the low down payment loans, and in my opinion they will likely really kick start no money down loans after the midterm elections.

However, before the FEDs pour gas on the fire and really create another housing boom, they need the help from two more players. Big banks and the media. Big banks are clearly suppressing inventory from the market. Again, as someone who is on the front lines of this market I have seen firsthand big banks holding back inventory and even suspending foreclosures. Because U.S. banks still have trillions of dollars in toxic loans on their books, they need to do everything they can to raise the price of real estate. If they had to mark to market their assets today many more banks would go bankrupt. Technically these Zombie banks are already bankrupt. However, because of the cheap lines of credit and bailouts from the FED’s they are able to remain open for business.

The last culprit is the media. No longer the watchdog, they have become the lapdog of the establishment. Promoting whatever lies and propaganda the government or big banks tell them. Case in point is the so called housing recovery. Are asset prices going up? Yes. Are foreclosures going down somewhat? Yes. However what they fail to tell you is that the main driver of this is the manipulation at the hands of the big banks, the Federal Reserve, and the big money financial institutions. I have yet to hear someone on T.V. or radio, except for me that is, inform the public that in many major metro markets 50% to 70% of all sales are from cash investors. Many of them big financial institutions. So the media is doing their job to promote real estate and prop up prices that helps the overall pump and dump.

So to recap, we have the Federal Reserve propping up prices and providing a life line to big banks so they don’t go broke. We have the big money investors pouring money into these markets. We have the federal government starting up the low equity down payment loans. And lastly we have the media promoting the “Real Estate Revival”.

In my opinion this is a HUGE pump and dump rather than the free market dictating the rise and fall of asset prices as well how the capital flows into the market. What all these institutions know is the following. Buy all the real estate you can now, hold the real estate for about 36 to 48 months while banks and the feds starting handing out no money down loans like candy and the novice investors that do not understand the drivers of real estate start playing Donald Trump again. Once prices are pumped to levels that resemble 2006-2007 these big players will start to dump homes and properties onto the unsuspecting shoe shine boy. Pretty brilliant plan, isn’t it? I mean Dr. Evil couldn’t come up with this. Not only will this allow these players to make a boat load of money it will also allow U.S. banks to sell their toxic debt into a market that is appreciating in price meaning the hit to their balance sheet will be minimal. In fact it will probably result in a profit.

What can the average investor do? I often tell my coaching clients and regular clients that knowing these circumstances means I have changed my time horizons. The investor that tells you they are holding long term usually doesn’t understand the business cycle or financial markets. I suggest you hold for a short time frame, 12 to 36, maybe 48 months. Getting in and out of deals is best and that is exactly what my firm does almost daily. This pump and dump will be HUGE and it also spells a HUGE opportunity for the educated investor.

If you are interested in learning more about the real estate markets and how you can tap into what I call the trillion dollar opportunity check out

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