Financial topics

[vincecate]

Real estate has had a monstrous historic crash relative to gold. There's never been anything like it in all of history, so far as I am aware.

Anyone who expects real estate prices to fall further should be very cautious about gold, as the number of ounces of gold to buy the median house has limited downside from here on a historical basis.

Yes, the "deflation in terms of gold" is already far along. I should not have made it sound like it was all ahead of us. However, if we go into hyperinflation then prices in terms of gold will go down well below historical trends.

The question is should those looking for deflation only be looking for it in terms of gold? And yes, they should see that already.

I'll say it one more time - nobody knows what markets are going to do. Nobody on earth. Not Jimmy Rogers, not George Soros, not Warren Buffett, not Bill Gross, not Goldman Sachs. Nobody.

I agree. But some are a bit more accurate at predicting the future than Bernanke.

[John]

I agree. But some are a bit more accurate at predicting the future than Bernanke.

Who?

[vincecate]

I agree. But some are a bit more accurate at predicting the future than Bernanke.

Who?

I think Peter Schiff has a higher accuracy than Bernanke. He is not 100% but he did get the housing bubble, China's yuan going up, gold and silver going up, and a few other things. Bernanke said there was no housing bubble and that printing money causes stock prices to go up but not food or oil prices.

[Higgenbotham]

Real estate has had a monstrous historic crash relative to gold. There's never been anything like it in all of history, so far as I am aware.

Anyone who expects real estate prices to fall further should be very cautious about gold, as the number of ounces of gold to buy the median house has limited downside from here on a historical basis.

Yes, the "deflation in terms of gold" is already far along. I should not have made it sound like it was all ahead of us. However, if we go into hyperinflation then prices in terms of gold will go down well below historical trends.

The question is should those looking for deflation only be looking for it in terms of gold? And yes, they should see that already.

I'll say it one more time - nobody knows what markets are going to do. Nobody on earth. Not Jimmy Rogers, not George Soros, not Warren Buffett, not Bill Gross, not Goldman Sachs. Nobody.

I agree. But some are a bit more accurate at predicting the future than Bernanke.

Agree on both counts.

An investor in gold now is either betting on hyperinflation or insuring against the possibility of hyperinflation. It's a not necessarily a bad idea to insure against hyperinflation, just as it's not necessarily a bad idea to buy other kinds of insurance.

On the question of real estate, I would say that if there is a hyperinflation, yes, during the hyperinflation gold will outperform. However, if some sort of normalcy is restored after the hyperinflation, then real estate should outperform gold from today's ratio. That brings up a lot of interesting questions from a logistical standpoint, as anyone wanting to buy real estate during the hyperinflation would need to be holding cash briefly after selling their gold or would need to exchange gold directly for real estate.

[Higgenbotham]

Scenario 1
Collapse back to hunter gatherer economy, no food surpluses.
Barter economy. All money and investments worthless.

Scenario 2
Collapse back to agricultural economy, no reliable food surpluses in most areas.
Barter economy. All money and investments worthless.

Scenario 3
Collapse back to agricultural economy, food surpluses. GDP falls, no rebound.
Gold is money. Conventional investments fall in value and don't rebound.

Scenario 4
Collapse back to basic industrial economy, GDP falls, then rebounds.
Fiat is money. Conventional investments rebound in value.

Agricultural surpluses = gold money (commodity money)
Industrial, real estate, etc., financing = debt money
Information = ??? (some would say digital gold currency)

When I talk about investing in real estate, the underlying assumption is that the economy levels out at Scenario 4 (or better) or gets back to it within a short time.

[vincecate]

Scenario 4
Collapse back to basic industrial economy, GDP falls, then rebounds.
Fiat is money. Conventional investments rebound in value.
[...]
When I talk about investing in real estate, the underlying assumption is that the economy levels out at Scenario 4 (or better) or gets back to it within a short time.

If the world reserve fiat currency collapses I don't think you will get a new world reserve fiat money in a short time. The problem is that some entity controls the printing of the money. Why would all the different countries trust that entity with so much power? After world war II the US had all the power and much of the gold, and maybe after a world war 3 we could get a new world reserve fiat currency. To me it seems clear that the world is taking deliberate steps to move to where the dollar is no longer the world reserve currency. At some point I expect a panic flight from the dollar.

I am not sure what you mean by "collapse back to basic industrial economy" but this does not sound like something that you just "rebound" from. Hyperinflation destroys retirement funds, destroys savings, destroys whole life insurance, destroys debts, etc. Any long term contracts denominated in the hyperinflating currency are messed up. However, it does not seem to change the level of industrialization. Civilization does not usually break down. In fact, crime does not seem to usually go up all that much. Taking away guns from law abiding citizens in Jamaica has probably caused the murder rate to go up by a factor of 10 in the last 35 years. I suspect none of the 100 cases of hyperinflation increased the crime rate nearly that much.

My big problem with real estate is taxes. If they put on a 3% property tax (I think the rate in Pittsburgh, the last place I lived in the US) it nearly cuts the value of the property in half. Now instead of paying a 5% loan for 20 years you have to pay that and 3% for forever. This is like the government owning your land and you just renting. And it is very hard to know when you buy the land what the property taxes will be 5 or 10 years down the road. Anguilla just put on an income tax. I suspect this will hurt property values big time. Many rich people like to move to countries where there is no income tax and you have financial privacy and this increases property values. But once you get income tax financial privacy has to be tossed aside. Even increasing sales tax rates can impact real estate values. If the tax rates get too high in one location people and businesses will tend to move away and real estate prices will go down.

[Higgenbotham]

If the world reserve fiat currency collapses I don't think you will get a new world reserve fiat money in a short time.

I don't think you will either. You'll get chaos instead. That's why Bernanke is such a dangerous man. He's put the world on the verge of complete monetary breakdown.

I am not sure what you mean by "collapse back to basic industrial economy" but this does not sound like something that you just "rebound" from.

It would be an economy that is still mostly industrial and still needs a large amount of debt financing to generate economic activity. It wouldn't be an economy where most of the population goes back to farming (like a pre World War II economy), but one where a large percentage of the population goes back to manufacturing and the US trade deficit is balanced out. It might resemble something like the 1960s.

My big problem with real estate is taxes. If they put on a 3% property tax (I think the rate in Pittsburgh, the last place I lived in the US) it nearly cuts the value of the property in half.

I've seen real estate taxes vary from about 1% to 3.5%. It is a big problem and it's a very entrenched problem. In areas where common sense prevails and real estate taxes get reduced, a lot of local government jobs will need to be cut. In areas where common sense doesn't prevail, property values will fall and people will move, creating a vicious downward spiral. Best to look for an area where taxes are low. But the reality is if you take a state like Texas as an example where taxes are generally low, real estate taxes are very high to compensate.


My conclusion and what made me think about these scenarios is the market has overweighted something like Scenario 3 and underweighted something like Scenario 4 (or better). Until recently, the market underweighted something like Scenario 3. Obviously, real events won't fall neatly into any of those scenarios.

[Higgenbotham]

First, what is the source of the corporate profits? Or why did they rebound from zero in the fourth quarter of 2008 to $800 billion per year for the S&P 500?

My answer is bailouts. Bailouts are the source of most of the profits. I think without the bailouts the S&P 500 would have still rebounded to profitability but to a much lower level. Looking at the numbers pretty much proves that.

Getting back to the initial point about using bailouts to boost corporate earnings, from here on out it gets much much tougher. Obviously, borrowing the money and putting it on the backs of the citizenry was an effective way to steal the money and siphon it into the corporate balance sheets to give a temporary earnings boost.

Very good and detailed explanation of the above blurb I wrote last weekend:

http://www.theglobeandmail.com/globe-in ... le2022944/

Currently, per capita GDP in the U.S. is not far off an all-time high. But excluding deficit spending, the real number is 10 per cent below the peak reached in 2007. Indeed, it has fallen back to levels not seen since 1998.

“If structural GDP fails to grow as a consequence of our deficits, then deficit-spending has failed in its sole and singular purpose,” he says. “What we find is that this recession is horrific.”

He would also isolate private-sector GDP by subtracting government spending (excluding transfers). Lo and behold, this measure is also back at its 1998 level. What his calculations show is an economy “bottom bouncing and showing no signs of recovery. All we’re doing is borrowing more and spending more. That’s the only GDP growth we’ve got.”

I've come up with the same numbers.

[OLD1953]

No disagreement from me on that, we've seen no real increase in the private sector for years, if you discount the govt borrowing.

Vince, the US bond being a backstop is not so much about the US being of diamond perfect quality, it's about everything else being too small (gold is the perfect example of "too small") or of garbage quality. Once Greece defaults, and the "haircut" turns out to be far more than anticipated, THEN you will see where the money goes.

When Europe is moving the manufacturing base of Europe to the US, when Greece, Portugal, Spain and Ireland default, when China goes into revolt or war, when the MidEast goes to revolt against corruption, you get to save your money in the Western Hemisphere or you get to watch it go up in flames. Nobody in their right mind will pay 50,000 per ounce for gold, and a fraction of the net worth buried in bonds would carry gold past that figure in a heartbeat. (Not to mention that the US would sell gold at that price happily and pay off the national debt. Then who is solvent?)

And that leaves the US, Canada, Brazil and Argentina as candidates. Looking at history, you'd cut that back to the US and Canada. One is rich in raw materials, one is high end manufacturing and technology.

[vincecate]

If the world reserve fiat currency collapses I don't think you will get a new world reserve fiat money in a short time.

I don't think you will either. You'll get chaos instead. That's why Bernanke is such a dangerous man. He's put the world on the verge of complete monetary breakdown.

I am not sure what you mean by "collapse back to basic industrial economy" but this does not sound like something that you just "rebound" from.

It would be an economy that is still mostly industrial and still needs a large amount of debt financing to generate economic activity. It wouldn't be an economy where most of the population goes back to farming (like a pre World War II economy), but one where a large percentage of the population goes back to manufacturing and the US trade deficit is balanced out. It might resemble something like the 1960s.

People figure out ways to cope when the currency is failing. One of the steps is that contracts will index prices to something else, say the price of oil or gold. Eventually other payment mechanisms will be worked out and then contracts will be directly in terms of these other things. Maybe there will be a way to transfer shares of GLD from one user to another at some brokerage firm that then becomes a payment clearing house.

It will be bad, but as long as people and markets are sort of free to operate things can muddle through. This link has typical hyperinflation stages, though this won't be so typical as hyperinflation of a world reserve currency is not typical.

http://pair.offshore.ai/38yearcycle/#hy ... tionstages

We are not going to lose the advanced farming methods where 1 person can grow enough food to feed 100 people. This technology won't go away. I expect many more people growing gardens on their own land, but this is as a way to save some money and increase food security, not that they become farmers full time.

But you are right, after the dollar fails the balance of trade needs to really balance out. So either the USA exports far more stuff to replace the paper money they used to export, or they import far less, or some combination. Part of this can be more people in the US working in manufacturing. Given how cheap people work in China and India, it is hard to imagine people in the US getting wages near what they have in the past.