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Posts Tagged ‘investing’

by Charles Hugh Smith
May 20, 2011
Of Two Minds

What is the relative value of housing if we price it in ounces of gold?

My basic point of view is that nominal prices and broad terms such as deflation, inflation and growth should be viewed with extreme skepticism. The more useful approach is to examine the purchasing power of various assets and the the purchasing power of the income streams generated by those assets.

Put another way: to value housing, let’s compare the price of a house priced in loaves of bread, or ounces of gold, or barrels of oil to historical norms. Secondly, let’s look at the income stream generated by the median-priced home (that is, the median rent and net income after all expenses of maintaining and paying for the rental home are deducted) and ask how many loaves of bread, ounces of gold and barrels of oil that net income can buy.

Corrospondent Bart D. has charted some relative values for essentials in Australia, and I will share his fascinating charts next week. Inspired by his work, I have done some calculations on U.S. prices of bread, housing, oil, etc. as well.

Today let’s look at a chart of the Case-Shiller Housing Index priced in gold, courtesy of longtime correspondent Harun I.

Click Image for Larger View:

Harun’s comments are worth studying. Selling housing at the top and buying gold would have enabled the speculator to buy back his/her house at 1985 valuations. Alternatively, an equal investment in gold in 2005 would have served as a hedge to the huge loss of housing value as the bubble popped.

The Case-Shiller Index tracks the resale prices of homes, and is widely considered to be the most accurate metric of house prices. Median or average prices can be heavily skewed by a small number of outlier homes (very costly or very cheap), and they do not reflect the dynamics of the housing market as well as resale prices.

In broad terms, the ratio of the Case-Shiller Index and gold can be understood as “housing priced in gold.” We can see that the current ratio is around 110, which aligns almost perfectly with the second chart, which prices the median home in gold going back to 1970.

The calculation is easy: last report median home price of $166,000 divided by price of gold $1,500 per ounce = 110.

On Harun’s chart, we can see the ebb and flow of both housing and gold. A mini-bubble boosted housing prices dramatically in the late 1980s as the last of the Baby Boom bought homes. (The Baby Boom is typically considered the generation born between 1946 and 1964, but many dispute these dates.) Those born in 1960, for example, reached their peak home buying years of 25-30 in 1985-1990.

Gold declined modestly in price in that era, so the ratio moved smartly as housing jumped.

In the 1990s tech/dot-com stock bubble era, housing and gold were both flat, and this is reflected in the ratio’s meandering through much of the 1990s. Gold slipped in the late 1990s and housing began a new ascent as the dot-com capital gains and low interest rates began to move real estate markets.

As housing prices climbed from 1997 to 2001, gold went nowhere, so the ratio more than doubled. Put another way, housing greatly outperformed gold.

As the dot-com bubble burst, housing increased its attractiveness as a speculation and gold began its ascent. As a result, the ratio stayed flat in 2001-2004 as both gold and housing rose together. The housing bubble’s last sprint to the peak in 2006 puched the ratio up to 500: it took 500 ounces of gold in 2006 to “buy a share” of the Case-Shiller Housing Index.

In terms of the median price, it took almost 600 ounces of gold to buy the median priced house in 2005.

Then housing collapsed, and gold rocketed from $500/oz to $1,500/oz. As a result of housing declining by 40% and gold tripling, the ratio has plummeted by 80%, from 500 to just above 100.

How low can the ratio go? Some might look at the second chart and conclude that the previous bottom around 90, in 1980 when gold shot up to $800/oz, might well mark a bottom in the ratio.

Those who believe that 90 is the bottom would then sell their gold and buy housing at that point. Since the ratio is currently at 110, that point is still a ways off.

I am not so sure, as there is plentiful evidence that we are entering an unprecedented era. The Baby Boom numbers about 65 million, and the generation behind them (Gen X) is considerably smaller (45 million). That suggests there won’t be enough buyers to buy all the houses sold as Boomers downsize/retire.

As the U.S. economy grinds toward its event horizon, the generations behind the Boomers are less wealthy–their wages have stagnated, and they will inherit less wealth as assets in general fail to keep pace with inflation (i.e. loss of purchasing power).

If you examine the data in this list of median home prices, by state, in nominal and adjusted prices from the U.S. Census Bureau, you will note a gigantic jump in housing prices between 1970 and 1980. This coincides with the brutal inflation of that era and the first wave of Boomers buying homes.

In broad brush, this data suggests that housing has retraced back to around 1990 valuations when priced in constant/adjusted dollars. Priced in gold, it has retraced to the early 1980s, but I think it likely that the generational retrace could eventually fall all the way back to 1970 prices in constant dollars.

That suggests housing could fall quite a bit further in markets which retained the huge gains logged in the 1970-1980 period.

Meanwhile, at least one respected analyst has set a target for gold of $5,200. Louise Yamada called the turn in gold in 2000-2001, and set a target of $1,500/oz years ago. Thus her technical targets should not be dismissed out of hand.

Yamada has also called for a turn in interest rates/the bond market. The Federal Reserve has kept interest rates at historic lows for years, but cycles cannot be eliminated, they can only be extended. So once the 30-year cycle of falling rates reverses into an era of rising rates, housing will come under a pressure it hasn’t experienced in two generations: price compression from rising mortgage rates.

Simply put, the $300,000 home at 5% mortgage rates will decline to $150,000 if mortgage rates double to 10%. The average household can only afford so much per month for a mortgage. If rates double, then the sum of the mortgage has to fall by half to be affordable.

Yes, there are cash buyers, but if central banks around the world have to stop printing trillions in free money to rein in rising inflation, then the flood of free cash looking for a quick return will dry up very quickly.

We might also ask what happens to speculation in rising home prices if interest rates start rising. If cash buyers are counting on hefty returns from rental income, then we have to ask what might happen to rents.

Even if housing stays at current prices, if gold triples to $4,500 an ounce, then the housing-gold ratio would fall to the 30s: $160,000 divided by $4,500 = 35.

If housing declines another 25% to a median of $120,000, then it would take a mere 27 ounces of gold to buy a median-priced house.

There are certainly good arguments (usually based on replacement costs) that housing can’t possibly fall much lower, but oversupply and higher costs of money may well combine to push the speculative value of housing to new lows.

This is all speculation and guesswork, of course. All we can do is look at trends and study history for clues about what might happen. What will happen is unknown.

Read the entire article HERE.

By Professional Investor – David Campbell

Having a good credit score is an asset only if you plan to use it to make money. I know people who consider their 750 FICO as a badge of honor. A credit score is a financial tool, NOT a measure of self-worth. If you aren’t utilizing your credit score to generate passive income, does it matter whether your FICO is 570 or 750? It’s like having a luxury car that is too precious to drive. If your credit score is sitting idle in your garage, it’s time to put it in gear and make money with it!
Here are a few secrets to ponder:

1. A credit score above 680 gives you the ability to borrow money for investing.

2. A higher credit score generally means you will be able to borrow cheaper money.

3. Banks borrow money at a low interest rate (banks can borrow money for 1% or less).

4. Banks invest the money at a higher interest rates (mortgage rates are around 5%).

5. Banks earn 5% and on money borrowed at 1% which results in a 4% profit on other people’s money! It is good to be the bank.

6. Your good credit score allows you to be your own bank! You can earn 9% on money borrowed at 5% which results in a 4% profit on other people’s money. If your credit score allows you to be the bank, what are you waiting for?

I can show you how to turn your good credit and a good job into $800,000 of loans at 5% secured by $1,000,000 of real estate WITH NO MONEY DOWN! If you could borrow $800,000 at 5% ($40,000 year cost) and invest it at 9% ($72,000 income), you would have a 4% profit on $800,000 ($32,000). If you can make an additional $32,000 from investing your credit score and no cash, why would you let your credit score sit idly in the garage?

If you don’t have a good credit score here are a few tips on how to get one.

Read the entire article HERE.

The financial collapse that so many of us have been anticipating is seemingly closer then ever.  Over the past several weeks, there have been a host of ominous signs for the U.S. economy.  Yields on U.S. Treasuries have moved up rapidly and Moody’s is publicly warning that it may have to cut the rating on U.S. government debt soon.  Mortgage rates are also moving up aggressively.  The euro and the U.S. dollar both look incredibly shaky.  Jobs continue to be shipped out of the United States at a blistering pace as our politicians stand by and do nothing.  Confidence in U.S. government debt around the globe continues to decline.  State and local governments that are drowning in debt across the United States are savagely cutting back on even essential social services and are coming up with increasingly “creative” ways of getting more money out of all of us.  Meanwhile, tremor after tremor continues to strike the world financial system.  So does this mean that we have almost reached a tipping point?  Is the world on the verge of a major financial collapse?

Let’s hope not, but with each passing week the financial news just seems to get eve worse.  Not only is U.S. government debt spinning wildly toward a breaking point, but many U.S. states (such as California) are in such horrific financial condition that they are beginning to resemble banana republics.

But it is not just the United States that is in trouble.  Nightmarish debt problems in Greece, Spain, Portugal, Ireland, Italy, Belgium and several other European nations threaten to crash the euro at any time.  In fact, many economists are now openly debating which will collapse first – the euro or the U.S. dollar.

Sadly, this is the inevitable result of constructing a global financial system on debt.  All debt bubbles eventually collapse.  Currently we are living in the biggest debt bubble in the history of the world, and when this one bursts it is going to be a disaster of truly historic proportions.

So will we reach a tipping point soon?  Well, the following are 25 signs that the financial collapse is rapidly getting closer….

#1 The official U.S. unemployment rate has not been beneath 9 percent since April 2009.

#2 According to the U.S. Census Bureau, there are currently 6.3 million vacant homes in the United States that are either for sale or for rent.

#3 It is being projected that the U.S. trade deficit with China could hit 270 billion dollars for the entire year of 2010.

#4 Back in 2000, 7.2 percent of blue collar workers were either unemployed or underemployed.  Today that figure is up to 19.5 percent.

#5 The Chinese government has accumulated approximately $2.65 trillion in total foreign exchange reserves.  They have drained this wealth from the economies of other nations (such as the United States) and instead of reinvesting all of it they are just sitting on much of it.  This is creating tremendous imbalances in the global economy.

#6 Since the year 2000, we have lost 10% of our middle class jobs.  In the year 2000 there were approximately 72 million middle class jobs in the United States but today there are only about 65 million middle class jobs.

#7 The United States now employs about the same number of people in manufacturing as it did back in 1940.  Considering the fact that we had 132 million people living in this country in 1940 and that we have well over 300 million people living in this country today, that is a very sobering statistic.

#8 According to CoreLogic, U.S. housing prices have now declined for three months in a row.

#9 The average rate on a 30 year fixed rate mortgage soared 11 basis points just this past week.  As mortgage rates continue to push higher it is going to make it even more difficult for American families to afford homes.

#10 22.5 percent of all residential mortgages in the United States were in negative equity as of the end of the third quarter of 2010.

#11 The U.S. monetary base has more than doubled since the beginning of the most recent recession.

#12 U.S. Treasury yields have been rising steadily during the 4th quarter of 2010 and recently hit a six-month high.

#13 Incoming governor Jerry Brown is scrambling to find $29 billion more to cut from the California state budget.  The following quote from Brown about the desperate condition of California state finances is not going to do much to inspire confidence in California’s financial situation around the globe….

“We’ve been living in fantasy land. It is much worse than I thought. I’m shocked.”

#14 24.3 percent of the residents of El Centro, California are currently unemployed.

#15 The average home in Merced, California has declined in value by 63 percent over the past four years.

#16 Detroit Mayor Dave Bing has come up with a new way to save money.  He wants to cut 20 percent of Detroit off from essential social services such as road repairs, police patrols, functioning street lights and garbage collection.

#17 The second most dangerous city in the United States – Camden, New Jersey – is about to lay off about half its police in a desperate attempt to save money.

#18 In 2010, 55 percent of Americans between the ages of 60 and 64 were in the labor market.  Ten years ago, that number was just 47 percent.  More older Americans than ever find that they have to keep working just to survive.

#19 Back in 1998, the United States had 25 percent of the world’s high-tech export market and China had just 10 percent. Ten years later, the United States had less than 15 percent and China’s share had soared to 20 percent.

#20 The U.S. government budget deficit increased to a whopping $150.4 billion last month, which represented the biggest November budget deficit on record.

#21 The U.S. government is somehow going to have to roll over existing debt and finance new debt that is equivalent to 27.8 percent of GDP in 2011.

#22 The United States had been the leading consumer of energy on the globe for about 100 years, but this past summer China took over the number one spot.

#23 According to an absolutely stunning new poll, 40 percent of all U.S. doctors plan to bail out of the profession over the next three years.

#24 As 2007 began, there were just over 1 million Americans that had been unemployed for half a year or longer.  Today, there are over 6 million Americans that have been unemployed for half a year or longer.

#25 All over the United States, local governments have begun instituting “police response fees”.  For example, New York Mayor Michael Bloomberg has come up with a plan under which a fee of $365 would be charged if police are called to respond to an automobile accident where no injuries are involved.  If there are injuries as a result of the crash that is going to cost extra.

Read the original article HERE.

NEW YORK (TheStreet) — Gold price manipulation is the most controversial theory that has circulated among gold bugs for 20 years.

Conspiracy theorists think that gold prices have been illegally suppressed over the last two decades by central banks and governments. GATA or Gold Anti-Trust Action Committee is the biggest complainant.

Central banks reportedly have 32,000 tons of gold, with the International Monetary Fund accounting for 2,800 tons. Under the Washington Agreement on Gold, its members can only sell a maximum of 400 tons a year thereby restricting the amount of gold in the open market place.

GATA argues that central banks in actuality have less than 15,000 tons of gold and that the missing gold has been secretly sold into the market preventing gold prices from rising to their actual price, which helps the country’s paper currency, bonds and interest rates. The suppression theory means that global economies are in worse financial shape than investors think and that gold should be bought as the ultimate safe haven.

The New York Post recently reported that the the Commodities Futures Trade Commission and the Department of Justice have launched criminal and civil probes into JPMorgan’s trading in the silver market to determine if the investment bank depressed the silver price for their advantage. There are also rumors circulating that a major New York law firm will launch a similar lawsuit against the investment bank.

I interviewed Chris Powell, secretary and treasurer of GATA to get the facts of this alleged manipulation.

Can you explain the basics of silver/gold manipulation?

Powell : Gold, and to a lesser extent, silver are currencies. Governments have intervened in the gold market in the open throughout history. Our complaint is that more often now they’re doing it surreptitiously as a mechanism of supporting their currencies, supporting government bonds and suppressing interest rates.

So can you break it down, how the government is doing it on the sly as you said?

Powell: Yes, the manipulation of the gold market now is achieved through two mechanisms mainly. One is the outright sale or leasing of central bank gold reserves to add gold to the market. The other is the sale of futures and options, gold derivatives by the big investment banks that have special relationships with the central banks, particularly with the Federal Reserve. These are essentially naked short positions in the gold and silver markets.

We believe they are pretty much backed up by the central banks, which will, at least in the gold market, provide whatever gold is necessary when somebody actually wants to remove gold from the system to really liquidate a position. The problem is the gold supply has been inflated in the futures market so there’s so much more gold paper out there than there really is gold.

For someone who has no idea what this means, how do the central banks lease to the bullion banks?.

Powell: It basically began as a carry trade. It was in the interest of most central banks and the investment banks. The central banks would lend gold at a very low interest rate, perhaps 1% to an investment bank. The investment bank in turn would sell the gold for cash and use the cash to fund its operations.

And this worked very well for the investment houses as long as they had some confidence that the gold price would not rise and destroy the carry trades. Central banks liked it because it kept the price of gold, the competitive currency down. It kept interest rates down. It supported the government bonds and the government currencies. Now this carry trade is breaking up a bit. We think because central banks are running out of gold that they can distort.

So that doesn’t seem so bad. You lease gold, it goes into the markets. So what’s the problem?

Powell: Well the problem is it’s surreptitious. It’s a matter of deceiving the gold market and more importantly, the currency and government bond markets as to what the government is doing. It also gives inside information to the investment houses that are working the trades that the government wants done. It’s a grand deceit. If it was done in the open, people would understand what the government policy was. But open policy would not have the effect of deceiving the markets. If you remove the deceit from the gold pricing scheme, the scheme is of very little use.

How long do the investment banks get to lease the gold for, from central banks?

Powell: The leases may be written in limited periods of a year or two years or three years. We believe that most of the central bank gold sales, or supposed gold sales in recent years, were not really gold sales at all. They were cash settlement of lease gold that could not be recovered and returned to the central bank without causing a huge spike in gold prices.

Continue the article HERE.

Purchase Professionally Graded Gold and Silver Coins HERE.

by Danielle Levy on Jun 02, 2010 at 10:34

Rothschild’s Private Banking & Trust’s head of investments Dirk Wiedmann has increased the firm’s overweight positions in gold and hedge funds in preparation for further volatility and modest economic growth.

Wiedmann highlights short-term fixes for long term problems as a key headwind facing the global economy.

‘The cracks in the financial system have been papered over and may not become critical for some time. Crucially, central banks will do all they can to prevent another recession. Policymakers will focus on short-term fixes and try to muddle through,’ Wiedmann said.

€750bn will not fix the Europe problem

Most notably Wiedmann argues the recent €750 billion stabilisation fund agreed by the EU, IMF and ECB will not solve the long-term structural problems in the eurozone or the unsustainable debt burdens of the ‘PIGS’ – Portugal, Italy, Spain and Greece.

He said this put a big question mark over the future of the euro. ‘The lack of unity among politicians and central bankers suggests a durable solution to deal with large structural deficits in many countries is still a long way off. Against that backdrop, and in a climate of risk aversion, we maintain our preference for the US dollar over the euro.’

As a result, the investment strategist said that high public debt levels coupled with currency volatility, tax rises, spending cuts in the developed world and monetary tightening in the emerging markets mean that the negatives outweigh the positives in terms of the investment case for equities.

Expect a gold surge in the second half

Wiedmann expects gold prices to surge during the second half the year in an uncertain environment, comfortably breaking the $1,300 per ounce level – particularly if sovereign debt problems in Europe continue to escalate to a point where a break-up of the euro seems likely, he said.

For other commodities the firm has a neutral to negative outlook, arguing that buying opportunities may be emerging if financial markets stabilise.

‘Following a sharp correction, prices of industrial metals such as copper, aluminium, nickel and zinc now much more reasonable. Much of the speculative excess has left this market and industrial metals are trading much more closely to their fundamentals,’ Wiedmann said.

Purchase Exclusive Gold and Silver Numismatic Coins HERE.

Read the entire article HERE.