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"Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion - when you see that in order to produce, you need to obtain permission from men who produce nothing - when you see that money is flowing to those who deal, not in goods, but in favors - when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you - when you see corruption being rewarded and honesty becoming a self-sacrifice - you know that your society is doomed*." Ayn Rand - Atlas Shrugged
"An honest man is one who knows that he can't consume more than he has produced."- Ayn Rand
"The fact that an opinion has been widely held, is no evidence whatever that it is not utterly absurd." - Bertrand Russell
The simple believeth every word: but the prudent [man] looketh well to his going. Proverbs 14:15
The rich ruleth over the poor, and the borrower [is] servant to the lender. Proverbs 22:7
I am not a financial advisor or any other kind of professional person. Anyone who makes conclusions, or otherwise acts on any information presented here, without seeking professional help or advice, or especially without applying their own logic or common sense, would of course deserve to loose whatever they did, as a result. There has of late, however, been no shortage of investment so-called "professionals" with abismal track records offering advice.
This page like most of the rest of this site has had little update for two to four years, but the heads-up about the events we are BEGINNING to experience today (fall '08), is still germane.
BUBBLES, MANIAS, PANICS AND CRASHES ARE NOTHING NEW (anchor)
The entire text of the 1852 edition of Charles Mackay's 'Extraordinary Popular Delusions and the Madness of Crowds' is available at bibliomania.com and it is a fascinating, and I consider a MUST, READ. One chapter deals with the Dutch "tulipomania" that should not be entirely unfamiliar today having had the benefit of witnessing the Nasdaq bubble pop, or the Japanese stock market bubble burst, followed a couple years later by the Japanese real estate bubble breaking leaving real estate, so far, with some accounts putting it at 10% to 20% of former values through its relentless 12-15 years of decline. The Financial Times reported that residential real estate prices in central Tokyo rose by 0.9% in 2004, which was the first time in 17 years that residential real estate prices in central Tokyo went up. Optimistic or bullish investor sentiment, a contrary indicator, might indicate that the U.S. dot-com and general stock market mania, which popped in 2000 indicated merely the beginning of a major stock market correction. "Be fearful when other people are greedy and greedy when other people are fearful." - Warren Buffet On August 21, 2005 Ben Stein suggested that it is OK to buy not just one but two or three houses in the current market. To be fair he also suggested that you may not see a lot of short-term appreciation. Not a month later on September 19th Jim Cramer announced the death of the real estate bubble, as in dead, dead, dead, mentioning that second homes are not selling, inventories are building, and prices are being slashed. He said he believed the peak of the housing bubble was in January. Mark Watson has some interesting insight into a future economic storm for the U.S.. A pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learns some very old lessons. - Warren Buffett
We may be seeing some deflation in the U.S. housing bubble. In general the charts of manias and bubbles are characterized by terrific spike highs such as this classic example shown in the chart of the Nasdaq. I reference this purely to show the SHAPE of the chart. The Nasdaq, or the rest of the stock market may have a long way still to correct. This historical chart gives you a better idea as to how much more room there is for correction. While most of us may have heard something about tulip bulbs being overpriced, many do not know that a single bulb could have fetched the price of a single-family home. One person offered 12 acres of building ground for the "Harlaem" tulip. "In 1634, the rage among the Dutch to possess them was so great that the ordinary industry of the country was neglected, and the population, even to its lowest dregs, embarked in the tulip trade." Consider what some Americans were willing to pay for pets.com, a company whose most important asset would seem to have been a sock puppet that advertised for it on TV.
MORE THAN PROPERTY APPRECIATION? (anchor)
Home price growth becomes considerably less impressive when you consider that the size of
the average American home has grown by over 50% over the last 30 years as adjusted by the yellow line. M3 has been growing at 2-1/4 times the rate of existing home prices per square foot.
The chart above shows the growth in the M3 money stock compared to sold single family home average prices (HUD price table page 64-65). M3 has gone up by a factor of roughly 15 times since 1968 while existing home sales have lagged and gone up by a factor of about 10 times, or 2/3 the rate, over the same period. If M3 were to have a relationship with industrial production, since 1959 M3 has gone up by a factor of 32 while industrial production has only gone up by a factor of 4. M3 has gone up at 8 times the rate of industrial production.
Since we can't buy U.S. houses from the Chinese, the price of housing has also been traveling with gold and other hard domestic assets and commodities, because the dollar is rapidly depreciating through excess dollar and credit supply. What will happen when the average homeowner gets squeezed by inflation or his adjustable rate interest only, or neg-am, note crushes him with a rise in interest rates? Increases in GDP as a result of increased government debt, is tantamount to borrowing future prosperity and economic growth from our children, and greedily seizing it for ourselves, today.
HOUSING BUBBLE / SPECULATIVE MANIA OR GOOD VALUE?
Although some on this subject below was written nearly a year ago, it is current, as the events that few understood, continue to unfold. Yesterday (12-20-06) I heard on the radio that Florida leads the Southeast, and runs number 2 nationally, in forclosures just behind California. The same piece gave the ominous warning that over a trillion dollars in adjustable rate mortgages will be subject to their first adjustment in 2007. Look out below.
(Written spring '06) Some believe we are at the beginning of a housing boom. Others believe we are at the peak of a housing speculative mania. Here are some figures and charts from Northern Trust Bank. It looks to me like we are in the heat of the most highly leveraged orgy of personal speculation in the history of the Republic. Housing cycles normally trail stock market cycles by a couple of years, which would be consistent with Japan's current, historical, bear market. If our housing bubble is to follow Japan's, as our stock market is in the process of doing, we are overdue based on this chart of the Nasdaq, but not necessarily by charts of the Dow or the S&P, however the double tops in hugely historical charts are considerably foreboding. Rampant speculation is also a good indicator of a top. Declines in prices are underway in many areas. As of May 2006 29% of home buyers over the last year owe more on their homes than the home is worth.
Here is a chart showing how many ounces of gold it would take/took to buy a home. In 2001 it would have taken 800 ounces of gold to buy an average home, but today only about 493 ounces. This and many more interesting charts from Investment Tools.com
Considering that housing prices seem to be moving with inflation, that is doubling over the last 9 years in many areas, and tripling in some, and considering the household debt owed on housing, autos, and credit cards, I tend to favor the over-bought opinion. I have recently seen spec houses sell for more than double the contractor's cost, when the project took less than a year, and this was all the longer the builder's (bank's) capital was tied up. I believe that in a housing slowdown, these houses will loose 50% of their value right out of the gate. Why pay double when you can have a contractor build you one at "cost plus 10%" or less; in other words half the current price? The fact that on CNBC or the radio I frequently hear the proverbial stock tipping shoe shine boy, now boasting about his newly purchased and financed "income property", or membership in a real estate "club", might be one of the best indicators of a top. I further believe the shortage of housing in some areas (while not in others such as San Francisco) and steep price escalation is, in part, due to individuals purchasing multiple homes. Currently 25% of homes in the U.S. are being purchased by people who never intend to spend a night in them. This is a much more serious Achilles heel than a market simply composed of overpriced personal homes. How are these highly leveraged multiple home owners going to bail out of a failing real estate market? How will their creditors? "The nation's banking operations have also become heavily reliant on the real estate sector. Mortgage-related assets at U.S. banks have swelled to more than 60% of total assets."
How will our economy fare considering that; "Since the end of 2001, housing-related industries have produced a whopping 43% of the nation's total net private sector employment growth. Obviously, therefore, any slackening of real estate activity would slow employment growth in the industry. Indeed, this massive job-creator could become a job-destroyer." "In 1996, U.S., private households borrowed $332.2 billion...With the housing bubble in full force, it hit $1 trillion in 2004."
A lot of folks seems to think that they can speculate in housing and still dodge the devaluation bullet when the time comes. Others are prepared to loose a little of their equity for a short period of time. I believe that when the music stops there will be considerably more than one chair missing. While it's hard for us to imagine, Japanese real estate values are at only 10%-15% of what they were at their bubble peak and have been deflating for 13 years straight. Also since Japanese real estate historically, changed hands reluctantly because of its scarcity, most real estate owners, little doubt, had nominal bases in their properties. I believe that Japanese values will sink even lower as the U.S. real estate market follows San Francisco, perhaps Las Vegas and England's budding post bubble deflation. How many Americans would be psychologically prepared to make payments on a home, purchased at double its future value, for the life of the mortgage? How many would simply leave the keys in the mailbox the way the Texans did during the oil patch crisis?
"The fact that purchases can also be financed with zero down, means that speculators can gamble with no risk what-so-ever should prices fall. Also, the availability of cash-out refinancing means that owners can press their bets while simultaneously taking their winnings off the table."
"The nation is marching along a permanently high plateau of prosperity." - Irving Fisher - 1929
"History does not deal kindly with the aftermath of protracted periods of low risk premiums," "Such an increase in market value is too often viewed by market participants as structural and permanent." Alan Greenspan, 2005
SAN FRANCISCO HOUSING BUBBLE BY PATRICK KILLELEA
Read this excellent analysis of the beginning of the demise of the San Francisco housing bubble that also explores many myths that will apply to your part of the country as well. Here are a few excerpts:
Myth: "'There's an under-supply of housing. That's why prices will rise.'
FALSE. There is a large oversupply of housing. To repeat: builders are making houses at a record rate, which is increasing supply dramatically at a time when new houses are not needed. The Bay Area has the highest rental vacancy rates since the 1950's."
"Extreme use of leverage. Leverage means using debt to amplify gain. Most people forget that losses get amplified as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss, he's bankrupt in the real world. Even a small price decline will bankrupt buyers with small equity. Buyers foolish enough to buy with no money down are already bankrupt, but still unaware of the fact."
"A reader who lived through the 1989 housing crash in LA pointed out the following nasty situation that can happen:
* Let's say you buy a house for $600,000, with a $500,000 mortgage.
* Then the house drops in value to $400,000, you lose your job, or otherwise must move.
* If you can't make your payments, the bank forecloses on you and nets $350,000 on the sale of your house.
* The bank's $150,000 loss on the mortgage is "forgiveness of debt" in the eyes of the IRS, and effectively becomes $150,000 of reportable income you must pay tax on." (So you would loose your original $100,000 and also owe tax on an additional $150,000 which would be $32,000 if you had no other income.)
"'As a renter, you have no opportunity to build equity.'
FALSE. Renters are actually in a better position to build equity because:
* Owners are losing every month on a cash flow basis. The tax deduction does not come close to making owning competitive with renting.
* Owers must pay taxes simply to own a house. That is not true of stocks, bonds, or any other asset that can build equity. Only houses are such a guaranteed drain on cash.
* You must insure house, but not most other investments.
* You must pay to repair a house, but not a stock or a bond."
"'There are great tax advantages to owning.'
FALSE. It is now much cheaper to rent a house in the San Francisco Bay Area than it is to own that same house. This is true even with the deductibility of mortgage interest figured in. It is possible to rent a good house for $1800/month. That same house would cost $600,000. Assume 6% interest ($3000 per month), $2000 closing costs, and a buyer loses $770 more per month buying than renting. Renting is a loss of course, but buying is a bigger loss.
Monthly Rent: $1,800.00
Property Tax: $400.00 ($625 per month at 1.25% before deduction, $400 lost after deduction)
Interest: $1,920.00 ($3000 per month at 6% before deduction, $1920 lost after deduction)
Other Costs: $250.00 (insurance, maintenance, etc)
Buyers still have to come up with the principal payment as well, just to watch it wiped out as the value of their house declines. Principle payments over 30 years would average $1667 per month.
Remember that buyers don't deduct interest from income tax; they deduct interest from taxable income. Interest is paid in real pre-tax dollars that buyers suffered to earn. That money is really entirely gone, even if the buyer didn't pay income tax on those dollars before spending them."
"'House prices don't fall to zero like stock prices, so it's safer to invest in real estate.'
FALSE. House prices do not fall to zero, but even a fall of only 10% completely wipes out everyone who has only 10% equity in their house. This means that house price crashes are actually worse than stock crashes. Most people have most of their money in their house, and that money is highly leveraged."
"'My dad made money on his house, and it will work for me too.'
FALSE. Your dad bought his house when houses were cheap compared to salaries, maybe 3 or 4 times annual salaries. Go ask him. Things are different now. Here is a chart of median house price vs median income in Palo Alto:
Year Median House Price Median Income Multiple
1980 148900 24743 6.0
1990 457800 55333 8.3
2000 910000 90377 10.0
Palo Alto has lost about 15% since 2000, but that is not nearly enough to bring prices and incomes back into relative alignment. Most bankers use a multiple of 3 as a "safe" price to income ratio."
MORE ON THE BUBBLE
"American dream putting homeowners in deep debt"
"The Housing Bubble Will Probably Burst" - Gary Shilling
If you, like Larry Kudlow, don't think interest rates are going to be a serious problem for some folks this year (2006) try graphing a few examples on this mortgage calculator. Especially the 3 year ARMs.
Bonds backed by home loans to the riskiest borrowers, the fastest growing part of the $7.6 trillion mortgage market, have lost about 2.5 percent since September on concern an 18-month rise in interest rates may force more than 150,000 consumers to default.
Bank risk - Dallas Federal Reserve
"Train Wreck of the Week: The end of the housing bubble" - Bob Chapman
Are Housing Prices, Household Debt, and Growth Sustainable? - The Levy Economics Institute of Bard College
Freddie and Fannie sell homes for 50 cents on the dollar.
Housing Panic Blog - housingpanic.blogspot.com/
Washington DC housing market cooling?
CONDO SPECULATION (anchor)
"In March, Credit Suisse First Boston downgraded the stock of Bonita Springs-based WCI Communities, one of the few publicly traded high-rise condo developers, due to concerns over 'investor speculation in high-rise real estate development, specifically in Florida.' Similarly, Raymond James issued a report stating its belief that investors and speculators accounted for as much as 85 percent of condo sales in downtown Miami."
There is an important point to note. Florida is peculiar to much of if not all of the rest of the U.S. in the rate of growth of the population in the state, not only by folks buying homes and/or moving here from the rest of the country but also from the rest of the world. Heating oil prices may well help to inspire more domestic migration in this direction.
We only have to look back to the 80s Florida condo collapse to see the historical demonstration of risk involved in condo ownership. In today's world it might not hurt to consider the additional risk regarding these structures as possible terrorist targets. What if one or more of the luxury condominium buildings, in one of the "it" cities, where units sell from 600K, to several million for upper floors, were contaminated by radiation or VX for example?
"More than a third of the houses bought last year were not intended as primary residences. Nearly a quarter was for investment. Another 13% were vacation homes."
(I link here for the numbers, not to promote the ad) "In the "Jumbo" category, nearly 50% of new mortgages in the United States are "IO" - interest only. Nearly 90% are ARMs - adjustable rate mortgages. Everyone seems to be speculating in real estate. Everyone wants to own property, but no one wants to pay for it. And everyone seems to like the new abbreviations. There is even a rising trend towards "neg-am" mortgages - where the amortization schedule actually walks backward and the principal grows larger. Neg-Am mortgages are popular now...they will probably become even more popular - until the homeowner walks backward into a ditch." Do a search for neg-am mortgages and you will even find offers for neg-am mortgages with a neg-am "piggyback" second mortgage. Here's a company that calls the neg-am ARM the "smart mortgage". Another mortgage company sells their interest only mortgage as their "smart choice". Perhaps smart for an uncollectable borrower, errr... except maybe for the new bankruptcy laws.
Chart from Martin Weiss - Safe Money Report (ignore the ad)
His only option is to dump his house or face foreclosure. When enough people are in this position what happens to the supply of homes? When everyone is lamenting a dropping housing market, and real estate signs are popping up everywhere, who's buying? I was raised by parents who were kids during the Great Depression in Detroit Michigan. They knew about families that lost all of their savings in the stock market and/or lost their homes through foreclosure. They instilled in me an appreciation for the fact that reward is always proportionate to risk. They also taught me that there is no such thing as a free lunch. In this regard they might have, however, underestimated the power of debased currency in the way this adage has not been recently applicable with the blizzard of fake money creation. As a result of my upbringing I may have lost some opportunity in financial markets, but it did keep me out of trouble. I do however have an interest in stock and commodity markets as they relate to and exert influence on our economy as a whole, and vice versa. This also drove me to be involved in wealth creation, as my father before me, rather than speculation.
FAIR VALUE FOR HOUSING
One of the most traditional and reliable methods of measuring the value of housing or commercial property is to determine as to whether the property can be rented and return a reasonable profit after the costs of ownership such as maintenance, insurance, TAXES, and depreciation are subtracted from the would-be rent. Recently in the San Francisco Bay area it cost less than half to rent than to own on a monthly basis even though 82% of homes are financed with ARMs. For actual rental property, adding the costs of deadbeat tenant non-payment, lack of occupancy, and the unforeseen such as legal costs of eviction and government regulation thereof needs to be considered. Most sales I am hearing of would only bring GROSS rents of 2 to 5% of the cost of the house. This wouldn't generally return the cost of the money let alone expenses. If property can produce a reasonable return, proportionate to the costs and RISKS of ownership, which may include significant PRICE EROSION, then the property is probably not overpriced. Today perhaps after expenses a 5 or 7% return may be considered but traditionally, or especially in a bubble peak with greater price risk, it might take 10%. How much have rents appreciated in your area compared to home price appreciation? Are you better off making a taxable rent profit at a few percent of the investment commitment, hoping that the property will appreciate, or in T-bills?
DO YOU PLAN TO DEPEND ON A PENSION TO FUND YOUR RETIREMENT?
"The 2004 reports, filed with the PBGC by April 15, 2005, were submitted for 1,108 pension plans covering about 15 million workers and retirees. The underfunded plans had $786.8 billion in assets to cover more than $1.14 trillion in liabilities, for an average funded ratio of 69 percent. But it is actually even worse. The reports are required only of companies with more than $50 million in unfunded pension liabilities. Smaller pension plans with smaller problems did not go into that figure. Adding them, as of September 30, 2004, the PBGC estimated that the total shortfall in all insured pension plans exceeded $450 billion." Can the corporate dinosaurs afford what they have promised to employees and pensioners?
(5-9-05) "The Commerce Department reported, "Sales unexpectedly increased 12.2 percent to 1.431 million houses at an annual rate." But before you interpret this to mean that house prices are going up in response to this increased activity, the Commerce Department also reported, "The median price fell to $212,300 in March from $234,100 a month earlier." Wow! A ten percent plunge in prices in one lousy month!" - "They found 28 bubbles around the world, including stock markets, currencies, and commodities, and including our stock market bubble here, although they did not, as far as I can tell, include our bond bubble and our housing bubbles in their analysis. And all of them broke, which they characterize as 'all the identified bubbles did indeed move all the way back to (or below) the trend that existed prior to those bubbles forming.'" (Mogambo Guru)
Imagine if prices returned to what they were just 5 years ago in your neighborhood. In my neighborhood this would return values to half of what they are today. It is certainly a minority view to imagine that housing could return to prices seen even this recently. Neighbors seem ecstatic with the rate of increase in the value of their homes. Certainly if they are in the immediate market to sell they should be. What about those who aren't selling? Even if your neighborhood hasn't doubled in 5 years, what would happen to values in your neighborhood if the values in my neighborhood go to 50% of today's? What would this do to the value of second homes, and vacation homes? How about levered out "income" properties and spec houses? Robert Prechter anticipates that this shake-out will eventually return farmland, for example, to prices of about 50 years ago. In Georgia this would be roughly 1/20th of today's values. What would this do to the luxury home market? How about apartments in NYC? Or luxury condos with high maintenance fees? What would happen to the local real estate tax base and compensation and pensions for bureaucrats?
Imagine if interest rates and therefore variable rate mortgage payments were rising, at the same time that housing was sinking. An increase of just 1.5% in a 15 year variable-rate mortgage originated at 4.8% would cause monthly payments to go up by over 10%. How long would homeowners maintain this position? Do you own calculations here. Are you better off renting or buying?
From Angry Bear blogspot:
"One way to prolong the bubble is to offer ever more leveraged financing. And here it is - a 35 year loan, interest only for the first 5 years, with no money down and 103% Loan To Value (to cover closing costs). Amazing."
From an article in CNN.com titled "'Eating your house'
Go ahead and take a bite. It's easy. At least if you believe the ads."
October 7, 2003: 4:18 PM EDT
By Jeanne Sahadi, CNN/Money Senior Writer
"Take, for example, one online promo for a HELOC credit card from Wells Fargo. According to the promo, its NowLine Visa Platinum Card is "a convenient way to access your home's equity without refinancing your mortgage every time you need money."
By "convenient," think 7-Eleven-Slurpee convenient: "Your credit is available 24 hours a day for everyday purchases like gas, groceries, and clothes, or whenever you need cash. NowLine can be used at millions of locations worldwide, anywhere Visa is accepted."
The loss of perception of risk in real estate today is perhaps only eclipsed recently by the lack of perception of risk in the Nasdaq in 1999. "Best of all worlds" or "PEs and Dividend yield are old fashioned ways to measure stocks, today cash flow is the best way to measure......blah, blah". Absence of the perception of risk in real estate is the biggest reason to be concerned about assets in general, going forward.
Sadly even those who perceive this period as one of high risk are often precluded from trading their house down. If they have been in their house for some time, and their homestead taxes have been protected from all but small incremental increases, they would next be paying taxes based on the purchase price of their new smaller home. So even though they may trade down to half the house they had, they may still wind up paying twice as much tax going forward eventually burning much of any capital gain they may have realized. Here's a chart from "The Rude Awakening" that compares homebuilding company stocks to the Nasdaq.
Here's a calculator to fugure Broward County taxes. "Sticker shock for property taxes can be rather painful for home buyers in South Florida -- especially with our continuing double-digit rate of value growth. The effects of the Homestead Exemption cause many people to mistakenly believe that the annual taxes paid by the seller (or neighboring properties) will indicate their future tax amount."
Additionally, while the federal government will greedily collect capital gains taxes on the entirety of any gain in real estate when realized (personal home exempt 250K / 500K per couple), it limits capital losses taken against other income to just $3,000 per year, and on a personal home capital losses are not deductable!
While the government and Greenspan have pacified the public with statements that inflation is running at a percent or two, I tend to favor the more old fashioned (1966) Random House dictionary definition: inflation, n. 1. undue expansion or increase of the currency of a country, esp. by the issuing of paper money not redeemable in specie 2. a substantial rise of prices caused by an undue expansion in paper money or bank credit. More politically correct Random House dictionary (1997) inflation—n. 1. Econ.a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency (opposed to deflation). 2. the act of inflating. 3. the state of being inflated. (M3)
Considering M3 by this definition, our inflation rate over the last 9 years has been running at over 10% per year. Some might argue that the money supply needs to expand because of growth in industrial production over the last 9 years but M3 has been growing at 7 times the rate of industrial production. In the 8 weeks ending September 19, '05 the government increased the money supply by 172 billion. This would appear to be an increase of over 1.7% to the entire stock of money created since 1913. To put the 8 week 172 billion dollar figure into perspective, it would seem that if the government sold all of the gold they claim to have today, at $470 per ounce, it would total less than 123 billion dollars. Perhaps I am wrong. Please go over the figures for yourself.
HERSHEY BAR INDEX (anchor)
To try to get a handle on how much of M3 money stock growth could be defined as inflationary is impossible since it has been subjected to the whim of an "arbitrary setter of value". Along with considering industrial goods production, while heavily discounting or eliminating "service" portions of GDP, it might be instructive to consider the "Hershey Bar Index". The only limitation in its supply since 1959 has been demand. The raw materials have more or less gone up and down over the period and probably do not represent a large percentage of the price to begin with. The only change in its inherent value since 1959 is the change from 1 oz, to the one that I bought on 10-15-05 that was 1.55 oz. From 1921 to 1968 it cost 5 cents (the bar grew during the depression and then shrank) while today I purchased the 1.55 ouncer, for 85 cents, or 55 cents/oz, at the 7-11 (comparable retailer). The one that I bought in the early 60s was a nickel. This example would suggest that M3 growth has been excessive, or inflationary, by a factor of 11.
OTHER MEASURES OF EXCESSIVE MONEY STOCK (anchor)
The Consumer Price Index is another measure of inflationary money creation, which is pretty consistent with the Hershey Bar Index. From the mid forties both multiplied by a factor of about 10. The Hershey bar lead a little in the early 1980s probably because of a quadrupling temporary spike in the price of sugar. The CPI increased by 50% during the 40 years prior to 1960 but increased by 600% in the 40 years after 1960, or 12 times the rate.
Material goods production has recently been running at 1/6 the rate of M3 growth, industrial production since 1959 at about 1/8th. Additionally these are much more than overwhelmed by personal, corporate, and government debt, with government debt at an unsustainable 4.9% of GDP, with future spending commitments running at 400% of GDP. In regard to any relationship between GDP and M3 - is wealth created when someone washes another's car, or paints another's fingernails, or is money simply transferred from one hand to another? What portion of GDP derived like this should be represented by "new money"? I would suggest zero. Cars get dirty again the next week and nails need to be redone. Increases in money supply can only be construed as being justified by increases in created wealth through mining, manufacturing and forestry, for example.
Some would argue that inflation and consequent carnage in the bond market would suggest advantages to owning real estate. Traditionally this may have been true, but when people loose jobs and can't make payments they are forced to sell their homes, especially their second homes, not to mention spec homes. The easy-credit driven artifically inflated amount of debt and equity that America has in housing and other real estate absolutely dwarfs the pittances they hold in stocks. Additionally this money is highly leveraged. If housing goes it will mark the end of consumer confidence as well as a devastating blow to the vast amount of privately held so-called "wealth" in the U.S. Aggravating the problem will be instruments such as neg-am mortgages, 125% mortgages, and "Genesis" loans that cover the downpayment and closing costs where "owners" have absolutely no personal financial interest at stake. CNN notes that Wells Fargo even offers NowLine Visa, which gives homeowners access to a home equity line that can be used "for everyday expenses like gas, groceries, clothes, etc." Imagine what a slowdown would do to the "second" or vacation or spec home market? Is it reasonable to imagine that a housing boom can continue in the face of record bankruptcy and mortgage default. Here's Lyndon LaRouche on the QAM adjustment (Quality Adjustment Method) to inflation.
CPI methods were changed under Clinton. This from John Williams - Gillespie Research:
"Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, 'Account overdrawn.'" - Ayn Rand
“But the fact that a bunch of Chinese factories are willing to produce consumer items at lower and lower prices, and thus sell them to me at lower and lower prices, does not mean that inflation is low.” - Mogambo Guru
PRECIOUS METALS AND "MONEY"
Americans might be tempted to believe that two stellar performers of late have been the gold and silver markets. From 2001 gold has gone from about $260 per ounce to roughly $430 per ounce as I write (2-22-05). While this seems like a respectable gain, New Zealanders have seen the gold price remain stagnant during this period because their currency has remained in lock-step with gold, while the Euro has come close to keeping pace. In other words gold hasn't gone up, as much as holders of U.S. dollars ability to purchase it has been diminished. The massive blizzard of fake money is evident in M3 which demonstrates that more faux money has been created in the last decade than the entire money stock that has been created since the inception of our debased currency nearly 100 years ago. Add in a measly 3-10% bank reserve requirement, with a 0% reserve required on loaning funds from personal time deposits, and the banking multiplier effect adds trillions. In other words, even if 100% of bank loans were 100% collateralized, just a 10% reduction in the value of the collateral (which includes givens like automobile and boat depreciation) would technically render the bank insolvent, or at least unable to return depositor's savings (even worse including time deposit reserves). With this multiplier an unsecured loan then, borrowed and deposited in another bank, would immediately add 90% of its amount in new "cash" (100% in the case of time deposits), created from thin air, to be loaned out by the second bank, requiring only 3-10% of the deposit they are loaning out to be held in reserve. Don't look for the FDIC to return your savings if there is more than a little trouble, because the FDIC is a banking pool the total funds of which can cover only 1-1/4% of insured deposits, that is 1-1/4 cents on the dollar.
What about Homeland Security rules for safe deposit boxes?
"She said they were told how only agents from Homeland Security (during such an event) would be in charge of opening safe deposit boxes and determining what items would be given to bank customers. At this point they were told that no weapons, cash, gold, or silver will be allowed to leave the bank -- only various paperwork will be given to its owners."
FOREIGNERS "PROFITS" IN U.S. STOCK MARKET
If you have been stuck in the S&P 500 or the Dow, your imported goods or raw material purchasing power has gone the way of the dollar, that is you have lost 30-40% of your purchasing power overseas, except for Chinese goods which are tied to the dollar.
If you were a New Zealander in the Nasdaq beginning in 1999 you would have lost 2/3 of your principle in the stock market before you even took the hosing of an additional 40% in the dollar's value, leaving you with less than 20% of your original investment. In order for you to recover your original principle you would now need to make a profit of 500% just to get back to where you started! How many foreigners are going to want to continue to own U.S. financial assets when they have suffered these kinds of losses in the dollar? How will they feel when their U.S. real estate "investment" treats them the same way?
In November '03 the commitment of traders report logged the largest commercial short interest in gold in history. Normally the commercials get it right and gold did indeed go down from a spike high. But if prices jump unexpectedly a lot of shorts are going to be caught flat footed and there won't be enough gold in the world to cover their positions.
REDUCE OR GET OUT OF DEBT
They say that one Bear can ruin the confidence of a whole room full of Bulls. It is not my intent to scare anybody into doing anything except, perhaps, getting out of debt. If you have a mortgage and also have money in the stock market you are effectively borrowing money while offering the roof over your head as collateral, in order to speculate in the stock market. Where will you be if your house looses 30% of its value, you loose your job, and/or your stock market "investments" take a hit? What if mortgage rates go back up to the 9% of just 12 years ago, let alone the 18% of the early 80s? If you suspect that you are living in more house than you should it might not be a bad time to trade down. The first $500,000 of capital gains on the sale of a home for a couple (250 for a single), are exempt from Federal capital gains taxes if you have lived there for at least 2 years. You do have to weigh the effect of the taxes you will be paying on your new home compared to your old home first. Your kids shouldn't mind the step down if it relieves money related stress in the household, and especially if it allows their mom to stay home and be their mom. If the kids are devastated by a move down it is only because you chose to instill in them the importance of having things like big houses, rather than emphasizing the more important things in life. If you have money in the stock market in a 401K or other asset investments and also have credit card debt you need to decide if the asset will continue to appreciate enough to cover the credit card interest as well as make a profit in proportion to the exposure. The odds of this are slim. If the next terrorist event sends the markets limit down for days in a row will you blame the terrorists or yourself, for speculating?
FOREIGN GOLD BUYERS
Major buyers of physical gold have been China, Indonesia and other Asian countries, Saudi Arabia and other Middle Eastern countries, and India. SDR's and private contracts in the very small gold market worldwide may currently equal several times the amount of gold that exists in the world today, nor do they include the vast amount of gold that has been committed through the commodity markets. The Chinese have been converting our worthless dollars into real assets including 260 commercial sea ports worldwide, and are accumulating and hoarding all manner of commodities and metals and hard assets.
WHAT IF FOREIGNERS TIRE OF LOOSING MONEY IN OUR CURRENCY?
If foreigners loose interest in financing our debt because of their losses in our dollar's rapidly shrinking value, our interest rates will have to skyrocket in order to attract reluctant foreign capital. Higher interest rates would result in massive personal and corporate default causing asset deflation thereby forcing more default through buyerless markets. This could happen if the Chinese simply decide to quit lending us money. Who will be buying the houses, real estate, and all manner of commercial enterprise, from our banks, when they wind up holding defaulted assets of U.S., European, and other fiat-currency country's, citizens assets? Whose money is going to have value? One view of the future might include the Chinese (who are already in the process), Asian, Indian, and Middle Eastern colonization of the United States. In the future they may be hiring our children to maintain their assets, that were formerly held by U.S. citizens. Perhaps our children's children will be emigrating to China to be utilized as railroad workers. You will be able to thank Woodrow Wilson (not without U.S. citizen support), with stunning recent acceleration from Alan Greenspan. I tend, however, to view it more in terms of the Book of Revelation Ch. 18: 17-19 and believe that the return of Jesus Christ will come first.