‘Bring On The Pain’ For The Housing Bubble
Let’s clean up the loose ends and start the weekend. “Former Starwood Hotels & Resorts Worldwide chief Barry Sternlicht he looked at one hotel recently in Aruba (that) would produce a return of just 5.5%. ‘I would pay $100 million less for it,’ Sternlicht said. The situation has all the hallmarks of the Internet bubble, Sternlicht said. ‘It feels like a hot potato market,’ he said. ‘I have to think, ‘Who’s the bigger fool I’m going to sell it to?’”
“Sales of Minneapolis condominiums decreased in 2005 from 2004, and projections for this year show a more drastic drop. While nearly 1,100 units sold in 2005, only 200 have been sold so far this year, which would be a pace of just 600 for all of 2006. Market giant Opus is being cautious with new projects. ‘We’re taking a step back and looking at what’s going on, trying to figure out what is real and what is not,’ says Tim Munane of Opus.”
“Dallas-area homebuilders are on a construction binge. But a market analyst worries that they may overdo speculative construction. ‘It does appear that the homebuilders goosed the market this spring in selected areas, being overly aggressive,’ Ted Wilson. ‘The increase in start activity is stunning.’”
“In the first three months of 2006, almost 13,000 single-family homes were started in North Texas, an increase of 16.6 percent. ‘The supply of finished housing has climbed to a record level” of about 9,600 homes at the end of March, Mr. Wilson told builders. ‘This has led to incentives and giveaways. The [buyer] cancellation rate is somewhat higher this spring than in years past.’”
From Inman News. “Bernanke’s predecessor allowed the Crash of ‘87 to interrupt (briefly) one of his four inflation-fighting campaigns; in no other did he pause. That man raised rates until the work was done, and cut them later to repair damage. Bernanke says that inflation is a risk, but under control. He made no mention of the wild run-up in commodities, or the absence of risk premia. He has all of his chips on a soon-to-appear economic slowdown.”
“If he pauses, and the economy fails to follow his model, and he then has to play catch-up, there will be hell to pay. Inflation and rates the least of it.”
From Rich Toscano. “Our series on common real estate myths continues this week with a local favorite: the idea that San Diego’s limited supply of land justifies our recent home price runup. But the fact is that we have not reached that point at all. Since 2003, according to the San Diego Association of Governments, the supply of San Diego homes has actually grown at a faster pace than the population. And that trend has strengthened the entire time.”
From Newsday. “When Raanan Moshe first put his home up for sale in October, he had high hopes. He listed the three-bedroom center hall Colonial, in a section of Roslyn Heights called Norgate, for $949,000. But no one came.”
“Earlier this year, Moshe reduced the selling price to $899,000. They hope to close in June on a contract for $880,000. ‘You have to compromise,’ Moshe said. ‘A lot of houses dropped because they were way overpriced.’”
And from Arizona’s public radio station, an audio piece titled, ‘Real estate coaster leaves one man in the dumps.’ “KJZZ commentator and voice actor Jason Spisak talks about the Valley’s real estate market, and why he’s been forced to tattoo ‘Bring on the Pain’ on his forehead.”
A very important week of housing bubble consensus, with critical housing reports and a shift in the homebuilders. My thanks to those who support this blog with donations and/or clicks. Be sure to send in your bubble photos for the weekend update. Check back this weekend for news, your topics and market observations!
Over 200 homes added today to our little central NY market; total now at 2500+. Certain homes in towns with skyhigh taxes (ie $11000 for 2600 sq ft) hit the market in droves.
Target town still VERY low on inventory (Its the lower tax rate, excellent schools and proximity to jobs that I think is keeping that town in good shape!) The only exception is the $300,000+ range which for this area is a well appointed 3000 sq footer. We could be seeing a glut in that price point. Maybe it has something to do with the fact that energy prices are going up and we had frost on the ground this morning (4/28). 29* at our home!
$100 a square foot, including land, is impressive for any Yankee house, IMO. What zip code is that?
Hi Chip,
I don’t think New Yorkers consider themselves Yankees, unless ya mean “Yankee” fans.
If you want to check out some local housing, check 13027, 13104, 13066, These are towns near shopping and industry. Towns out further may cost less unless on lakefront. Also these are the towns that have experienced greater expansion in housing inventory (newer).
When you look, try Coldwell Banker.com. It seems to have all listings. I don’t think zip realty covers this area.
Keep in mind that Onondaga county was 1 of 2 that had a reduction in population over the last 12 months (Erie county the other). Other than SU this area is losing jobs which is sad and will have a downward impact on the housing market.
Unfortunately, global warming is making everything cooler. Damn shame.
These New York prices are beyond insane. Do people have anything left over every month after the housing costs are paid? It sounds like they ‘are run of the mill office and clerical workers. How do they buy 800K houses?
- No downpayment or repayment-of-principle requirements help.
- Real estate prices always go up, especially in New Yawk, since everyone wants to live there.
“To help her pinpoint the best price, broker Judy Markowitz, with Re/Max Millennium in Flushing, now brings in real estate appraisers. She shares the cost with her sellers and hopes that in the end, they make more by starting with a better price.
That is key. If the first price is the right one and the buyers come, the house may sell quickly. But if the house goes through several price adjustments, which is happening to many homes today, it could sit on the market even after the “right” price is found. The “worst question in real estate,” Markowitz noted, is, “How long has the house been on the market?” Having a house listed for too long can be “the kiss of death,” she added”.
I couldn’t agree more with this. If a seller gets greedy, they risk having the house go stale. Buyers watch these houses and if they see price cuts at regular intervals, they may bet on more to come and keep waiting. In this market it’s better to err on the low side and get it sold sooner than later.
Minutes before I read this, a friend just called to say just accepted an offer on his house after 10 months on the market. He’d had many price cuts but none were very big and in total they were only 15% off his original price. Had he listed somewhere between the price he accepted and his original price, it probably would have sold quickly and the huge carrying charges on the new home and home equity loan — and all the anxiety could have been avoided. But greed got the better of him.
The idea of getting an appraiser is an excellent one as long as you hire a reputable one and insist on only the most relevant comps. Too many agents will just BS you on price and lead you to disaster.
They may be building lots of houses in DFW, but I cannot find anything to buy. Although many builders are offering fairly significant incentives, I cannot find anything that will rent for 1% of the purchase price (my goal when buying a rent house). It does seem to me that prices are higher now than they were a year or two ago, but rents are flat. So what if I can get 15-20k off of the price of a new house in “incentives” and commissions if the house will not yield enough in rent?
Also, I am somewhat concerned with increasing gas prices. Most of the new construction in Dallas in my price point (120k or below) is a long way from anything and I doubt that tenants will be willing to commute 20+ miles when gas is $4 per gallon.
On the other hand, another good week shorting the HBs.
20 plus miles in hellish traffic.
And for 120K in Dallas you get something I wouldn’t house my collection of pet rocks in.
Ironic — Texas also leads the nation in foreclosures.
“Texas, which led the nation in foreclosed homes, experienced a 38 percent increase in its total number of residential foreclosures during March. “
Colorado, which also claims the dubious distinction of having the number one forclosure rate in the nation, experienced a 30% increase in residential foreclousres during March.
You might want to check out Grand Prarie (just don’t try and live there).
I lived in Cedar Hill right next to Grand Prairie. Parts of GP are actually pretty nice and for awhile, it was easier to drive from there into Dallas (much easier!) than from Richardson and certainly anywhere north of that. Go figure.
The problem with guys like Zell is that he has no macro view. He only sees how things are today and extrapolates into the future.
The real issue at hand is extremely low real US interest rates, which can only last until dumbshit bondholders get a whiff of nasty inflation. At that point the US dollar will sell off (got gold?), forcing the Fed to severely jack up short-term rates.
Crisis occurs as a manifestation of overvaluation and disequilibrium, Classic currency crisis, just talk to Iceland or Argentina about it.
My posts do not appear.
I’ll try again in short-form.
Zell has no macro view. US real rates not sustainable as we are a debtor nation. Dollar will crash unless borrowers are compensated more. Countries who experience currency crises do so because there are imbalances, not because everything is hunky dory.
Zell talks about how much housing costs as a % of income compared to Europe.
First, using an overvalued market such as Europe (i.e. Britain, Spain, even France, etc) to justify the US housing market is circular logic.
Second, if housing costs DO eat up 1/2 of European income, the same should be true of renting costs. In both the US and Europe, they do not. A typical London home rents for 250 quid per week while the same hosue sells for 300,000 pounds (150,000 pounds 5 years back at a similar rent).
It’s more a function of national poverty when “shelter” (whether you rent or buy) takes up 50% of your income.
“Dollar will crash unless borrowers are compensated more.”
Should say “lenders are compensated more”.
So when does it happen? When does the consumer cut back b/c of high mortgage costs?
and when do the foreigners cut back on lending to the US because their principal is at loss, or because they get insufficient compensation?
I’m currently positioning myself to be able to work outside the U.S. if things suddenly go south. The good thing about a knowledge based global economy is geographic location means less and less every year. It is truly possible to live almost anywhere and increase ones purchasing power instantly. High cost cities will begin to become ghost towns if affordability(much lower home prices) doesn’t change soon. From a strategic perspective, high home prices are making it more difficult for the U.S. to compete globally. People will work more and delay education for themselves and their kids just to pay for their homes. I remember someone on this blog a few ago mentioned global wage arbitrage. Think about: High home prices where people need 50% or more to pay for them while their wages are decreasing because their work can be done elsewhere by someone else for less. Supply and demand impacts wages too. The next 10-20 years will be an interesting story. I hope it works out for the better. It is plausible that home prices could stay stale for 20 years or longer until the rest of the world catches up with us. I like to think of it as the global reserve and how the run off will continue until the global reserve becomes scarce.
People in Europe make less money, in general I think. Also, I think most people buying in the last 5 years are paying WAY more that 20% of income on their mortages..
Besides, that guy has a vested interest in talking up prices..
BubbleTrack.blogspot.com
A minor addition — people in Europe barter far more than we do in the U.S. They trade haircuts for pigs or kitchen cabinets. Taxes there cause apparent incomes to be distorted to the downside. True even in Canada — ask a Canuck about guerilla restaurants and their cause d’etre.
For any really picky readers way up north, cause “d’etre” = “raison d’etre.”
I lived in Canada the first 30+ years of my life and have never heard of anyone bartering for anything or guerilla restaurants - it’s no different than living in the US.
Lived in Canada for 45 years, never heard of guerilla restaurants. I know Americans think Canadians are backward, but we’ve actually moved beyond the barter system and have used currency for some time now. I wouldn’t know what to do with a pig.
another comment regarding comparison with Europe:
In the Netherlands both homeowners and renters are heavily subsidized. The HMD is 50% and because income tax is by far the biggest tax in Europe, this means a HUGE tax discount for homeowners; most homeowners borrow the maximum they can get so they pay the absolute minimum in taxes.
In the Netherlands anyone who rents a home below a certain price level gets a huge subsidy from the government as well, even if they are very wealthy. Only the more expensive homes and special stuff like student apartments are excluded from this subsidy. If you have a low income you are out of luck; you have to pay nearly all of the mortgage yourself so you will never be able to buy.
Trouble is, for all these subsidized rental homes there are waiting lists of many years and a stalinistic distribution regime, so it is impossible to get in if you don’t rent already. Outside the system, rents are 2-3 times higher.
In other EU countries the housing subsidies are smaller than in the Netherlands, but there are many similar distortions. So yes, it is extremely difficult to compare.
And regarding wages, the US social security level would be an attractive income here - many people who work get less than that.
I wouldn’t know what to do with a pig.
Put lipstick on it and list it for $700,000, of course!
LOL!!
Watch what Sam Zell does, not what he says. His EOP has been a net seller of properties for the past 12-18 months. Cashing up and reducing leverage. Zell has a point, if the market begins to free fall, the Fed drops rates back to 1%. At that point, real estate will hold up in US dollar terms, but will still drop big time in terms of Yen, Euros, Gold, etc.
I don’t know if I’d agree with that. It’s more of a psychological thing - once the masses realize the housing market is heading for a crash, they all pile into the exits at once and it would take several years before Joe Public wants to even think about getting back into real estate again. Plus the massive equity that will be wiped out will leave very few people with any money to buy anything - 1% rates or not.
Low rates from the Fed will cause a different bubble……this one has too many holes in it.
Low rates from the Fed will cause a different bubble……this one has too many holes in it.
I agree 100%. Low Fed rates in 2002 didn’t re-ignite the stock bubble, it ignited housing instead. The tsunami of ARM-adjustment foreclosures has arrived and there’s nothing the Fed can do at this point to stem the tide. Massive losses by banks, hedge funds, and FCBs will put an end to the no-money-down/no-doc/option-ARM insanity (and if bank regulators ever get off their asses, mortgage funny money will disappear even faster).
By the way, it won’t take Fed cuts to start another bubble — the next bubble is already well underway, in commodities (esp. oil and metals). It’s just a matter of time before those soaring commodity prices work their way into the artificial inflation metrics the Fed watches. My guess is that it will result in a sudden, rapid increase in consumer prices and Ben will find himself scrambling to get inflation back under control.
Yes they do.
“In Miami, a building boom has more than tripled the inventory in the past year. Even so, population growth should absorb any excess supply within 12 to 18 months, says Ronald A. Shuffield, president of Esslinger-Wooten-Maxwell Realtors, a big real-estate brokerage firm there.”
There are a couple of boonies markets that I follow because I hope to relocate there for family reasons, after prices fall. I’ve been following listings there for more than six months. What I notice is that the sellers who listed in the Fall are sticking to their price, but those who are listing much more recently are under-cutting the former by a bunch. In a slow-moving area, homes stay on the market so long that this is observable — I find it interesting and to my benefit. A stubborn seller determined to get a 2005 price is no longer on my radar because the 2006 sellers see the writing and are pricing accordingly. I suspect this pattern of selling behavior will be true for many “non-bubble” areas. I like it, I love it, can’t get enough of it.
Or perhaps the homes of those who listed in the Fall at reasonable prices have sold and are no longer on the market, so the residue that remains from Fall listings is inherently composed of what was priced above market by people who would not (or could not?) accept less.
loved that PBS radio clip. Gonna be a lot of those pain-meisters out there REAL soon.
“Stepping back” seems to be NAR’s “The Phrase That Pays” this week. Three variants in three articles.
Delicious bear meat:
http://www.itulip.com/newdepression.htm
TXchick,
Thank you for your link. I’ve been following it since you posted initially (a couple of weeks ago?).
For those who haven’t checked it out, I **highly recommend** the itulip site. It’s very informative and complements what we talk about here on Ben’s blog.
I second the opinion. Great information and insights.
Executive gets the BOOT:
Tony Meola, the production chief for Washington Mutual Inc., Seattle, has resigned from the company, effective immediately, MortgageWire has learned.
would you have a link to this information?
thanks
http://www.tfp-ofac.com/
Headline only, registration required.
That is timely news.
I keep meaning to switch my checking account out of WAMU due to their exposure to exotic mortgages.
Gonna be seeing a lot of mortgage executives finding personal reasons for moving on.
Where you gonna put it, under your mattress? Have you seen the portfolios of any bank lately?
“Where you gonna put it, under your mattress? Have you seen the portfolios of any bank lately?”
Washington Mutual has had a poor rating from Weiss for years. I checked it a few years ago since all our cash was in it and was surprised to find it was only a C+; I don’t know what it is now. Now our money is mostly in Treasury bills which I buy online through Treasury Direct and our account is through Washington Federal Savings which has an A+ rating. You can look at the top rated banks at the Weiss web site for free. Every state has stronger banks available than Washington Mutual.
Farmers and Merchants bank out of Long Beach is the strongest bank in CA.
It is also convienent since I drive past 2 branches on the way to work.
Read their last 10-K, sunsetbeachguy. I posted this a couple of days ago: they are holding more than $80 billion in option ARMs in their portfolio. I’m short WM.
where are you finding this info about tony meola?
>”Bernanke says that inflation is a risk, but under control…If he pauses,
>and the economy fails to follow his model, and he then has to play
>catch-up, there will be hell to pay. Inflation and rates the least of it.”
As I don’t have a complete grasp on how these things work, does anyone have an opinion about the posibility of hitting another “stagflation” period as we did durring the Jimmy Carter days (high inflation + high unemployment)? Thanks!
Not sure I have any better grasp on stagflation that you do.
However, for high inflation, you really don’t have to look much farther than the rising everyday costs for gasoline, medical insurance, house payments, tuition etc. Most of these are inflationary to us everyday types, but not to the policy wonks in Washington who try to convince us that inflation, as measured by the core CPI, is still ‘very low’. High inflation is also indicated by twenty year highs for gold and other commodities, and the retreat of the dollar now that Bernanke has indicated they want to pause future increases in the prime.
On the high unemployment side, the ‘global labor arbitrage’ that Stephen Roach (Morgan Stanley) has written about so extensively is doing its bit to move high-paying jobs (Research & Development, technical, medical radiography, accounting etc.) offshore to India and elsewhere. This is really just a follow-on of the previous loss of high-paying manufacturing jobs to China. So this could help explain the ‘high employment’ part of the equation.
So the elements for a ’stagflationary’ environment seem all in place.
definitely agree with that, and I can assure you that it is exactly the same in Europe. Stagnant or declining wages for 95% of the workers, and skyrocketing costs for everything that is necessary for everyday living.
CPI is officially 1-2% here, but real inflation is around 10%.
Without the extra income from the home-ATM, many EU citizens would have gone bankrupt some years ago already.
The stagflation was a hangerover from the Vietnam War era, so if you want to blame someone, it should be Lyndon Johnson and Richard Nixon.
Any one woner why David Lereah, the Realtors’ chief economist, says “price gains to be atleast around 6 percent , compared with the double-digit gains in prices in recent years”.
Answer:”So that when sellers/speculators who bought last year and want to sell their property this year would be able to pay 6% to realtors and avoid any loss”
6% increase will pay only for .06/1.06=.566 or 5.66% commission…
6% commission would be paid for with 6.38% increase [.06/(1-.06)] to be exact…chump change i guess
Very interesting observation!
I wrote my congressman, Jerry Lewis, about the housing bubble and he wrote me back. Here’s his reply:
Dear Dr. Mason:
Thank you for contacting me regarding the state of our economy as it pertains to the housing sector. I appreciate hearing from you.
As you know, the past few years have seen huge increases in the housing market throughout the country. This has prompted speculation as to the nature of this growth and the stability of the economy. Congress, aware of the issue and surrounding concerns, is scheduling and holding hearings from economic experts, including Federal Reserve Chairman Ben Bernanke in the next few weeks. The aim of these hearings is to ensure that any resulting legislation is well researched and informed. As Congress moves forward on debating this issue, I will be certain to keep your comments in mind.
Again, thanks for input. Please do not hesitate to contact me in the future on this or any other issue of concern to you.
Sincerely,
Jerry Lewis
Member of Congress
I predict that the result of the hearings will be that any new legislation will be scrutinized for the risk that it could prick the bubble or cause some kind of limit for Fanny/Freddy operations.
We have had many similar discussions in the Netherlands and the result is always the same: more housing subsidies and tax incentives for homeowners ‘to keep housing affordable’, higher ceilings for government-backed mortgages ‘to help out starters and low-income families’, more money for big developers ‘to stimulate building of new homes’.
Seems like someone actually read your letter, instead of the usual “thanks for your comments” reply. Please let us know if you get any more feedback.
Thank you for sharing your correspondence!
“Bernanke says that inflation is a risk, but under control. He made no mention of the wild run-up in commodities, or the absence of risk premia. He has all of his chips on a soon-to-appear economic slowdown.”
I sense some change … 1-2 months ago many visitors on this blog were sure that Bernanke was going to stop inflation in its tracks and prick the housing bubble. Well, it’s time to wake up from those rosy dreams.
Helicopter Ben is living up to his nickname even more than I could imagine. He has done NOTHING to stop the flood of easy money. Yes, speculators are in trouble in some areas but they would have been in trouble anyway. Bernanke clearly chooses to defend the housing bubble and let the dollar drop.
Instead of the promise of ‘more openness’ from the FED the M3 figures are no longer available and the money supply is surging in an attempt to bail out the stock and housing markets. Inflation is ‘under control’ at the statistics office but that’s about all - and I am sure it will get much worse in the next months/years.
Watch what they do not what they say.
nhz,
I couldn’t agree more! It definitely feels like hyperinflation to me. Guess our deflation/hyperinflation question looks like it will be answered in short order.
Question is…what can we do about it? Although I believe hyperinflation is the medicine of choice, it’s worrisome to invest all our $$$ in commodities, as crashes of all sorts seem like a possibility.
What do you all think?
The local free quarterly mag of my neighborhood (15217) advertised $375k condos, with 1500 sq ft. That seems a bit pricey, IMO. They are to be finished next year, IIRC. There was a home on my block for $159k a few months ago. It wasn’t the best home here, but it is in a good neighborhood, on a nice street. I don’t get the condos. At least the quantity, of them. They keep saying empty-nsters will move from the suburbs. I suppose some will, but even in my nice hood, we have beggers on the streets. High taxes, nearly bankrupt city, socialist govt, bad schools … Don’t have that in the burbs. Well, the schools are a mess everywhere, but at least in the burbs they have standards. Here it is just hate America…
Places like Minneapolis have more of a silent bubble IMO. In San Diego, EVERYTHING is outrageously overpriced, and the people clearly cannot afford it. In Minneapolis, things are expensive to be sure, but seem comparatively so cheap, especially given the high incomes Minnesotans have. (we’re not like the states with low RE values and low wages like Mississippi or something).
But the glut of condos is astonishing. There are more and more coming on line at an alarming rate every day. And they are all “luxury” condos. And they are increasingly becoming towers instead of just mulitplex units. In the article above, they reference Opus. Opus built 2 condo towers here (Grant Park is built, The Carlyle has skeleton and skin up) with condos that run into the $4+ million range. who is buying these? (they are all bought… how many by speculators? we’ll soon see)
To any who are interested, here’s a sampling (note, there are like 7 condo towers in the 40-60 story range in planning or being built… scary)
http://www.skyscrapercity.com/showthread.php?t=159529&page=1
I have no doubt this will end VERY badly. The builders are only building luxury condos. They aren’t building any affordable condos… and in the actual CITIES of Mpls/St. Paul they aren’t building barely any SFHs either. To get a new SFH, you have to drive 10-20 miles away into the far out burbs. (I just toured the Parade Of Homes… we do it every year).
And once the condo market tanks… my SFH will follow not too far afterwards I’m sure… Yes, SFHs are much more desireable to Minnapolitans, but a condo is an exchangeable good…
sigh. I’m glad the loan value of my house is = to 2/3rds of our annual gross income.
clouseau
It’s been pointed out more than once that some of these luxury condo’s may well be affordable in a year or so :D.
Except for the HOA fees :(.
Home-Sales Forecast Not Rosy
In D.C. Area, Condos to Take Biggest Hit as Inventory Grows
By Sandra Fleishman
Washington Post Staff Writer
Saturday, April 29, 2006; Page F03
http://www.washingtonpost.com/wp-dyn/content/article/2006/04/28/AR2006042800928.html
“The speech was the first time Zandi has named specific areas in the nation where he expects “crashes,” which he defined as declines of more than 10 percent, and “corrections,” where he sees a drop of 5 to 10 percent.
He pinpointed six areas where prices have exploded as the most likely to see crashes. In addition to the Washington area, they were Atlantic City-Ocean City, N.J.; Las Vegas; Miami; Orlando; and Phoenix”
Let’s get back to those 35-40% price declines after the bi-coastal RE bubble. Those were the declines relative to inflation, not in nominal dollars, for one-family homes (condos/coops were hit much harder).
The problem is in some markets housing prices are out of line with incomes even at low interest rates, let alone high interest rates. The adjustment could come with much lower prices. Or it could come with six years of rising prices/wages while home prices are flat.
If you end up with 25% inflation over six years, flat home prices in some areas, and a 15% drop from the peak in bubble areas, the bubble will have deflated. Housing will have been a lousy investment, but those who bought at the peak at fixed rates will repay their mortgages in deflated dollars, and thus be saved (at the expense of lenders).
And those who bought with variable rates? Doom either way. That financial institutions were able to sell, and consumers were willing to buy, mortgages with variable rates when interest rates were at all-time lows is one of the great fleecings of the suckers in recent history.
— “Those who bought at the peak at fixed rates” — raise your hand if you bought at the peak with fixed rates…no one? That’s right, most mortgages at the peak were ARMs/IO.
25% inflation over six years? I think 50% (6-7% yoy) looks more likely at the moment.
For a 35% correction in real terms that leaves even room for a mild nominal price increase … in which case all those who are waiting to buy are doomed as well.
Um…
4 billion Chinese and Indian workers say you won’t be getting wage inflation anytime soon.
Unless you are flipping the next great bubble asset.
Which may be Indian equities and real estate.
Yep, CALPers is buying it.
As far as public pensions go they are better than most.
Four billion Chinese and Indian workers won’t indefinitely accept printing-press Federal Reserve Notes backed by, um, “trust,” for real goods and services.
I have to thank this blog for my purchase of GLD, silver bars and palladium coins, just prior to the recent run up. I doubt I would have done so otherwise!
One of the best books on investing is Roger C. Gibson’s “Asset Allocation: Balancing Financial Risk” (2nd Edition). Gibson has always recommended ‘hedges’ such as precious metals or mining stocks (less or equal to 6% of total assets) to provide a truly-balanced investment portfolio.
The basic idea is that if you invest solely in traditional assets (i.e., US domestic stocks and bonds) you are overlooking fully 50% of the world’s assets (i.e., international stocks and bonds, precious metals, real estate). Instead, if you invest in accord with you own risk tolerance and spread your investments among US and foreign assets, you will increase your returns and lower your actual risk.
Precious metals are a great example of an ‘unloved’ asset class by Wall Street. For nearly 20 years, gold, precious metals and mining stocks were largely reviled by the talking heads on CNBC. Others (and my) argument was simply that the low price for gold was simply a consequence of low real inflation rates. Now, with a substantial, real inflation rates (although not necessarily indicated by official US estimates), precious metals are quite understandingly rising in price.
Not to mention the fact that Wall Street doesn’t make commissions on purchases of metals, unless it’s a mining stock or an ETF.