The Housing Bubble

How much further are QE3 and other printing press activities destined to drive up the price of gold?

Buttonwood
Precious relic
Gold remains popular, despite the doubts of economists
Oct 13th 2012 | from the print edition

GOLD is the most difficult asset class to analyse. For a start, it divides opinion so sharply. Its supporters have a quasi-religious fervour, regarding the metal as the one true source of value. Its detractors (a group that includes many economists) treat it, in John Maynard Keynes’s phrase, as a “barbarous relic” that has no place in serious discussions of monetary policy.

The task of valuing gold is made harder by the fact that it lacks a yield, let alone a profit from which you can calculate a price-earnings ratio. The best you can do is see how its price has performed relative to other things (see chart). Since 1971, when its link to the dollar was severed, gold has easily outpaced American consumer and house prices; it has beaten the S&P 500 and oil as well. The picture is not quite as clear if you compare the price with the 1980 peak; gold is still lower now in real terms than it was then.

One way of explaining gold’s rise is as an alternative currency. The Swiss franc has been so strong of late that the Swiss central bank has intervened to cap its value; even so, gold has easily outperformed the franc over the past 40 years. On this view, gold’s surging value is related to investors’ nervousness about paper money. Although the total supply of gold grows very slowly, central banks can create new money with just the click of a mouse. David Bloom of HSBC reckons that central banks have created $9 trillion of money during the crisis, equivalent to the value of all the gold that has ever been mined.

While rich-country central banks are busy creating money, developing-world central banks are buying gold—a record 158 tonnes in the second quarter, according to the World Gold Council. Daniel Brebner of Deutsche Bank sees a version of Gresham’s law at work here, in which the good money (gold) is hoarded in central-bank reserves and in exchange-traded funds, and the bad money (the dollar) is used for transactions. Expansionary monetary policy is thus good for gold.
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Have economic policy makers learned anything constructive from 25 years of asset bubbles and crashes during the Greenspan-Bernanke era at the Fed?

P.S. Does it seem to other HBBers like the U.S. stock market is in an election-year bubble RIGHT NOW?

Stockmarkets
Black marks from Black Monday
A big market crash happened 25 years ago this week. The wrong lessons were taken from it
Oct 20th 2012 | from the print edition

TWENTY-FIVE years ago, on October 19th 1987, global stockmarkets suddenly, and unexpectedly, collapsed on what instantly became known as Black Monday. The Dow Jones Industrial Average fell by almost 23% in a single session, still a record decline. At the time analysts rushed to look backwards. Parallels with the 1929 crash, which preceded the Great Depression, were immediately made. In fact they should have been looking forward. Three of the main reasons why the crunch happened in 2007 date back to 1987.

The biggest mistake was to do with monetary policy. Central banks around the world responded quickly to the crash, some cutting interest rates, others pumping money into the system. “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system,” said Alan Greenspan, recently appointed as head of the Fed. Calming a fraught financial system made sense at the time, but it introduced the idea of the “Greenspan put”, the notion that central banks would always intervene to support the markets when they fell sharply.

This was compounded by Mr Greenspan taking the opposite position when it came to asset bubbles: that even when prices were sky-high, it was not the job of central banks to outguess markets by trying to bring them back to earth. The one-day price fall of 23% in 1987, seemingly unconnected to economic fundamentals, gave a hint that markets are not always efficient. But Mr Greenspan declined this newspaper’s advice to intervene both when dotcom stocks surged in the late 1990s and when house prices rocketed in the early 2000s. For investors, markets became a one-way bet: central banks would intervene when markets were falling, but not when they were rising. The “great moderation” was a long period of steady growth and low inflation—and a huge build-up of debt.
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Put in its place

With trading, then, investors (and their regulators) simply failed to learn anything, and made the same mistake again. But the other two errors sprang more from policymakers opting for a solution that itself created problems. Perhaps the biggest conclusion of all is that any extended period of rapidly rising prices is an indication of a bubble—and that sadly there is no painless way to clean up the mess after the bubble pops.

My impression is that the Fed’s ZIRP and QE-at-the-click-of-a-mouse policies have had the effect to summarily redistribute wealth to Megabank, Inc, leaving it up to them to trickle it down to the rest of America through lending activities at an artificially-created spread (aka subsidy). Through this channel, the Fed has driven a huge divide in the U.S. wealth distribution between the Wall Street have’s and have-not’s.

But this is merely an impression. I’d be interested to hear a rebuttal.

For richer, for poorer
Growing inequality is one of the biggest social, economic and political challenges of our time. But it is not inevitable, says Zanny Minton Beddoes
Oct 13th 2012 | from the print edition

IN 1889, AT the height of America’s first Gilded Age, George Vanderbilt II, grandson of the original railway magnate, set out to build a country estate in the Blue Ridge mountains of North Carolina. He hired the most prominent architect of the time, toured the chateaux of the Loire for inspiration, laid a railway to bring in limestone from Indiana and employed more than 1,000 labourers. Six years later “Biltmore” was completed. With 250 rooms spread over 175,000 square feet (16,000 square metres), the mansion was 300 times bigger than the average dwelling of its day. It had central heating, an indoor swimming pool, a bowling alley, lifts and an intercom system at a time when most American homes had neither electricity nor indoor plumbing.

A bit over a century later, America’s second Gilded Age has nothing quite like the Vanderbilt extravaganza. Bill Gates’s home near Seattle is full of high-tech gizmos, but, at 66,000 square feet, it is a mere 30 times bigger than the average modern American home. Disparities in wealth are less visible in Americans’ everyday lives today than they were a century ago. Even poor people have televisions, air conditioners and cars.

But appearances deceive. The democratisation of living standards has masked a dramatic concentration of incomes over the past 30 years, on a scale that matches, or even exceeds, the first Gilded Age. Including capital gains, the share of national income going to the richest 1% of Americans has doubled since 1980, from 10% to 20%, roughly where it was a century ago. Even more striking, the share going to the top 0.01%—some 16,000 families with an average income of $24m—has quadrupled, from just over 1% to almost 5%. That is a bigger slice of the national pie than the top 0.01% received 100 years ago.

This is an extraordinary development, and it is not confined to America. Many countries, including Britain, Canada, China, India and even egalitarian Sweden, have seen a rise in the share of national income taken by the top 1%. The numbers of the ultra-wealthy have soared around the globe. According to Forbes magazine’s rich list, America has some 421 billionaires, Russia 96, China 95 and India 48. The world’s richest man is a Mexican (Carlos Slim, worth some $69 billion). The world’s largest new house belongs to an Indian. Mukesh Ambani’s 27-storey skyscraper in Mumbai occupies 400,000 square feet, making it 1,300 times bigger than the average shack in the slums that surround it.

The concentration of wealth at the very top is part of a much broader rise in disparities all along the income distribution. The best-known way of measuring inequality is the Gini coefficient, named after an Italian statistician called Corrado Gini. It aggregates the gaps between people’s incomes into a single measure. If everyone in a group has the same income, the Gini coefficient is 0; if all income goes to one person, it is 1.

The level of inequality differs widely around the world. Emerging economies are more unequal than rich ones. Scandinavian countries have the smallest income disparities, with a Gini coefficient for disposable income of around 0.25. At the other end of the spectrum the world’s most unequal, such as South Africa, register Ginis of around 0.6. (Because of the way the scale is constructed, a modest-sounding difference in the Gini ratio implies a big difference in inequality.)
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Has the Electric Car Revolution Stalled?

Much-hyped battery maker A123 Systems filed for bankruptcy this week, hoping to get its assets sold to big-league auto supplier Johnson Controls. Meanwhile, one of A123’s key customers, Fisker Automotive, said that production of its next model – originally slated to start this quarter – was unlikely to get rolling until 2014 or 2015, as it confronted a whole series of problems.

Meanwhile, Ford, which has invested heavily in improving the fuel efficiency of its conventional gas-powered models — has also been ramping up its hybrid offerings.

http://www.fool.com/investing/general/2012/10/18/has-the-electric-car-revolution-stalled.aspx

The “Electric Car” revolution might be stalling, but that doesn’t mean it’s over.

As a follower of the saying, Keep it Simple Stupid (KISS), I am more likely to buy one of Ford’s highly efficient conventional models, a Fiesta or a Focus.

The “Hybrid” technology seems to be more workable, as Toyota has shown, but the future will bring out much better technology and I would prefer to wait until that’s developed.

Bloomberg News
China Set to Lose Top U.S. Lender Spot to Japan
By Wes Goodman and Daniel Kruger on October 16, 2012

China is poised to lose its place as the U.S.’s biggest creditor for the first time since the height of the financial crisis, blunting one of Mitt Romney’s favored attacks in the presidential campaign.

Chinese holdings of Treasuries rose 0.1 percent this year through August to $1.15 trillion, Treasury Department data on international capital flows released today show. Japan, a stronger ally of the U.S., raised its stake by 6 percent to $1.12 trillion, on pace to top the list of foreign creditors by January.

While Romney promises to label China a currency manipulator if he wins the election and says President Barack Obama has been too lenient in trade disputes, foreign demand is a reason Treasury yields remain close to record lows, reducing the cost of credit for the government, companies and individuals. Whoever wins Nov. 6 will depend on both nations to finance a budget deficit that surpassed $1 trillion for a fourth year in fiscal 2012. The candidates hold their second debate today.

“We would still have a great need for overseas money,” Dominic Konstam, head of interest-rate strategy in New York at Deutsche Bank AG, one of the 21 primary dealers that trade with the Federal Reserve, said in an Oct. 11 telephone interview. “Whatever deficit we’re running, we’re going to supply a lot of Treasuries and someone’s going to buy them, and if it’s not China it will be someone else.”
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Is a firm housing bottom in place now?

Oct. 19, 2012, 12:27 p.m. EDT
Housing is the floor to build bank stocks on
Commentary: Third quarter shows data will be the key for future
By MarketWatch

SAN FRANCISCO (MarketWatch) — Housing data. For the next three months they are the numbers every banker — and bank investor — will be watching.

And on Friday, the news wasn’t good.

Sales of existing homes fell 1.7% in September, according to the National Association or Realtors. The drop, which surprised analysts, came after a streak of positive reports that showed the housing crash, if not reversing, then at least stabilizing. See full story about sales of existing homes.

A housing recovery is not only critical to the economy, it’s vital to the banks. The fact was underscored during the last 10 days as the nation’s biggest lenders, Bank of America Corp. (BAC +0.25%), Citigroup Inc. (BAC +0.25%), J.P. Morgan Chase & Co. (JPM -1.17%) and Wells Fargo & Co. (WFC -0.80%).

Each reported stronger results, in large part, due to fewer writedowns and costs associated with their mortgage portfolios. J.P. Morgan’s mortgage-lending revenue was up 57%. At Wells Fargo, it was up 50%. Bank of America saw an increase of 13%.

U.S. Bancorp (USB -0.57%) underwrote so many mortgages, $519 million worth, during the period, it now ranks as the third-biggest originator this year, as measured by Trefis.com.

The improvement prompted J.P. Morgan’s influential CEO, Jamie Dimon, to proclaim “the housing market has turned the corner.”
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Neighbors’ altercation ends with one shot and killed

Posted: Oct 18, 2012 10:41 PM EDT
By: April Kellogg,
FOX 13 News

APOLLO BEACH (FOX 13) - One man is dead and the neighbor that did the shooting is not facing charges – at least for now.

It happened around 6 p.m. in Apollo Beach, and authorities tell us it could possibly involve a Stand Your Ground argument.

According to the Hillsborough County Sheriff’s Office, David Cockerham, 67, was out walking his dog along Silver Falls Drive when neighbor John Gallik, 52, confronted him.

“Some kind of altercation broke loose and resulted in one man being shot and killed,” said Hillsborough Sheriff’s spokesman Larry McKinnon.

Detectives say the dog was startled and knocked over a sign blocking the sidewalk, and then Gallik got angry, yelling profanities, charging Cockerham and pulling out a knife. According to detectives, Cockerham took a step backward to create a distance between the two.

However, Gallik attacked him and threatened to cut his throat, detectives say. When Gallik charged him, detectives say Cockerham opened fire with a .38 caliber revolver that was in his pocket. Detectives say Gallik was shot once and died at the scene.

Cockerham immediately called 911 to alert them of the altercation, detectives say. He has not been charged with a crime as the investigation continues.

“So there’s a lot of components in the investigation, and once those all come together a determination will be made whether this was a Stand Your Ground self-defense, or in fact someone ends up getting charged with some level of homicide,” McKinnon said.

Neighbors tell us Gallik has had problems with many people in the past, and they say his house was in disrepair and his home in foreclosure.

The case is heading to the state attorney’s office.

http://www.myfoxtampabay.com/story/19859545/2012/10/18/neighbors-altercation-ends-with-one-shot-and-killed - -

There are trial balloons being floated about the possibility of central banks simply cancelling government debt.

Questions:
1) Is this possible?
2) Who suffers from this?
3) Who benefits from this?
4) Is it a TINSTAAFL violation? Does it matter?
5) Why could the US / UK get away with this but not Zimbabwe?
6) What are the unintended consequences?

Will Central Banks Cancel Government Debt?
Posted 10/15/2012 3:39 PM by SL Advisors

The FT today has a dynamite article with the abovementioned title by Gavyn Davies, Chairman of Fulcrum Asset Management. As the title suggests, Mr. Davies speculates that the vast holdings of government debt create the possibility that central banks may forgive some of it so as to further stimulate growth.

The most compelling feature is that there is no obvious injured party. Putting aside for a moment the likely adverse market reaction of such a move, if the Federal Reserve did agree to a modification of terms on the debt it holds, there would be no direct private sector losses as a result. It could be done in many ways more subtle than a complete write-off, which might include taxing interest income to the Fed, extending maturities or even rolling over maturing debt at favorable rates. Carried out in small, incremental steps that sought to minimize any negative market reaction, such an approach could be politically very appealing. At a time when Congress will be wrestling with a set of highly unpalatable choices involving spending cuts and tax increases, a modification in debt terms that was part of a wholesale improved fiscal outlook could gather populist support at a minimum. After all, if we owe the money to ourselves, which in effect we do for that component of the debt held by the Federal Reserve, why shouldn’t we be free to alter its terms.

http://community.nasdaq.com/News/2012-10/will-central-banks-cancel-government-debt.aspx?storyid=181582#.UIHDkrIhJkY

Weekend topic suggestion: where should I move to after my wife finishes graduate school? Maybe a smallish type town in N.Georgia?

I can’t wrap my mind around flat, hot, and no fall foliage for the rest of my life. I can’t imagine my kids missing out on these things, too. My original idea of being a teacher in Florida and traveling a lot has not panned out.

So, that’s my question for everybody: what’s your plan B now that the bubble is going sideways?

‘My name is Sonia Todd…’
10/19/2012

“My name is Sonia Todd and I died of cancer at the age of 38.”

So begins the poignant and straightforward obituary written by a “youngish” mother just before her death from cancer. According to the obituary published on the Idaho Statesman website, Todd wrote her own she didn’t care for the usual sorts of obits:

Either, family or friends gather together, and list every minor accomplishment from cradle to grave in a timeline format, or they try and create one poetic last stanza about someone’s life that is so glowing one would think the deceased had been the living embodiment of a deity.

According to Todd, she didn’t do anything worth shelling out the money to publish in an obit. Nor did she wish for her family and friends to fabricate a “glowing report” filled with half-truths.

I just tried to do the best I could. Sometimes I succeeded, most of the time I failed, but I tried. For all of my crazy comments, jokes, and complaints, I really did love people… Some folks told me that writing my own obituary was morbid, but I think it is great because I get a chance to say thank you to all the people who helped me along the way… I was blessed beyond measure by knowing all of you. That is what made my life worthwhile.

Writing her own obituary also gave Todd the chance to share last words of advice:

-If you smoke—quit
-If you drink and drive—stop
-…take a kid out for ice cream and talk to them about their hopes and dreams
-Forgive someone who doesn’t deserve it

Sonia Todd deserved more time with her children, but through her words, they will have another way to remember their mother.

Read more of Sonia Todd’s obituary at IdahoStatesman.com