Housing Burst Will Cause National Recession

[NotARocketScientist]

Grandma rocks!

[powayseller]

I’ve thought of that also: paying off your house is better than money in the bank.

But, why would we repeat a Depression? I wasn’t alluding to that, although I have no idea why it can’t happen. Is a depression possible? Are all the same risk factors in place?

I was suggesting a recession. A recession is not a bad thing at all, just a normal part of economic cycles. Like a forest needs a good fire now and then, an economy needs recessions. Did you know that the redwood seed needs the heat of fire to crack its hard shell and make it sprout? Fire cleanses dead weeds and underbrush and shifts nutrients from flora to the soil. Recessions also have their place, as they curb excesses from the markets.

[lostkitty]

Watch your slinging of statistics there Jim. Just 3 standard deviations would include 99.73% of a population, 4 st dev = 99.993, and 5, 99.99994. “Hundreds” of standard deviations above the norm you say??? That would be easy to hit – maybe one homeowner? I think even you would agree that the foreclosure rate will be greater than than “hundreds” of standard deviations above the historical mean.

[powayseller]

The Mortgage Bankers Association estimates that the burden of higher interest costs would fall on about 7 percent to 8 percent of all homeowners.
The rest have either paid off their mortgages or face no immediate increase because they took out fixed-rate mortgages or refinanced their earlier loans
to mortgages that hold rates steady for 5 to 10 years.

I figured that 7-8% of all homeowners represent a majority of recent purchasers. In any case, this is a very high number of homeowners nationwide who are going to be in trouble by the end of 2007.

[picpoule]

I’d have to research it, but due to our anemic economic situation, the retail sector is probably not exactly robust. The tech sector bust, combined with a downturn after 9/11 really hit CO badly and we’ve been reeling ever since. I’d say the State economy in general is not doing well. I do know that the State government had a multi-year budget shortfall, which seems ameliorated a bit due to a raise in taxes (sigh). My instinct is that when people lose jobs in CA it’s a big enough State that’s fairly well diversified that people can find work there again. This is not the situation in CO. There aren’t an abundance of jobs here. We’re just fly-over country; not very important on a broader view of things. But I doubt CO’s poor economic performance over the last years have affected much of the U.S. economy. CO is a small state, unlike CA.

Powayseller, too bad you’re not in CO! What you’re anticipating to happen in CA seems to be on it’s way out here, even without any real estate bubble!

[North County Jim]

I must be missing something kitty. The average historical foreclosure rate can’t be much more than a third of a percent with a pretty small standard deviation. How do three standard deviations get you to 99% of homebuyers?

[4plexowner]

Commodities Bull Market

This is in response to powayseller’s question “how are you positioning your investments at this time?”

I wrote this e-mail to my parents this past weekend:

You shared the April 9 Union-Trib business section with me. Probably because the front page has this headline above the fold: “Some would-be gold bugs need to be aware of past volatility.”

We are going to see lots of articles like this in coming years.

Here are some facts for you to consider so you have an idea of what I expect from the current bull market in precious metals and other commodities.

All markets ebb and flow. One aspect of the ebbing and flowing is that commodities and equities take turns being the preferred investment vehicle (ie, when equities are hot, commodities are dogs, and vice-versa).

There have been 5 bull markets in commodities during the last 200 years. The shortest one was 14 years and the longest one was 40 years. The average was 18 years.

The current commodities bull market started in 1999 (when gold finally bottomed in its 20 year bear market) or in 2000 (when the equity markets tanked).

1999 plus 14 years takes us to 2013 so 2013 is the earliest that I believe the bull market in commodities will end.

Given that 3 billion new people (China and India) are trying to reach the living standards of the Western world, the current commodities bull is likely to run for much longer than anyone currently expects (and will likely take prices much higher than anyone expects). Think about all the metals and energy required to make TVs, refridgerators, cell phones, computers, cars, air conditioners, cities, etc and you can understand why demand for commodities is high.

My last point is supported by the behavior of the base metals over the last five years. Aluminum +105% Zinc +230% Lead +263% Copper +287% Nickel +302%

Notice that articles urging caution about the precious metals don’t point out that we are in a commodities bull market and that ALL commodities are surging in price.

So, this is my main point #1: we are in a commodities bull market that is supported by the addition of 3 billion people striving to achieve a western lifestyle – based on past commodities bull markets, the current one is likely to continue until 2013 AT LEAST and probably much longer.

Another significant factor in the current bull market is that commodity production has been in decline for the last 20 years. Low commodity prices caused numerous exploration companies and mining companies to go out of business and/or stop exploring for new resources.

It takes years to bring a new mine into production (5 to 7 years is typical) so it will take several more years before commodity production can ramp up to meet surging demand.

Some commodities (copper) will stop surging in price once supply is ramped up to meet demand – other commodities (uranium, zinc, silver, etc) will probably never be available in amounts large enough to stop them from continually increasing in price.

So, main point #2 is the other side of point #1 – ie, not only do we have surging demand for commodities we also have a lack of supply caused by the previous 20 year bear market in commodities. This lack of supply will take several more years to address.

The last point I’m going to make today has to do with money.

My understanding of monetary history says that fiat currencies have a lifespan of 50-70 years before the people reject them and (usually) move into silver and gold-backed currencies. Bankers and politicians reluctantly follow the people into silver and gold-backed currencies until they can pull the wool back over the people’s eyes and introduce another fiat currency.

The US dollar has been a fiat currency within the US since 1933 (illegal for US citizens to own gold) and outside of the US since 1971 (Nixon closed the gold window) – ie, based on history the US dollar is reaching the end of its lifespan.

This movement from fiat currency to real money (silver and gold) occurs because people lose trust in the governments that are (over)producing the fiat currency.

I won’t bore you with the laundry list of financial issues that the world is facing – let’s just say that part of the current rise in silver and gold prices is due to the poor economic state of ALL the western countries. As people become more aware of these economic issues they move into real money to protect their assets.

This would indicate that one way to stop the rise in silver and gold prices is to fix the economic issues that are causing people to move into real money. In the 1970’s, Paul Volker (Fed Reserve chairman) raised interest rates to 18% before economic issues were ‘fixed’ and the bull market in silver and gold was crushed.

So, from a monetary perspective, I expect the current bull market in silver and gold to continue until the economic issues of the world are fixed or at least addressed in a serious manner.

In the US ‘fixing the economy’ means all three deficits (trade, current account, budget) have to be resolved. In all of the western world, ‘fixing the economy’ means that all the unfunded promises that have been made to people (welfare state) have to be funded or revoked.

I believe it is likely that some country (probably China) will choose to back their currency with silver and gold before all the western countries resolve their economic issues. The next reserve currency for the world will most likely be the first one that is backed by silver and gold.

Point #3 – it isn’t reasonable to expect the bull market in silver and gold to end until the economic issues of the world are resolved and, probably, until some country backs their currency with silver and gold.

Bottom line for me: I’m not going to be swayed from my commodities bull market position until I see economic issues being seriously addressed in western countries or until some country backs their currency with silver and gold. I expect that the soonest this will happen is 2013.

I didn’t discuss it in this e-mail but real estate and equities should be making significant bottoms in the 2010-2012 timeframe and I will probably be moving investment money out of commodities and into real estate and equities when those bottoms occur.

end of e-mail

Hope this helps, powayseller.

[powayseller]

This makes a lot of sense. Point #1 and #2 is a summary of the book Hot Commodities by Jim Rogers, and that entire book makes sense. Point #3 makes sense too, and I wonder if you can give us some examples.

What makes you think that China is backing their currency with gold? If they are, could they be responsible for the rise in gold, as they are buying lots of it? Do we know who is buying gold? Is that listed anywhere?

Do you have any explanation for gold’s sudden rise? Do you expect profit taking to give us some good buying dips?

If you wish, you can post the answers on the What’s Up with gold post.

[LookoutBelow]

Pessimistic ? are you serious ?

Its not “pessimism…its REALITY ! The numbers are there, just look.

What your experiencing is “Cognitive Dissonance”.

[North County Jim]

I watch numbers every day. I think things will get very ugly. I just don’t think that economic Armageddon is around the corner.

Read some of powayseller’s posts. Predictions of all kinds of financial failures (pension funds, banks, etc.).

I don’t think these events are beyond the realm of possibility. I just don’t believe they’re likely.

[powayseller]

I believe the Fed will step in to minimize any damage, so I am certainly not predicting elimination of fiat currency or a Depression. I’m just looking at the data, and realize that unless we change course, we are putting our entire financial system at risk. This is what has been said by Greenspan, Paul Volcker, and many others. I only quote respected economists in my posts. Take it or leave it….

[lostkitty]

I suppose anything is possible… History verifies the fact that horrible things can, and do, happen. Powayseller is not necessarily stating these things WILL happen, but that they COULD happen. She is gathering information to best protect her nest… and GOOD FOR HER! Let the dialogue continue. This exchange of ideas will benefit us all.

[North County Jim]

OK, we can all agree the dangers are there. Protect assets accordingly.

[privatebanker]

Hey Jim, how are you doing? I just wanted to touch on a few things you mentioned here from the perspective of someone in the private wealth management world.

You bring up a good point with the having some exposure to gold and other precious metals in your portfolio. We are definitely in a bull market along with other commodities. There’s a lot of money to be made going forward. But I wouldn’t commit more than 10% of my portfolio to it.

As for money managers always thinking the market will only go up, I think this is untrue. I’ve had many conversations with portfolio managers and have heard just about the same thing from all of them. Most fund managers seek to outperform their respective benchmarks while minimizing risk. They all realize that everything is cyclical and certain asset classes outperform others during different economic cycles. I’ve never had a manager tell me that the market is always going up. Over the long term it has but as the old disclaimer goes, past performance is no indication of future results. Alternatively, I’ve had many debates with real estate agents with their claims of real estate only going up.

Portfolio Managers are usually Chartered Financial Analysts (CFA) and MBAs with thorough knowledge of all the financial markets. As for their tenure and having been in bull & bear markets, I would advise anyone looking to invest in a fund to look for a manager with a long consistent track record in all market cycles. To your point, most big wirehouses will have “rookie” portfolio managers run or be apart of their proprietary funds, which I would recommend avoiding.

I think you are missing the point for investing in mutual funds. Indeed, they are not insured by the federal gov. but that’s where risk vs. reward comes to play. Most fed. insured investments have a return that is at or below inflation. To offset those returns, one invests in an asset that can provide more return for the risk assumed. Modern Portfolio Theory implies that by spreading your money across a variety of low correlating asset classes, it will provide consistent returns while minimizing overall portfolio standard deviation. Gold is not insured either and is very volatile, however when mixed with other low correlating investments, the volatility is reduced.

I think “baby boomers” should seek the advice of a successful, intelligent wealth advisor with a CFP or CFA designation that can educate them on diversifying their portfolio to gain exposure to low correlating asset classes such as gold, managed comodities, etc. This will help them hedge against the “dooms day” that I’ve been seeing everyone talk about lately.

Not that this is a big deal but it’s SIPC that protects investors not SPCIC. ;)Sorry, couldn’t let that one go by.

Thanks again!

[powayseller]

I would be interested in meeting with such a professional. Do you have any recommendations for an average person like me, I mean non-wealthy?

[Author]

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