[rseiser]

Yes, jg, your method makes sense, and I came to a similar result when I calculated how much of our liquid dollar assets (cash, CDs, bonds) one would put into gold. That is exactly the most important variable, and that can be anywhere between 0% and 100%. Are we totally trusting paper money and hold 0% gold. Probably not since there is clear precedent to the contrary. Are we totally losing faith in politicians to manage paper money honestly, then we will want to hold towards 100% in gold and demand a gold standard.

I think a number of 20% is reasonable (again, just talking about dollars we own, not our other assets) which would put gold much higher than it is now. It is very realistic that in times of rising inflationary fear that this ratio trends continuously up, e.g. from estimated (?) 5% to 30%. That’s one of the major reasons why gold can easily go up a factor 6 from its bottom (plus of course another 7% annualy or whatever dollars are printed during this time frame). Can the ratio go towards 100% and give another factor 3 (making it a total of 18 times up)? Sure, who knows, if we regard nothing as valuable as gold, but then it clearly becomes more risky. I rather take the easy gain in the beginning than panic later and try to get in at a price of about 3 times ($2000) from now.

Everyone has to answer for himself how much he trusts the government and paper, and what the other (clueless?) participants will think in a few years.

By the way, the production cost is so low because there is presently not so much demand. If the demand multiplies due to the above factors, there won’t be enough production at low prices, so the marginal price to meet this demand will come from additional mines at much lower grade, and then the production cost will be a muliple of now. (Think of some Saudi oil at <$5/bbl and the tar sands at $50/bbl total cost. That's why oil is $60 and not $6.)

[rseiser]

Poway,
thanks for the suggestion. With your being afraid of buying gold and commodities, I totally understand. But you have to strike a balance. Your balance is 5% gold. Better than 0%. How about other commodities doing well in a recession? You could put say 3% in agriculture, 3% in food, 2% in silver, 5% in oil. Those things did well in the 70s which was also a recession (inflationary albeit). Of course you can put it in companies including international ones that are involved in these sectors and also paying dividends like Peter Schiff suggests. I was always curious how it is to have an account with him, but he says the right things: That getting dividends in foreign currencies compounds and makes it easy on taxes if you keep the stocks long.

By not putting 95% in gold (or even buying short funds) you are definitely saying that you have more confidence in the dollar being preserved than gold. But I would just look at the evidence as currently presented: You get 5% on your dollar which is maybe 4% after tax. At the same time money supply numbers, price increases, future obligations, war spending, it all points to a total of 7-10% loss annually. So you are losing 3-6% almost garanteed, and it could be more and rising. Other certain assets might in theory only lose 0%, provided they didn’t have a big runup. Would you put 95% of your money in something losing 5%, and only 5% in something you are afraid of losing what? 10, 20, 50%? Who knows. Maybe they gain 30% annually like they did in the 70s. So the chance looks more like centered around 0% than around -5%.

I guess you could have more confidence in foreign currencies and try and get interest there. But again you have to look at the present facts and their governments. If they pay 6% interest and have money supply numbers of 5%, that sounds better, but it still doesn’t make you any money. It could also lose you money if that government decides to join the dollar devaluation, say the Europeans like the Euro at $1.20 better than at $1.33. What are they gonna do? They won’t force the US to take 10% of dollars out of circulation. They will just print 10% more Euros themselves. But some foreign currencies would be still reasonable diversification.

It’s all conjecture on my part, but look at the evidence. Is the government honest in their spending? Are they giving accurate numbers? Is your interest rate outpacing your price increases?

[rseiser]

The common saying is that the Singapore dollar is the soundest currency (don’t know why). Also the Swiss Franc might be ok. I am interested in opening a foreign account like I have one in Germany. There, I can pretty much buy most stocks or get interest on the cash balance.
What I am trying to find out for years, is if it is correct that one can pay taxes on the stock gains in the local currency. This is what I read years ago. What that means is, that if I have a stock which gains 500 Euros but $1500 in dollars (because the Euro went up during this time), I would only have to pay tax on the 500 Euros (~$650) and not on the $1500. This would prevent you from paying taxes just because the dollar is collapsing, even if you don’t have a real gain.
Of course, if the Euro drops this rule goes against you. Although, I saw one article that referred to IRS sections, that you can actually elect which method you use to pay the taxes (foreign entity (first method), or American capital gains (second method)).
I would really appreciate if anybody knows anything about this.

[rseiser]

Yes, you are right. It is not a good deal for the renter/buyer in most cases. My friend did many deals like this, and the stories are just insane.
Potential buyers are so blinded by the possibility to own the house (and try living in it risk-free for a while before the purchase) that they throw all reason overboard. They generally are willing to pay an upfront fee (the option), especially if they won or inherited the money. The other possibility is that they have bad credit. This gives them time to clean up the credit, and at the end they can buy the house at the agreed price. The agreed price is generally higher, i.e. 5-10% as you mention, or linked to the market.
There are stories of people putting down $50,000 in cash just to have the chance to own. After they lose their job or can’t clean up their credit, they miss a payment on the rent, and the $50,000 are gone. This happened sometimes after a few months of renting.
Most people walked away quietly, since they didn’t pay rent for a few months, and see their own shortcomings. At that point they don’t even care about the option payment anymore. Crazy!
This is one of the mistakes buyers and investors make: They think the house or stock is going up, and they stop considering any other outcome, including that they could move, lose their job, need money, or the price stays the same. But one has to consider all the outcomes and multiply them with realistic or even very conservative probabilities.

[rseiser]

DrChaos, if all currencies fall in tandem, long bonds won’t be such a good investment either, would they?

[rseiser]

I do agree with powayseller, vrudny, Roubini, and Fleck, and I also think if one wants to risk the inverse funds or options, go for it. Just don’t use up all your money (like me, haha).
And I want to stress, that all of us have an opinion and an opinion only. This is a free forum and nobody should take advice literally. Rather chuggle if he doesn’t agree with others, and time (and profits) will tell who is right. I was wrong several times, and always I learned a lesson I will never forget.

Yes, I absolutely do believe that most people that drove up that rally do not have a clue. The same way any rally in 2001 happened, where nobody had a clue. If so much profit comes from the finance industry, and everybody has all his 401k in stocks, no wonder nobody cares to do the math anymore and just be bullish. The same way PALM at $160 didn’t add up if one divided the market cap by likely users. That’s why it went to $1 (and maybe for other reasons, too)

This is a rally like any other upside or downside trend, that has nothing to do with who knows what better. It just happens. Again this is just my opinion, and I am very happy that it is a contrary opinion, except for a few users on this board who agree.

[rseiser]

You know, this site is really one of the best I have ever seen, and that’s the product of Rich and a lot of smart posters.
Yes, you get into this occasional argument who sold when and got 100K more or less than somebody else, and where the market will go in the next 2, 4, or 6 months.
But I believe the issue is much bigger. There is a lot of logical reasoning coming out of this site, some of it very relevant to our future, even from a macro-perspective if you consider the fools of prior history including the fall of the Roman Empire, the Mississippi Company, or Japan’s economic fate. Maybe our politicians, including San Diego’s great city financiers should spend a few hours on this site.
I have a lot of friends that struggle their whole life to get out of debtor’s prison, and some of them are still dreaming about buying a house without ever having saved a dime. And guess what, the lopsided system would actually allow them to. Readers of this site are lucky to avoid a trap that’s still lurking out there.
Ignore it at your own risk!

[rseiser]

I am sure a CFP is more useful in helping you in routine procedures and guiding you what has worked historically and not in forecasting the market. (I am just guessing since I am not one)
powayseller, if you mostly want to predict the future, I am sure a CFP will be no help to you. He will at best guide you along the probabilites of the past, but they will be different than the probabilities you believe in.
However, it might be useful to exchange information between both of you. A CFP might give you an idea what many other people are thinking, and then based on that you can adjust your own outlook. (Away from consensus if you think consensus is flawed).

[rseiser]

Whew.. much too abstract for me guys, but I would argue that one could distinguish between a rational scientist and a rational person.
A person could be considered rational if they believe in experience collected over the lifetime of mankind, even if there is no proof. A person is probably rational to count on the sun always shining every day. Sure, maybe it doesn’t one day or the moon could be in front of it, but I wouldn’t call the person not being rational believing in the regular event.
I also wonder if probability plays into this. We know that events are rare, but we don’t know if they will hit us each of the next two days.
We could say that it is rational to buy a house in California if it is cheap, and earthquakes are rare. But what if one hits one week after you buy it? Both people will fight about who is more rational, the buyer because the chance was low, and the friend who warned him will say she was rational because an earthquake can hit any time in California.
Same with the market. I suppose you cannot claim that it is rational that a market will go up. Since you cannot predict the future, no prediction is rational. One person can claim it is rational that it goes up its historical rate, and another person can claim that this time is different and unforseen events might happen. Either way the market goes, one person will declare victory without proof that he was rational. Then what? Are they now only following the lead of the person who was right?
I suppose we would follow the person who was more often right the last couple of times, but is this rational?

Still a little conundrum for me how to resolve our differences on market predictions. I guess, the one who has made a better return when he retires was rational; or lucky, haha.

[rseiser]

Yes, I agree, that is has been presented and reported on all over the country. You are right, it is not a secret. But you know, after a few months everybody has heard it and since it hasn’t hit yet, they kind of think how bad can it be. After a few months of a break, even I don’t believe in it anymore emotionally, maybe it doesn’t happen at all. But then you go back to logic and go over the numbers and then you realize everybody is just numbed from the news. The people around me still want to buy houses, they still think it will go up next year. ARMs are still going to reset. Lenders are still writing credit at ridiculously low rates, and people still invest in mortgage backed securities, since it’s the best deal around. The best of all are the banks who offload all these bundled mortgages to wall-street, and then their next door collegue in the investment department buys all of them back by investing the bank’s and client’s money in them.

Sorry for the rant, but “nothing is over” yet, and nobody in his gut believes anymore that it’s going to matter. It hasn’t so far so why bother.

But on a different note. Hedge-funds also invest a lot into MBS and derivatives. I heard they are not doing very well this year. (Besides Refco, GM-bonds, Amaranth, and Vega)
Have they improved a lot with the latest rally? What are their typcal returns YTD?

[rseiser]

Actually, I agree with all of you at the same time.
-I agree with no_such_reality that things ARE good at this moment and that the perception IS for things to be ok and getting better.
-I also agree with powayseller that going forward things MIGHT NOT be that good.
-And I totally agree with heavyd that it only matters how the perception will CHANGE from now on.

While nobody knows exactly the future I am certainly leaning to the side of perception being soon be adjusted to the downside.

First, we had an incredible rally and everything comes in swings, so maybe we swing back to the mode we were before July, i.e. rising interest rates and oil.

Second, there is one single piece of information that this board believes in and that is different from the mainstream perception. This one piece is housing and credit. Both are so huge, that people cannot even comprehend what it means if real-estate drops 10% or more. It wipes out about 3 trillion dollars that somebody thought he had, but nobody really had, including owners, lenders, builders, contractors, mortgage brokers. Yeah, the government can print 3 trillion which they probably want to, but hey, good luck to all the different market participants.
The second question is, does it drop 10%, or maybe only 2% as some suggest. Well, it can also drop 20% if we consider where it came from or by what empty speculation it was driven, or by what it compares to rent. So 10% is a totally reasonable guess. If someone thinks the market just drops 2% and then goes up again next year 5%, like some coworkers of mine do, I can only say that even mathematically it wouldn’t add up. Nobody could afford to buy any property anymore, with all the bills coming, and to service all those buildings in the future. Especially, where rents and salaries lag behind so badly.

[rseiser]

Poway, I agree with all you say, but since I have been proven wrong a few times, I better shut up and see what happens.
Regarding the rally though, the S&P (and mutual funds I assume) really had an incredible rally since June/July. So far so good, but I don’t remember anybody calling this rally, except a few stock perma-bulls. I have covered a few shorts in July, so that was a good move, too. We shall see how long the rally lasts, but predicting a rally to start now (after this move) is as useful as starting to short in July.
I am still learning a lot here, and I am trying to see if we could have something like 1973, it certainly would fit the script perfectly. What was going on then in terms of signs?
What I have heard on this board makes me believe that maybe an end (permanent end) to the bond-rally might initiate a dramatic change in direction (20 year bull-market in stocks/bonds being over).

[rseiser]

Yes, ChrisJ has been exactly warning of this gold breakdown when it was slightly above $600. Also, he mentioned $574.5 as support, where it exactly bounced the first time (How did he know? Is he the biggest player in the gold market, haha?). Now it broke below $574.5. Does this mean it will go lower and that it will take a long time before it goes above $600 again? I am not acting on any of this, since I don’t see any value anywhere else to put my money. But I am certainly curious how one can so well predict these trading rallies.
Regarding the stock rally and bonds accompanying it. Yes, after the fact we can see that both went together, but how could we tell that bonds would rally so far in the first place? Trust Bill Gross more often? Going forward, would a break in bonds signal that the stock market rally is over?

[rseiser]

davelj,
I liked your example. A great interpretation and certainly one way to see it.
Regarding your other post, why didn’t you just link to it. I would have read it, too.

[rseiser]

This board all wrong? No, first of all, most of the arguments presented describe the state of the economy and the risk one is taking when going into one asset class. It is not to forecast something month by month.
Just look at stocks, from May until August they fell, and from August until October they rose. Depending on the Dow or Nasdaq we are roughly back to even. Same with gold but slightly earlier, we had a rally and now we are back down. So one can call both markets flat and discuss what is going to happen longer term.

Me personally wrong? Yes, I admit it I was partially big-time wrong.
I was right on warning about oil and industrial metals when they were high. I was ok on suggesting agricultural commodities since they did okay. I didn’t push gold much when it was high, but below $600 I recommended it. So I was slightly too high, and we will se how it will do going forward.
But where I was really wrong was on bonds. I never expected interest rates to fall so far and expected stronger gold and weaker dollar. I also was wrong in stocks, which I didn’t expect to be so strong the last week. I predicted an end of the rally the end of September, and I took a real beating with my money. So don’t follow my advice in the future. I can still be right on the lending and housing stocks since they are acting weak right now and might not make their May high before they roll over again.

Bottom line: We might not be good in predicting the short-term, but buying stocks or bonds at these prices is quite risky. Not as risky as real-estate, but risky nevertheless historically.

[Author]

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