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    • Fri Apr 4th 13:53 PM | Rating: 0 0
      Commented on:
      Why Gold Juniors Have Not Yet Popped
      I give up - how / where can a small investor in the U.S. efficiently invest in these stocks, preferrably as a basket?
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    • Mon Sep 18th 16:44 PM | Rating: 0 0
      Commented on:
      Housing: Too Much Cash Waiting for Investment for the Market to Fall Sharply
      Where to start with the flaws? First I'll nitpick, then I'll get on to the "big picture".
      Some nitpicks:
      The author contends homes price don't go to zero. Yes they do. A home is a depreciating asset, but the land may appreciate. In neighborhoods that go south, often the homes are sold for a pittance.

      Also, stocks represent ownership in a business. A company with a good operating history has utility as evidenced by its profits. It also has real options to expand and diversify.

      Lastly in the nitpick category - we should clarify that even if the author's contention that real estate may only fall 10-15% is true, that doesn't make it a good investment currently. If the price of your investment falls 15% over the next two years and then climbs 4%/yr thereafter then it will take you 6 years to break even in nominal terms. (If inflation goes at 3%/yr then in real terms it takes just under 9 years.) And cap rates are really low...

      In looking at the "big picture" it's often useful to compare an asset class aggregate value against GDP. For GDP represents the output of the nation. Mortgage debt as a percentage of GDP shot up from below 50% of GDP in 2000 to about 70% in 2005 (a 40% increase!). (Adjusting for the 1986 Tax Reform Act this ratio had held fairly constant for the previous 40 years.)

      Nonprime lending rose from 11% to 33% of all originations just from 2003 to 2005. Within the nonprime category "non-traditional&... (IO and "pay option") lending grew from ~10% to ~50% of new loans in that period. Put another way, prior to 2003 nonprime non-traditional loans were negligible. By 2005 they made up 1 out of every 6 new loans. (The preceding two points are based on published FDIC reports.)

      Also, if you plot aggregate housing valuation vs. GDP since WWII a decided "spike" like the late 90s stock bubble is *very* obvious. Yet even with this, home equity hasn't budged and indeed household balance sheet debt-to-equity has spiked up 50% since 2000 after being range-bound since the 1950s!

      I could go on and on. Long term interest rates have completed a secular 25 year decline and a post-WWII low fed funds fueled speculative lending in ARMs, IOs, etc. in 2003-2005. Lending standards have declined precipitously as securitization has exploded. Home "ownership" rates are at an all time high (meaning less buyers on the sidelines for residential properties).

      Structural changes, legislative actions, demographics, and finally psychology have layered on one another during the past 30 years to create increases in real estate values that are not sustainable long term. Just like the 20 year bull market in stocks (80s, 90s) lulled many to sleep on the back of expanding PEs, so have the non-repeatable drivers of post-WWII - and especially post-1980 - real estate valuations.
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