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TonyC-SA
39 Comments
The Bedrock Case for the Return of the Gold Bull
Gold and the Dollar: Putting the Relative Cart Before the Relative Horse
The Bedrock Case for the Return of the Gold Bull
Jakedeez: The point of owning gold is the point of any stock; owning a share of Dell doesn't give you any trading rights to property or equipment or product, you can't go collect on your share whenever you want. You own the stock because you think the *stock* will go up. All these people arguing about whether gold can be used as currency are fools. Stocks can't be used as currency either!
In the case of Gold (IAU for instance), there is a tendency for the price to move counter to the international buying power of the dollar. It also runs counter to some stocks (but tends to move in the same direction as the S&P overall). So for some investments, you can reduce risk by making Gold a part of the mix.
The point has nothing to do with inflation or long term investment, the point has to do with the short term moves of stocks and gold and other commodities, and overall volatility. The advantage of controlling volatility is predictability, at the cost of greater upside. At an extreme for controlling volatility we just buy bonds, but even that doesn't protect you against the dollar sliding; gold does.
Personally, I keep 20-25% of my investments in gold (currently, IAU) since 2005, rebalancing every quarter. I do this because of national debt concerns, the value of the dollar is sliding and I don't think the long term outlook for that is good. If my opinion changes, so will my gold investment. Recently, gold has been tracking energy costs and those seem likely to rise long term as well.
Money Managers and the Berkshire Hurdle
Note that Buffett himself acknowledges TVB's point and has said BRK is so big it cannot achieve the returns it had in the early years.
The hedge fund manager's argument can be straight from Buffett himself: Warren has said he could earn 50% annually in the market if he were investing millions, but there is an upper limit because the companies that can deliver that kind of return are small and don't scale instantly.
But suppose we are talking about a $50M fund, if it earns 50% that is $25M, if the manager takes 20% and leaves investors $20M, that is 40% on the money. That beats the hell out of Buffett's average of 14%.
That would be the model argument for a hedge fund manager that wanted to claim he is the 40 year old clone of WB and wants us to pay him $5M a year.
Winners and Losers from the Mortgage Mess
For investors with capital, there are some desperate people and banks that cannot afford to wait two or three years for prices to recover, and that may mean a profit. I am not doing it, but it may be possible to find houses selling cheap, at auction or otherwise, that could be rented to cover 90-95% of the mortgage, and will appreciate in value 25% or so by 2012. That is far more than a respectable investment. Suppose I have to put 15% down and pay 6.25% for a mortgage and the rent only covers 90% of the mortgage payment. If the property appeciates 25% in the next four years, my total investment is 22.5% of the paid value, maybe 25% with repairs, while my profit is 25% of the paid value 100% in four years. That is an annualized compounded return of 19%.
As with all booms and busts, the winners after the bust are the people with the capital and judgment to acquire good assets cheap. As people lose their houses they must live somewhere and if it isn't the street, apartments and rentals are the only place left. I expect a new boom in trailer parks.
Down Payment Assistance Cancelled For Builders [Housing Tracker]
I think an interesting "bright side" article on the housing recession would be how this is affecting building labor and materials cost (if at all).
After the dot-com bubble burst, salaries and contract rates for computer programmers dropped as much as 50%. This was good news for those of us with demands on the programming market unrelated to dot coms, suddenly we had great talent available for less per hour than *before* the bubble.
By supply-and-demand reasoning, I would expect a similar effect in housing. At least for a while, labor and material should be in over-supply and the non-housing market builders should be reaping benefits.
Some Real Talk on Housing
The only caveat is that we should expect the housing market to grow with the population to some extent, but that will be a tiny boost for a little six year span, and will certainly be regionally dependent on local migration flux.
In truth, eventually we can expect to return to the trend line as it would have progressed without the bubble; this is the nature of bubbles in the stock market and commodities. When rational pricing returns and supply and demand are in sync again, sellers and buyers can agree on a price.
But at the moment, as the author notes, supply far exceeds demand, and as sellers get more desperate to unload assets that cost them money every month, prices will come down and losses will be taken, at first by the sellers, then ultimately as the sellers enter bankruptcy, by the banks.
We may drop below 2002 pricing as the market clears, but that will be the bubble rebound. Ultimately, 2002 pricing holding steady for six months is a pretty good indicator the drama is over.
Foreclosures Will Moderate as Home Prices Continue to Fall
Now when it comes to buying any investment I agree that a prime concern should be how you will unload it in five years, so standard replacements and construction and amenities are a necessity, and the future of taxes and utilities are a concern. Smaller homes are less subject to such concerns, and for an owner/occupier, can be a good investment. (I am not selling any, btw!)
Homes are big purchases, but like any purchase the best time to buy is usually when sellers have already accepted the fact of loss and are desperate to just stop the bleeding. My advice to buyers would be to calculate the valuation using mid-2001 numbers + 25% to 36%, i.e. pre-bubble numbers adjusted for normal inflation. This factors out the effects of speculation.
If the deal looks good at that valuation, and the tax and utility and maintenance expenses look good going forward, and the construction and appliances are standard issue, it is a pretty good deal for an owner/occupier. Eventually the recession is over and we return to the long term trendline, about 4.5% annual appreciation (which includes about 3% annual inflation), and that turns out to be a real investment because it is significantly less than the alternative of renting. I repeat, people have to live somewhere.
You Don't Own Real Estate - It Owns You
My wife and I retired to a garden home in a great neighborhood about fifteen years ago. I still keep up with apartment rents as part of my investment research, and our mortgage payment, property tax and maintenance average about 70% of what we would be paying for an apartment of equivalent size. And because we bought in a prime residential "triangle" servicing medical professionals, university workers and a large local employer, our property has had real (post-inflation) appreciation.
Putting money in your pocket is not the only hallmark of an investment. The difference between an investment and a purchase is whether the item can be expected to increase your net worth or decrease it. All investments have some risk, a successful investment increases your net worth.
If I buy a car or TV for personal use, that is a purchase. The only reasonable expectation is that it will decrease my net worth the instant the check is signed, and depreciate in resale value every month thereafter.
Renting an apartment is a purchase. My house is not a purchase because my alternative is renting. The house increases my net worth by several hundred dollars a month, every month. Since I build equity it increases my long term net worth. The interest payment tax reduction also increases my monthly income, since the alternative would be to pay that interest as rent and get no tax deduction.
The fact that the money in my pocket comes from savings does not prohibit this from being an investment. Home builders rightly consider pneumatic nailers and hydraulic lifts and even circular saws an investment, but for all of these the payoff is strictly savings on man hours, they put zero cash in the pocket, and eventually the equipment becomes worthless junk. But they are an investment because the only alternative to the equipment is hand tools and time-consuming muscle work.
We do enjoy the use of our home and neighborhood, but it was a relatively low risk investment in 1993 and remains one today. It has increased in value since we bought it (despite the RE crash) and continues to put money in my pocket every month, compared to any comparable benefit alternative.
Warren Buffett on the Dollar, the Recession, Subprime and Bear Stearns
The Folly in Calling a Housing Market Bottom
When markets crash (even local ones) they always crash further than rationality would dictate. Everybody sees lower pricing is imminent. Nobody wants to be left holding the bag so the supply increases disproportionately to the true value decline; people that need to sell in the next six months or whatever all rush to the exit now instead of waiting and taking a hit. In the meantime, demand dries up faster than the true value decline would dictate; buyers that were thinking of closing in the next few months but can wait it out for a better price will wait and see what happens. Knowing about a crash accelerates the crash on both the supply and demand fronts; this is why markets always crash much faster than they rise, and momentum carries them below their ideal setpoint. Fear of impending loss is a much stronger motivator than hope of eventual gain.
The Folly in Calling a Housing Market Bottom
But don't forget that these national averages do not reflect local conditions; the variation across the country is huge. As is often said, there is no such thing as the national real estate market! People are just not that mobile, even the young and single. They are tied to a locale by family, jobs and lifelong friends and business relationships.
So the California market is likely to be hit 2-3 times harder than the rural Texas market. In the former, prices began high and speculation was rife; in the latter, prices began low and speculation was either not necessary, or did not involve nearly as big a bet. It is not as if Calfornians were using ARMs to buy Oklahoman or Texan 1-acre country plots. They were buying overpriced condos and homes in California and as a percentage of true value (say, average for the locale under 1985-1990 valuation norms) their bubble was bigger than the bubble in rural Texas. So the "recovery" (meaning return to a normal +1% real dollar real estate market) will not overcome that bubble premium in real dollars for probably 20 or even 30 years.
The Folly in Calling a Housing Market Bottom
I am a staunch Democrat willing to provide some safety net to keep people from falling into abject poverty, but if we completely bail them out and make them whole we infantilize them and do them a disservice; we teach them a false lesson, namely that wild speculation has no real financial consequence.
Rather than ignoring the market, we should treat it like a MARKET: When supply vastly exceeds demand prices drop to the lowest the sellers can stand, and a prudent investor, looking 3-5 years down the road and assuming the housing market will return to its long term trend, can find value, be the buyer a seller needs immediately, and be rewarded for the ability to wait out the turmoil of the popping bubble.
The Myth of Gold as an Inflation Hedge
WHAT? As to water, YES. As to gold, yes. Somebody might trade me food or more water or shelter or transportation for the gold, so I doubt even a pound of gold coins is going to make a huge difference in how far I can go in the desert. If I can only choose one, I'll take the water, but that (as is pointed out in a post above) is a false choice, we can split our investment money pretty finely.
Also, I disagree with the idea that velocity represents the "intrinsic worth" of gold, it's intrinsic worth is in its rarity and as an ingredient in its inherent elemental properties that cannot be duplicated. It is not just jewelry and its value is not entirely due to some sort of psychological quirk of humans. As for velocity, I don't care a whit how often others are trading gold or whether there is an "opportunity"... to raise a price, and I don't know any serious investor that does. My only opportunity to raise the price is when **I** sell what I have. I agree that liquidity is an important consideration, and very active trading is a clear indicator of assymetric information (and a bubble when one side of that information is just mistakenly optimistic). But such indicators are not predictive of prices, they just warn you to pay attention and find out what it is you don't know, and correct at least what may be a personal information deficit.
Merck and Schering-Plough Make the Bad News About Vytorin Even Worse
To go further than the author, I would suspect the lowering of LDL by statins is a result of effect on some underlying and unidentified factor in atherosclerosis while the higher LDL itself is just an indicator of this underlying factor. If true, reducing LDL means nothing and the standard wisdom that high LDL causes atherosclerosis is simply false. Mask the indicator all you want, it doesn't address the root cause. And to whatever extent statins DO address the root cause, they incidentally cause a reduction in the LDL that indicates the severity of that root cause. Stop chasing the shadow of the problem and figure out what is casting the shadow.