 | | The Daily Reckoning | Tuesday, May 1, 2012 |
- The end of the dollar-euro world...Is it time to imagine the unimaginable?
- How exactly do gold and silver stack up against the world’s preferred paper,
- Plus, Bill Bonner on brick and mortar investments (in America!) and plenty more...
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|  | | | | Less and Less Unimaginable | | Preparing for a Lengthy and Unpredictable US Dollar Crisis | | |  | | Eric Fry |
Reporting from Laguna Beach, California...
“On the threshold of a crisis,” we observed in the July 19, 2011 edition ofThe Daily Reckoning, “a fertile imagination can be an investor’s most valuable asset.”
“During normal times,” we continued, “investors can focus only on buying quality stocks one by one from the bottom up, without also trying to envision what tragedies might befall them from the top down... But it may be time to begin imagining the unimaginable.
“It may be time, in other words, to begin considering that the next phase of the global monetary system might not include the US dollar as its reserve currency...or that the next two decades of life in America might not look anything like the last two decades.”
Here in the US of A, life is still pretty good, even if the economy isn’t perfect. A true crisis seems unimaginable. After all, even the 2008 crisis wasn’t that bad. Today, the Apple store in the mall is always packed, most of the restaurants in town are full...and the dollar is still strong enough to buy a nice vacation almost anywhere in the world.
A currency crisis that triggers an economic crisis — or vice versa — just feels like a bunch of wacky doom-and-gloom stuff. And it may well be. In the context of America’s legendary resilience and economic might, a catastrophic currency crisis seems almost unimaginable... But the time has arrived to begin imagining it...not because it is certain, but because it has become less unimaginable.
The best way to defend against a currency crisis is as obvious as it is emotionally difficult: Don’t hold the currency that is hurtling toward a crisis.
There is nothing mechanically difficult about this remedy, but it can be very difficult emotionally...and tactically. An individual who trades dollars for some sort of “safer” currency, for example, risks looking like a fool for a long period of time. Not even gold is a sure bet over short-to-medium-term timeframes. This safe-haven asset tumbled about 40% against the dollar during the 2008 crisis.
In short, being “safe” can sometimes feel very dangerous...and foolish. And no one wants to look as foolish as Noah building his Ark...unless, of course, it starts raining.
When the rain started falling on Brazil in 1990...or Thailand in 1997...or Russia in 1998, investors who had traded their local currencies for US dollars or gold were able to sail through the crises relatively unscathed. As their economies tumbled into deep recessions and asset values collapsed, the folks who had parked their wealth in dollars or gold were able to preserve their wealth...and also to take advantage of the resulting bargains.
But these folks had to be both forward-looking and patient if they were to succeed in protecting their wealth. Even so, their mission was infinitely easier than the one we Americans face today.
Throughout the serial currency crises of the last several decades, individuals everywhere throughout the world knew they could protect their wealth simply by trading their local currencies for US dollars. They didn’t even have to think about it. Just a wee bit of imagination enabled some investors to steer clear of these crises. The dollar was a sure thing.
But now that the “sure thing” itself is the thing that is becoming less sure, the appropriate course of action is very difficult to determine. Today, the looming potential crises are not unfolding in banana republics or in chronic economic basket cases, but in the world’s largest economies.
Investors required almost no imagination to envision the Argentine currency crisis of 2002. Argentina, Brazil and Russia all possessed a rich history of monetary incompetence and chicanery. Today, however, investors will require an imagination so vivid and wild that it would border on hallucinogenic. They must not merely imagine that an Argentina might have a currency crisis...again...but they must try to imagine that the euro might splinter apart...or that the dollar might suffer a disastrous hyperinflation.
If, in fact, the foundations supporting the dollar’s strength are eroding, how should the forward-looking dollar-holders protect themselves? Should they swap dollars for a few select foreign currencies? Maybe, but what if they select the wrong “select” currencies?
Singapore, Norway and Chile, to name just three examples, issue currencies that have been appreciating against the US dollar for many years. Broadly speaking, their currencies are strong because these nations operate in a much more fiscally responsible manner than the US government. Yet, when the euro crisis reached a boil last summer, the US dollar was still the world’s go-to currency. The Singapore dollar, Norwegian krone and Chilean peso all fell at least 10% against the US dollar.
All three of those currencies have since recovered most of their losses. But the point remains: Trying to preserve wealth by swapping US dollars for some other currency is a terrifying and risky quest...even if that strategy may be absolutely correct over the long run.
There simply is no easy way to prepare for a dollar crisis that unfolds in fits and starts over a very long period of time. Even so, in the column below, Jeff Clark, reiterates the case for buying gold and silver...come what may...
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In Communist China, suicide is considered a crime against the State.
The rash of suicide attempts over the last year there has incited a small, but growing revolution.
And its effects are influencing billions of investment dollars from big multinational companies.
How is this China revolution making its way back to America? And how could it affect you? Where should you park your money in the coming years?
Get the full story here.
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| | The Daily Reckoning Presents | | Time to Accumulate Gold and Silver | | |  | | Jeff Clark |
Do you own enough gold and silver for what lies ahead?
If 10% of your total investable assets (i.e., excluding equity in your primary residence) aren’t held in various forms of gold and silver, we at Casey Research think your portfolio is at risk.
After speaking at the Cambridge House conference last month and talking with many attendees, I came away convinced that most investors fall into one of two categories: those who hold an abundance of gold and silver (which tends to be physical forms only), and those with little or none. While both groups need to diversify, I’m a little more concerned about the second group. Here’s why.
Regardless of what you think will happen over the remainder of this decade, one thing seems virtually certain: the value of paper money will be affected, perhaps dramatically. Even if the economy slipped into deflation, the deflation wouldn’t last long. A panicked Fed would print to the max and set off a wild rise in prices. This is why we’re convinced currency dilution will not only continue but accelerate.
Let’s take a look at what’s happened so far with the value of our currency vs. gold, afteraccounting for the loss in purchasing power.
Both the US and Canadian dollar, after adjusting for their respective CPIs, have lost about a quarter of their purchasing power just since 2000. Concurrently, gold has increased dramatically in buying power, far outpacing the effects of inflation.
This is the core reason why I’m convinced we should hold our savings in gold and silver instead of dollars.
Mayan prophecies aside, many of our panelists last month, including most of the senior Casey staff, believe economic, monetary, and fiscal pressures could come to a head this year. The massive build- up of global debt, continued reckless deficit spending, and the lack of sound political leadership to reverse either trend point to a potentially ugly tipping point. What happens to our investments if we enter another recession or — gulp— a depression?
Here’s an updated snapshot of the gold price during each recession since 1955.
Clearly, one should not assume that gold will perform poorly during a recession. Even in the crash of 2008, gold still ended the year with a 5% gain. And with the amount of currency dilution we’ve undergone since that time, it seems more likely gold will rise in any economic contraction than fall. Indeed, if the response of government to a recession is more money printing, precious metals will be a critical asset to have in your possession.
Even if the gold price ends up flat or down this year, the CPI won’t. Gold’s enduring purchasing power is why we hold the metal.
How about gold stocks?
In spite of the debilitating 1970s that suffered from stagflation, price controls, three recessions, and the Vietnam war, gold producers rose over 600% while the S&P was basically flat. And that includes a roughly 65% fire-sale correction, much like we saw in 2008. To be clear, gold and silver stocks won’t be immune to selloffs if a recession or worse temporarily clobbers our industry. But in the end, we’re convinced they will prevail.
Don’t lose patience with, or confidence in, your gold holdings. What happens to the price over any short period of time is only one chapter in the book of this bull market, and we think you’ll be happy by the time that last chapter is written.
Regards,
Jeff Clark,
for The Daily Reckoning
Ed. Note: Jeff Clark is Senior Precious Metals Analyst for Casey Research. Jeff is constantly researching companies to recommend, analyzing the big trends in metals, and looking for safe and profitable ways to capitalize on the gold and silver bull market. He puts his money where his mouth is, and is completely committed to making his research letter BIG GOLD the best precious metals advisory for the prudent investor.
| | | | | Breaking News: “Are gold prices manipulated?” |
Are governments, banks, and traders secretly pushing gold prices... down?
Controversial new sources say they could be.
They could be using the manipulation to get very rich, at the expense of anybody who owns gold or silver. But our head resource expert says the charade “can’t last much longer.”
Click here now for details.
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| | | | | And now over to Bill Bonner who has the rest of today’s reckoning from Baltimore, Maryland... | | Is It Time to Buy a House? | | |  | | Bill Bonner |
Is it time to buy a house? Maybe...
This morning we received a bouquet of flowers. It was from the woman who just sold us a house in Baltimore. She sent the flowers to say ‘thanks.’
“We must have paid too much,” we said to Elizabeth. ”She likes us. She probably figures she was lucky to find such retarded buyers.”
We needed a house. We found one we liked. It was one of a kind. We bought it, even though the price seemed high. We weren’t even bidding against anyone. She hadn’t had an offer in months...maybe years. But she held out...and got the price she wanted.
Meanwhile, The Wall Street Journal reports that the housing market may have bottomed out. Of course, that’s what the press has been saying for the last 4 years. But now, theWSJ says buyers are bidding against one another:
A new development is catching home buyers off guard as the spring sales season gets under way: Bidding wars are back.
From California to Florida, many buyers are increasingly competing for the same house. Unlike the bidding wars that typified the go-go years and largely reflected surging sales, today’s are a result of supply shortages.
“It’s a little surprising because we thought bidding wars were done with,” said Andy Aley, who is looking to buy his first home in Seattle’s Beacon Hill neighborhood. The 31-year-old attorney was outbid this year when he offered up to $23,000 above the $357,000 listing price and agreed to waive inspections and other closing conditions.
Competitive bidding in the current environment isn’t producing huge price increases or leaving sellers with hefty profits, as occurred during the housing boom. Still, the bidding wars caused by tight inventory provide the latest evidence that housing demand is starting to pick up after a six-year-long slump.
An index that measures the number of contracts signed to purchase previously owned homes rose in March to its highest level in nearly two years, up 12.8% from a year ago and 4.1% from February, the National Association of Realtors reported on Thursday.
“We very much believe we’ve hit bottom,” said Ivy Zelman, chief executive of a research firm, who was among the first to warn of a downturn seven years ago. Earlier this week, she raised her home- price forecast for the year, calling for a 1% annual gain, up from a 1% decline. |
We don’t know. But our guess is that there’s more pain to come from this housing bear market...lower prices. And more collateral damage too.
In the 1960s, Americans had housing equity equal to 70% of their homes’ values. Now, it is barely 40%. Forget about trading up...homeowners don’t have anything to trade with.
And with 4 million homeowners still underwater, that’s a lot of inventory to work down. It could take a while...and lower prices...before the bottom is finally reached. Recent buyers are still losing money. And CoreLogic says prices are still falling. Here’s a Reutersreport:
(Reuters) — More than 1 million Americans who have taken out mortgages in the past two years now owe more on their loans than their homes are worth, and Federal Housing Administration loans that require only a tiny down payment are partly to blame.
That figure, provided to Reuters by tracking firm CoreLogic, represents about one out of 10 home loans made during that period.
It is a sobering indication the US housing market remains deeply troubled, with home values still falling in many parts of the country, and raises the question of whether low-down payment loans backed by the FHA are putting another generation of buyers at risk.
As of December 2011, the latest figures available, 31 percent of the US home loans that were in negative equity — in which the outstanding loan balance exceeds the value of the home — were FHA- insured mortgages, according to CoreLogic.
Many borrowers, particularly since late 2010, thought they were buying at the bottom of a housing market that had already suffered steep declines, but have been caught out by a continued fall in prices in wide swaths of America.
Even for loans taken out in December — less than four months ago and the last month for which data is available — nearly 44,000 borrowers, or about 7.5 percent of the total, now find themselves under water.
“The overwhelming majority of the US is still seeing home prices decline,” said CoreLogic senior economist Sam Khater. “Many borrowers continue to be quickly wiped out.”
According to the S&P/Case-Shiller 20-city composite index, which tracks home values in 20 major US metropolitan areas, US home prices were down 3.5 percent in February from a year earlier and are now at their lowest level since late 2002. Over the past 12 months, 15 of the 20 major metropolitan areas monitored saw declines. |
But that doesn’t mean that houses are a bad deal. Or that you will lose money buying now.
To the contrary, this could be the best time to buy in many, many years.
*** Things are a’changin’. And they affect the outlook for housing for many years into the future.
For one thing, young people don’t seem to be getting together and pitchin’ woo the way they used to. They’re waiting longer. They used to get married and have children in their 20s. Now they wait until their 30s.
So, they don’t need to buy a house until years later. In the meantime, they rent. Rentals are up...which could be good news — if you’re a landlord.
Home ownership is at its lowest level in 13 years; it seems to be going down, even though houses are much more affordable than they’ve been in many years.
Unemployment among young people is much higher than usual; fewer young people have the wherewithal to buy a house.
Young people also have much more debt than they used to. Student debt, for example, recently topped the $1 trillion level. No jobs...no spouses or children...shackled to student debt — young people are unlikely prospects for house-builders.
But “US housing is the best value play in America,” says colleague Chris Mayer. ”If you own a house then look to buy and rent another.”
Here’s the idea. You can now buy a decent house for $60,000 to $80,000 depending on where you are. You spend a little to put it into rentable condition. Then, you can rent it for $1,000 a month...maybe $1,500. At $1,200 a month on a $60,000 house you have a gross rental yield of nearly 20%. Assume you spend half of that on taxes, maintenance, etc. That leaves you with 10% net. Not bad.
Better yet, mortgage it for 30 years. Say you put up cash of $20,000...and mortgage the rest. Your mortgage payments should be a good deal less than $250 a month. So, after expenses (assuming they are 50% of your gross rent) you are netting $250 a month, which works out to a 15% yield on your cash.
And what happens to that $40,000 mortgage? Could be that it is a burden for years...and you pay it off with no gain or loss. More likely, it gets cheaper, year after year. Inflation knocks it down. Perhaps slowly at first — 3%...5%...
But we wouldn’t be at all surprised to see it get knocked away completely in a few years. Most likely, within 10 years a $40,000 mortgage...at today’s fixed rates...will be worth less than half of what it is today. So, you’ll make another $20,000 over 10 years...giving you a real yield on your investment over 20%...
This seems to us like the perfect investment for a retired person with time on his hands. Put $60,000 of savings into a money fund and you’ll get...what...$100 a month?
Instead, buy 3 houses for $60,000 each...mortgaging $40,000 on each one. You’ll have to work to fix them up and find the right tenants. But you’ll end up with positive cashflow of about $750 a month...plus, maybe a bonus of $60,000 more over 10 years as your mortgages get whittled down by inflation.
*** We were wrong about Harley Davidson.
A few months ago we guessed that it was time to sell the big hog builder in Milwaukee. We noticed who rides Harleys. Big, fat, old guys. Not much future in that, we reasoned. Especially when times are tough. The old guys will sell their bikes, we said.
Alas, your Daily Reckoning stock research department seems to have erred.
A report in The Financial Times tells us that Harley Davidson profits rose 44% in the first quarter of this year. Turns out they’re selling more bikes in the US than they expected. To whom?
Foreigners. Two thirds of the sales happen overseas.
A total of a quarter of a million motorcycles are expected to sell this year.
Amazing. We didn’t know there were that many fat, old guys overseas.
Harley Davidson seems to have created a worldwide brand.
Regards,
Bill Bonner,
for The Daily Reckoning |
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