US dollar vs the gold it could be backed with

[citizennobody]

Quote from laziz314159:



I was trying to give the austrian argument without saying 'austrian', so we didn't get into a 'Chicago Rulez, Austria Droolz' sort of debate.

I, personally, think we get a hard landing. A housing bubble is one thing, but a housing bubble + currency probs + other systemic risks (fundamental to the pro-gold argument) points to some wild ups and downs.

Regards,
Laz

Yeah I agree, I didn't want to get into an Austrian droolz debate either but my point is what if the housing bubble pricks? What if the USD drops out? I think that equities will shine.

The housing market has played out its major momentum. People live in houses for the needs based dynamics, not the win/loss profits dynamics of the stock market. If house values run loose people won't be panicking in the streets like when equities run dry... An increase in rates might hurt some builders but as a whole the industry will fare well plus one last college try for last minute refis/buyers will push through the market. So, in other words don't let that argument steer you into a panic if interest rates start climbing.

If the dollar drops, our demand (imports) and supply (exports) will initially in the short term be inelastic. This means that as companies are running around trying to lower their sigma (expected probability of return on portfolio models) we will see a bull run on commodities. Our overall quantity of supply/demand won't change but values will as Xrates move. We will also see a run for the last round of mortgage refis and home purchases as the laggards get motivated. The capriscous redistribution of wealth will cause domestic producers to immediately increase shortrun production to get a last piece of that inelastic pie from the Xrates movement.

And finally, equities will run because, in the short run, we will see a very short cough then big run up. Why, while short term books will cook because of lost revenue that no one will see because everyone will be watching the interest rates, multinational CFO's will be running around trying to either play current hedges from the forboding Xrates flux or immediately playing the expense/chargoff/profit/loss/AR/AP/NWC international accounting game that they play finding out how to create earnings out of my arse. I know how they do it but I wont tell. Plus with the initial commodity market run up (which will cause the head fake stock mkt cough) momentum will eventually run, sooner than later, str8 from Chicago to NY as traders hedge intermarket. The combination of great news coming out of companies (because they played the Xrate/accounting shell game), intermarket hedging & arbitrage, foreign demand for US rates that are higher vs risk (they will run and come back), and then mom & pop running into the market cuz SR manufacturing is up (lowerin unemployment) and maw & paw think that US industry revival is coming which will make them think they are about to miss the next bull mkt will cause equities to shine.

I skipped over so much stuff here it isn't funny. Read between the lines and don't choke on your ovaltine because I didn't take the time to explain every point, but I hope you get the idea.

Watch what will happen, we are in an election cycle! Dow 15000 near (probably right after re-election) and then all bets are off. I will be bullish until the election and then VERY skittish. These countries (those propping their currencies againse the $) hate us and they are going to dump on us with their US assets hoping to get Bush whacked (so they can get a dam liberal in office), but they don't realize how greedy we are and they are going to get BUSHWHACKED!

CALL ME CRAZY, BUT THE #'S ARE LOUDER THAN WORDS TO ME RIGHT NOW!!!

 

[laziz314159]

Quote from citizennobody:



Yeah I agree, I didn't want to get into an Austrian droolz debate either but my point is what if the housing bubble pricks? What if the USD drops out? I think that equities will shine.

The housing market has played out its major momentum. People live in houses for the needs based dynamics, not the win/loss profits dynamics of the stock market. If house values run loose people won't be panicking in the streets like when equities run dry... An increase in rates might hurt some builders but as a whole the industry will fare well plus one last college try for last minute refis/buyers will push through the market. So, in other words don't let that argument steer you into a panic if interest rates start climbing.

I think you underestimate the effect that equity appreciation possibilities have had on 'trade-up' housing sales. If RE values sink, putting any fraction of houses 'under water' relative to outstanding mortgage balances, people will just walk away from their homes when they start having difficulty making the payments. So you're right, they won't be panicking in the streets-- they'll be living there.

This plays out in the short-run but has long-term effects on both housing demand and consumer credit availability in general-- I think (and reasonable people can disagree on this) that export demand growth due to a lower dollar won't replace the decrease in domestic demand as a result of the credit contraction.

There's an additional effect that may or may not come into play as people liquidate their 401k holdings into a rising market to try to save their houses/pay off their credit cards as interest rates go up making refi equity extraction prohibitively expensive.

<snip explanation>

This seems somewhat different from your original argument for dow 15k which (at least as I read it) went something like "yeah, it's !@#$'ed up now, but what if the expansionary monetary policy gives the economy enough breathing room to fix itself after the fact".

Now all you seem to be saying is that short-run effects are in line with a supportive stance from the fed to kick the dow to 15k before the election. That's not nearly as radical as the original.

You may be right-- but what the inflation/war/gold skeptics are arguing is that the shell game (which you reveal you understand within the context of corporate accounting-- how you don't believe the gov't is capable of the same things smacks of naivete) cannot possibly be kept going until the election-- I'd say that the recent run in the CRB, the policy mistakes of the Bush administration, and the changing perspectives of those sovereigns that hold the bulk of our treasuries suggest that maintainence of the current farce cannot be preserved for the next year. It's like that old engineering joke: "You can have it good, cheap, and fast-- pick two." The stock market may be propped, gold may be capped, and interest rates may be capped-- pick two.

I skipped over so much stuff here it isn't funny. Read between the lines and don't choke on your ovaltine because I didn't take the time to explain every point, but I hope you get the idea.

Look, what you're trying to explain isn't that complicated. The red herrings you stick in the middle of your argument to give yourself academic 'street cred' are merely distractions from the core of your argument, which when plainly put could be understood by nearly any layman with a more-than-joe-schmoe familiarity with the economy and its workings.

I think most of the posters involved have done a good job of sticking with the thematic strokes of your argument instead of splitting hairs over specific misunderstandings.

Screw ovaltine. I'll have a vodka on the rocks-- make the rocks outta pills.

Watch what will happen, we are in an election cycle! Dow 15000 near (probably right after re-election) and then all bets are off. I will be bullish until the election and then VERY skittish. These countries (those propping their currencies againse the $) hate us and they are going to dump on us with their US assets hoping to get Bush whacked (so they can get a dam liberal in office), but they don't realize how greedy we are and they are going to get BUSHWHACKED!

That's not my take on it at all. Those foreign countries have been propping up the dollar both as a favor to their exporters and to us, and to their treasury portfolios. This has required taking on far more $ reserves than is sane. It's a favor to us because for so long, the effect of foreign capital inflow on our equities markets (and the value of the currency) has far outstripped the worrisome effects on exports (this is the virtuous circle).

But the dollar index has already decreased by > 21%. http://futures.tradingcharts.com/chart/US/W what's the threshold before your supposed export effects kick in?

Maybe you're right, and bush wins as the dow goes up. I think his only hope is to kick the PNAC folks (rumsfeld, perle, wolfowitz) out, come completely clean about the outing of Valerie Plame, etc. He's far too arrogant to do that-- the tide of public opinion is turning against him, as slowly and surely as an oil tanker turning into Freeport.

Regards,
Laz

 

[citizennobody]

Quote from laziz314159:



I think you underestimate the effect that equity appreciation possibilities have had on 'trade-up' housing sales. If RE values sink, putting any fraction of houses 'under water' relative to outstanding mortgage balances, people will just walk away from their homes when they start having difficulty making the payments. So you're right, they won't be panicking in the streets-- they'll be living there.

This plays out in the short-run but has long-term effects on both housing demand and consumer credit availability in general-- I think (and reasonable people can disagree on this) that export demand growth due to a lower dollar won't replace the decrease in domestic demand as a result of the credit contraction.

There's an additional effect that may or may not come into play as people liquidate their 401k holdings into a rising market to try to save their houses/pay off their credit cards as interest rates go up making refi equity extraction prohibitively expensive.

This seems somewhat different from your original argument for dow 15k which (at least as I read it) went something like "yeah, it's !@#$'ed up now, but what if the expansionary monetary policy gives the economy enough breathing room to fix itself after the fact".

Now all you seem to be saying is that short-run effects are in line with a supportive stance from the fed to kick the dow to 15k before the election. That's not nearly as radical as the original.

You may be right-- but what the inflation/war/gold skeptics are arguing is that the shell game (which you reveal you understand within the context of corporate accounting-- how you don't believe the gov't is capable of the same things smacks of naivete) cannot possibly be kept going until the election-- I'd say that the recent run in the CRB, the policy mistakes of the Bush administration, and the changing perspectives of those sovereigns that hold the bulk of our treasuries suggest that maintainence of the current farce cannot be preserved for the next year. It's like that old engineering joke: "You can have it good, cheap, and fast-- pick two." The stock market may be propped, gold may be capped, and interest rates may be capped-- pick two.



Look, what you're trying to explain isn't that complicated. The red herrings you stick in the middle of your argument to give yourself academic 'street cred' are merely distractions from the core of your argument, which when plainly put could be understood by nearly any layman with a more-than-joe-schmoe familiarity with the economy and its workings.

I think most of the posters involved have done a good job of sticking with the thematic strokes of your argument instead of splitting hairs over specific misunderstandings.

Screw ovaltine. I'll have a vodka on the rocks-- make the rocks outta pills.

That's not my take on it at all. Those foreign countries have been propping up the dollar both as a favor to their exporters and to us, and to their treasury portfolios. This has required taking on far more $ reserves than is sane. It's a favor to us because for so long, the effect of foreign capital inflow on our equities markets (and the value of the currency) has far outstripped the worrisome effects on exports (this is the virtuous circle).

But the dollar index has already decreased by > 21%. http://futures.tradingcharts.com/chart/US/W what's the threshold before your supposed export effects kick in?

Maybe you're right, and bush wins as the dow goes up. I think his only hope is to kick the PNAC folks (rumsfeld, perle, wolfowitz) out, come completely clean about the outing of Valerie Plame, etc. He's far too arrogant to do that-- the tide of public opinion is turning against him, as slowly and surely as an oil tanker turning into Freeport.

Regards,
Laz [/B]

Consumer credit (mortgages and foreclosures) are independent of housing prices. Just because the real estate value dropped and some properties are underwater wont cause higher default rates. Most of the mortgages are fixed rates so there is no interest risk. And I predict a drop in unemployment so I don't think that unemployment will contribute to rising default. Most people look at RE as a long term hold and will just sit tight and weather out the storm. What are their options? To either sit tight or foreclose and wait until their credit improves so that they can buy again? And anyone that has a variable rate in this environment should get burned.

I forgot to mention the further easing of fed policy in my last post. Thanks for reminding me. Oh, BTW, that will help inflate the bubble too.

As far as the posters keeping up, well thats what they would like to believe...
Read this just for edification purposes, NO, not you Laz, you know what you are talking about. As for the red herrings, I have seen any. Have you?
http://utminers.utep.edu/tcford/docs/poptrade.html

 

[laziz314159]

Quote from citizennobody:



Consumer credit (mortgages and foreclosures) are independent of housing prices. <snip>

What I'm really getting at is the interaction between other-than-mortgage debt (e.g. credit cards) and mortgages. You are right to note that I assume some increase in unemployment. If you're right about export demand due to a lower dollar resulting in increased employment, I think we should have seen it already. At this point it gets down into parsing the employment reports, and again, reasonable people can disagree on that.

I forgot to mention the further easing of fed policy in my last post. Thanks for reminding me. Oh, BTW, that will help inflate the bubble too.

Some of the gold guys are watching the repo pool totals day-by-day. I think you're right about the intervention measures being taken (just disagree on the 15k part)-- more likely the intervention keeps the indexes treading water while the rest of the financial house crumbles.

As for the red herrings, I have seen any. Have you?

What I mean is, there's a disconnect between your stated goal of trying to get a lot of diverse input on your thesis and your tossing about of growth models, etc. Anybody who can get past those bits already has an opinion like yours or a counter-opinion you or your thesis advisor have already considered. If you're looking for something truly different, the specialized content locks those people who might have wildly different (but useful and interesting) perspectives out of the discussion. Sometimes it seems like your primary goal is asserting your knowledge of academic theory, not discussion of the thesis at hand. I know that you might think you're 'just baiting' a little bit, but tone matters, and should be considered when you want a real discussion. Remember that we're all thousands of miles away, behind a screen, and have no idea what your 'just kidding' tone/expression looks like. And really, if you spend as much time behind a screen as i do, all-caps text has the same impact as drunken shouting in a church.

Kind Regards,
Laz

 

[jbtrader23]

When the housing bubble finally pops in this country it will be messy. People everywhere act as if housing prices only go up 10-20% a year. This has been re inforced by books like Rich Dad Poor Dad, by the media, and by peoples short term memories (conveniently forgetting the real estate crash of the early 90's).

I know of a woman here in LA who recently bought a house as an investment property who had no clue as to what she was doing. Why did she buy? Because it was her ticket to "financial independence". And how convenient that you can get a 80/20 loan to buy it. Who needs a downpayment?

Loan standards have dropped dramatically over the last 10 years. There was a reason the standard downpayment use to be 20%. But it looks so good politically for there to be an increase in US homeownership that credit standards have gotten very lax.

When the crash hits, you'll see the effects of this easy credit policy. People who simply shouldn't have bought a house in the first place will be the first ones affected.

Look at all the financial institutions out there that have loaned 100%-120+% of a homes value to people. Look at what will happen to the FNM/FRE credit machine.

Even though mortgage rates are historically low, I'd argue peoples poor balance sheet finances aren't equiped to handle another point or two increase in mortgage rates.

 

[TheStudent]

There are a lot of arguments flying around, but let's take a page from history.

Has there EVER been a case of a bubble reflating?

I know there was a Kuwaiti bubble that was pricked in 1977, reflated and pricked again in 1980 to disasterous effect (the market shut down and all securities were cancelled). I don't know the specifics, but here's a link :

http://www.gold-eagle.com/gold_digest_98/veneroso060198.html

As long as you accept that NASDAQ 1995-2000 was a bubble, you have to contend with the lack of empirical precedant.

 

[citizennobody]

Quote from jbtrader23:

[BLoan standards have dropped dramatically over the last 10 years. There was a reason the standard downpayment use to be 20%. But it looks so good politically for there to be an increase in US homeownership that credit standards have gotten very lax.

[/B]

Well since it looks so good politically to lend money why dont these lender give me $1000000000 since I will get out of school eventually and it will look good politically to help a young guy with 4 kids. I guess that business sense doesn't even begin to enter the equation right?

As far as chaos entering the market if housing prices drop. I am sure we will hear some sensational stories about some areas like LA, NY, SanFran from a news media looking for a bit, but did we expect any less. I promise that suburban USA will not be hit. Remember home ownership, just like any deb,t is a cash flow equation. How is their income going to be hurt (unless they are in RE) and if their mortgage is a fixed rate which I have a sneaking suspiscion most are...

BTW, I live in a part of the country (El Paso) where new home growth is so brisk that I know of homeowners that bought in the early 90's and their value today is the same as then. The new homes have vaulted ceilings and bigger BR's plus huge kitchens. I still haven't heard one person say they aren't going to either buy or quit making pymts...

Get a grip...

 

[darkhorse]

Quote from TheStudent:


I would definitely agree that the housing bubble has been pricked. Whether we get a hard landing or soft is the real question.

Hasn't been popped here yet (northern NV Reno/Tahoe)... a friend of mine is a retired engineer who made many millions in real estate and still keeps a close eye on things. In the million dollar plus gated community he lives in, he estimates that at least 40% of the properties are empty. Not unsold, empty- bought as investment properties and left unrented. There are three or four guys on his block who own a second mcmansion in the same neighborhood, just as a place to park their cash. There are literally dozens of areas here that fit the same profile.

In a huge middle class development south of Reno (thousands of houses), a solid third of the properties are empty as well- all bought, just not lived in. There are plans for another seven thousand homes to go up. Realtors here have their clients on speed dial- new properties are still being sold within an hour of going up for bid.

Consumer debtloads are only half the problem. The other half of the problem is that the housing bubble is speculative in nature as well, at least in highly desirable areas.

 

[TheStudent]

Quote from darkhorse:




Hasn't been popped here yet (northern NV Reno/Tahoe)... a friend of mine is a retired engineer who made many millions in real estate and still keeps a close eye on things. In the million dollar plus gated community he lives in, he estimates that at least 40% of the properties are empty. Not unsold, empty- bought as investment properties and left unrented. There are three or four guys on his block who own a second mcmansion in the same neighborhood, just as a place to park their cash. There are literally dozens of areas here that fit the same profile.

In a huge middle class development south of Reno (thousands of houses), a solid third of the properties are empty as well- all bought, just not lived in. There are plans for another seven thousand homes to go up. Realtors here have their clients on speed dial- new properties are still being sold within an hour of going up for bid.

Consumer debtloads are only half the problem. The other half of the problem is that the housing bubble is speculative in nature as well, at least in highly desirable areas.

Interesting. Wouldn't you say that's indicative of a top that's about to meet a nasty tumble? I do know that the HK property market corrected more than 50% from its peak. If you were levered 4 to 1, that's a 200% loss if you held on. Ouch.

My only indicator for real estate is the New York Times close to ask premium/discount

 

[darkhorse]

Quote from TheStudent:



Interesting. Wouldn't you say that's indicative of a top that's about to meet a nasty tumble?

Yes and no... we are at the top of the mountain imho, but the nasty tumble may yet be quite delayed. If the fed muddles through and keeps hope alive, we could see a slow grinding stagnation that drags on for years as opposed to sudden collapse. Fast or slow, time will tell.