-- Posted Monday, 5 July 2004 | Digg This Article
Friday, July 2, 2004
Housing, bonds, and stocks, in general, are very overvalued.
Home ownership levels are at all time highs, and the public, always buys at the top, when values are at the highest. Mass buying by the public creates a top. Home prices are boosted by the availability of cheap money due to low interest rates, and easy-to-qualify Federal loans from Freddie Mac and Fannie May. The easy money from the cheap loans creates extra buying pressure. Whenever there is extra buying pressure, prices will rise higher. Whenever most buyers are using borrowed money to buy things, it creates overvalued prices.
Overvalued home prices are clearly seen in the boom and high value of home building stocks. If home prices are too high, it will be very profitable to build homes, and it is. Further evidence is seen as reckless speculators buy unoccupied houses, with the sole intention of selling them at higher prices.
Hereís further proof that when people spend borrowed money, it creates over-valued assets. Remember the stock market of 1929? It crashed, creating the great depression. Why? Because the Federal Reserve, which was created in 1914, had created a bunch of new paper money during the ďroaring 20ísĒ. People borrowed this money, and bought stocks, on margin. In other words, they were using borrowed money to buy stocks. Therefore, stocks became overvalued.
Today, almost everyone uses borrowed money to buy a home. That is the standard, and it is creating the bubble in real estate that must, therefore, collapse. Don't fool yourself into thinking you are "safe" if you own your home debt free. Would you want to own stocks in 1929, just before the crash? No.
Housing and the bond markets are related. Bond values move inversely to the interest rates. Literally, the bond market creates interest rates. When interest rates are low, bond values are high. When interest rates are high, bonds are cheap. The time to sell bonds is when interest rates are low, and the value of bonds is high, like today. What is the value of the bond market, and what will bondholders buy instead? Bonds are the alternative to gold and silver. They say that "bonds are the safest lowest risk investment," but this is not true. Today, bonds pay 1-5% in interest, which is lower than the inflation rate, so you are losing money holding them. Furthermore, bond values can go to zero value in two ways: either through hyperinflation or default. In contrast, gold and silver cannot ever go to zero value. In truth, gold and silver are the safest, lowest risk investments, not bonds.
The U.S. bond market is $20 trillion. But all the gold ever mined in the history of the world is a mere $1.9 trillion at $400/oz., and the remaining identifiable silver supplies of 200-600 million ounces, at $6/oz. is a mere $1.2 to $3.6 billion, not trillion.
The bond market is propped up higher than it would be for several reasons. First, other nations are accumulating U.S. bonds. Will that continue, or will they ever want something real in trade for their goods? Second, the Federal Reserve is buying bonds in the open market to keep interest rates low. The Fed activity is uneconomic, and unsustainable, due to the deficit.
The U.S. government has a $700 billion annual deficit, and that number likely excludes the interest on the debt, which, since the days of Clinton, has been excluded from the numbers. So, the actual deficit may be much higher. How can this be financed unless the Fed SELLS bonds? Yet, the Fed is buying bonds to prop up the bond market! When it comes time for the Feds to reverse course, and sell this $700 billion in bonds to the public, the bond market must collapse, as interest rates rise.
The only alternative for the Fed is to not sell bonds, in which case, the Fed will basically be ďmonitizingĒ the debt, which is extremely inflationary. And this has been taking place, as can be seen due to the fact that many basic commodities, such as oil and steel are up several hundred percent in the last few years.
As bonds collapse in price, and as interest rates rise (when the Fed reverses course from buying bonds to selling bonds), bondholders will be forced to try and sell their bonds before the Fed sells their bonds. Bondholders will need to lock in profits and protect themselves from the loss of value of their $20 trillion worth of bonds. Their only viable alternative is gold and silver.
As interest rates rise, it will be much more expensive to make home payments for all who have adjustable rate mortgages. Many of these homes will be foreclosed, and as banks repossess these home and sell them, this will add supply to the housing market. (Foreclosures are already at a 40 year high.) At the same time, new home loans will be much more expensive, due to the higher interest rates, and thus, there will be fewer buyers who qualify for loans, and demand will go down. As home supply goes up, and as demand for homes go down, there will be a severe collapse in housing prices.
As interest rates rise, it will cause the bankruptcy of many major companies in corporate America. Ford Motor Company, for example, has $180 billion in debt to either pay off, or refinance. How will Ford be able to sell bonds when the Federal Reserve begins to sell $700 billion in bonds after artificially boosting bond values by buying bonds? Ford Motor company has a profit of a billion dollars per year. If interest rates rise by a mere 1%, it will cost Ford another $1.8 billion, and unless Ford can borrow more money, they will be, effectively, bankrupt.
As companies like Ford Motor Company and GM go bankrupt, their stock prices will, of course, collapse to zero just like Enron. In addition, the bondholders who own Fordís bonds will become the new stockholders of Ford. The $180 billion in bonds will likely turn into perhaps $30 billion of a reorganized Market Cap of Ford. Thus after bankruptcy, stockholders will lose everything, and Fordís bondholders will lose perhaps 83%.
Stocks are overvalued because price to earnings ratios are outrageously high, and many companies are in debt beyond hope. When stock markets collapse, the P/E ratios return to the low 6ís and 7ís. If P/E ratios are around 20, this means stocks, in general, will collapse by about 2/3ís, or expressed in another way, will lose at least around 66% of their value today--and that's if they can maintain current profits in the midst of a currency collapse and depression.
If the currency collapses completely, it will create another gold and silver rush, as people would abandon their mortgaged homes to look for gold in the hills. If that happens, imagine how cheap housing would be, and how many homes you could buy if you were smart, and invested in silver or gold now, while they are cheap. Make no mistake: housing prices are very dependant upon the survival of the fraud of the overvalued dollar.
Further, consider taxes. Many people who own homes, have decided to own them for the tax advantage. The interest is deductable against your income, which reduces the income tax. But there are two other very important tax considerations that I would like to bring to your attention.
First, there is a property tax levied by the state. You do not really own your home if you must pay a property tax. If you donít, or canít, pay the property tax, they will put a lien on your house, and even auction your house off to pay the tax. If the currency collapses, and home values collapse, and when state governments get into serious trouble, they will levy a property tax in the form of gold and silver. Thus, if you do not have gold or silver to pay the property tax, you may lose all of your real estate holdings, even if you own them outright and have paid off the mortgages! So, even if you own your home outright, and itís paid in full, your asset is not safe. It might first lose 90% of it's value, and then, you might lose it entirely if you can't pay taxes if you have no gold or silver.
Second, consider the tax advantage of owning gold and silver. Officially, there are capital gains taxes on every asset you own that rises in price, and then sell. Unofficially, there is no way to track when and at what price you paid for silver when you acquired it. Therefore, realistically, there is no capital gains tax when you sell silver or gold after they appreciate. And if they pass any ridiculous law to try and tax gains on the sale of gold and silver, that will only cause less selling of gold and silver, which will, in turn, make them more valuable, and less likely to be used in trade. The only way for society to emerge from a currency collapse is to pass laws designed to attract and encourage the trade of gold and silver. So laws that tax captial gains on the sale of gold and silver should not be feared.
Anyone owning stocks, bonds, or housing needs to seriously consider diversifying into an asset class that is not overvalued, cannot go to zero, and that will move up in value. Thatís gold and silver.
Most people also really need to consider the entire concept of diversification. Personally, I donít put more than 10% of my portfolio into any one thing. Yet for many people, housing is their entire investment. This is so risky that you should not do it unless you really know, from a lot of study, that you are buying something that is vastly undervalued. Iím so bullish on silver that I can recommend that people invest 100% of their assets into silver bullion and silver stocks. I have. But if you are not so aggressive, you should at least diversify, say, 50%, into silver and silver stocks. So, if you have $100,000 in home equity, and no other investments, you should at least have $100,000 worth of silver bullion.
Unfortunately, perhaps one investor in 1000 owns any substantial holdings of silver bullion, which proves itís such a great price.
Gold has been moving up in value from $255/oz in 1999-2001 to $400/oz. today, and remains seriously undervalued. Gold is less than half the price it was in 1980, and since 1980, M3, the best measure of money supply, the money in U.S. banks, has exploded upwards five times from $1.8 trillion to $9.1 trillion. Thus, the inflation adjusted price of gold in 1980, of $850/oz. is really $4250 per ounce, and I have no reason to think the gold price will stop there once the price begins to head there. If the money in the banks was truly backed by U.S. gold, the price would exceed $35,000/oz. or exceed $110,000/oz. if you include bonds with that.
Finally, consider carefully the needs of insurance companies who control trillions of dollars. They must invest in things that go up in value; therefore they are at severe risk if they invest in real estate, bonds, or stocks.
But before I discuss the needs of the insurance companies, let me discuss my bias. I pay for no insurance. I hate insurance, and the entire concept of insurance. To me, insurance is the process whereby risks are shared by all those who buy insurance policies, and therefore, insurance is socialism, and communism. Insurance reflects a rejection of personal responsibility, and insurance replaces the role of the Church. Take, for example, life insurance. In theory, itís there in case the breadwinner dies, and so the widow will be taken care of. But the role of the Church is to take care of widows--and only those over age 60. Therefore, life insurance usurps the role of the Church, or the family, in society. And consider car insurance. The purpose is to remove the risks of accidents. Therefore, people will tend to drive more recklessly. If people knew they had to pay for all damages they caused, they would be more responsible with their own actions. Mandadory car insurance is simply communism, there's no other way to put it. Consider health insurance. If you have it, you care less about your health, because you have this ďback upĒ. If you donít have health insurance, you will take much more care of your own body, and you will want to exercise, eat right, and take vitamins and herbs as necessary.
About ten years ago, in my mid 20ís, I took a three day class to study the various terms of the life insurance industry, and I earned a license to sell insurance. The idea was to sell cheap term insurance as opposed to expensive whole life insurance (that has a bad savings plan attached), and to convince the customer to invest the difference. After I took the course, I was so disgusted with the entire insurance industry, I could not, in good conscience, sell any of it. As another aside, my father sold term life insurance by writing ad copy that went out in bulk mail. Therefore, I and my father know a lot about insurance. We both believe that although term insurance is better than "whole life", all insurance is a scam, and let me reveal to you the scam. The insurance business will take your money, invest it, and thus, be able to earn more than enough money needed to pay off the insurance claims. They only sell it because they profit by doing so. If they fail to invest wisely, the company goes bankrupt. Regardless of whether the company has to declare bankruptcy, in the meantime, much money will be siphoned off of you by all the salesmen and company executives. Consider the slogan of Prudential. ďGet a piece of the rock!Ē implying that they are ďSolid as a rock,Ē and not in danger of insolvency or bankruptcy. In reality, itís probably more like, ďSolid as a derivative!Ē
As my father has often said, ďThereís a reason that most of the big, tall, impressive skyscrapers in all major cities are owned by banks and insurance companies.Ē
There is also a reason why Warren Buffet, the worldís most successful investor, is heavily involved in the insurance business, such as Geico, the cheap car insurance with the talking Gecko as mascot. As a successful investor, Warren Buffet should be able to allow Geico to outperform their competitors. There is also a reason why banks, insurance companies, and brokerage houses were separated as businesses after the great depression. Think about it.
So, getting back to the insurance companies. They take your money, and they must invest it successfully, or die. That is their business. That is their need. Therefore, the insurance companies are literally forced to invest in market sectors that are proving they have profitable returns. Like it or not, believe it or not, we are in a bull market in gold that has lasted 3-5 years now, from 1999 or from 2001. No other market sector has had such great percentage gains in this time period. In 2003, silver stocks gained 314%! Thatís unparalleled, and cannot be ignored, and is a foreshadow of a great movement upwards in the silver price. If the investment managers study the market fundamentals for gold and silver, to see why this has taken place, they will realize that these markets are still vastly undervalued, and they must invest in this sector to achieve the gains necessary to stay in business. This will lead to trillions of dollars moving into the very tiny precious metals markets, and will help to push prices way up from here.
Here is one business idea that I will throw out there for my readers. If someone were to start an insurance company today, and invest the money into the precious metals sector, specifically silver bullion and silver stocks, they would be able to charge much less than their competitors for the same amount of coverage. This, in turn, would help them get much greater market share, (with their low prices) and thus, they would end up being in charge of more and more money to invest. As they get more money to invest, they would be able to buy more and more silver, which, again, would push prices up.
Consider again the U.S. annual budged deficit. Itís $700 billion. How can the silver market be smaller than $1 billion at the same time? Itís insanity, and market madness. Itís not that Iím stupid and donít ďget itĒ, and neither are you. Itís that the markets are in severe imbalance, as the vast majority of Americans and humanity is in the pursuit of monetary fraud and madness. Literally, today, we are living in an economic dark age compared to how good things can get once the insanity is gone.
I believe that sanity will return, and that sanity will prevail, and that the fraud of the dollar, that has achieved over 99.99% market penetration, will lose market share. Iím betting that Americans will return to sanity, and that economic reality will return.
Ultimately, market dynamics will literally force the prices of precious metals to rise far greater than we can realize. Personally, I could start up an insurance company, or bank, and invest the proceeds in precious and ever-more-scarce silver, and do very well. I would not have to loan out the money or buy stock at all, but simply buy silver bullion. But morally, Iím against both banks and insurance. I hate the entire concept of insurance as it is practiced, and thus, I would never do it. The only forms of insurance that I accept are things like silver (insurance against the fraud), a safe (insurance against an attempted theft), a gun (more insurance against an attempted theft), and good planning. But realistically, I understand and know that other people in the world will not have my aversion to insurance, and I know that to stay in business and to get the most business, insurance companies will be forced to buy into gold and silver bullion and stocks. Therefore, be forewarned, and invest before they do, today.
About six months ago, I predicted that silver miners would start using silver as money. A few have begun to do so. Within the next six months, I predit that not only will many more silver miners do this, but soon, the insurance companies will start buying silver and gold bullion and stocks. Like the silver companies, it will start with some of the smallest insurance companies, and then, demand will grow from there as price performance will force others to join our party.
A lot of people think they will wait until after silver really begins to rise in price, and then they plan to buy silver. What these people do not realize is how hard it is to find silver bullion in bulk, even today. Please call your local coin dealer, and visit his shop. Ask him how much silver bullion he has available right nowónot how much he can buy for you. They will always promise to be able to deliver the moon. But some dealers are now saying there is a one-month wait, or a 6-week wait, some even refusing orders, especially the big orders. Imagine if ten times as many investors decide to buy silver, so that not 1 in 1000 investors are buying silver like today, but 1 in 100. Will the wait for silver bullion extend to ten months, or 60 weeks? Or will the price rise substantially? Think about it.
To sign up to receive in email my free weekly commentary and report on over 100 silver stocks, see GoldIsMoney.com
-- Posted Monday, 5 July 2004 | Digg This Article
Previous Articles by Jason Hommel