Housing Burst Will Cause National Recession

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Submitted by powayseller on April 14, 2006 - 5:33pm

This topic is in response to a question by North County Jim, in the topic
"Obvious Guy" sez a Soft Landing is Possible. He challenged my assertion that a housing bubble bust will cause a nationwide recession. He believes that RE bubbles and their fallout are
local in nature. He noted that the dotcom fallout and the S&L debacle did
not cause a recession. He made a good argument, and when someone is sharp
enough to make a good argument, I take the time to respond in kind.

I will quote/paraphrase from From John Talbott's book, Sell Now.

Industry expert predictions about the post-bubble economy are as rosy as
they were during the boom. Prices have gone up too much in too many areas
for there not to be a major correction that will be national or even global.
Our most overpriced cities are also our largest cities. The 22 most
overpriced cities are more than 40% of the total value of all residential
real estate in the country. Even if a housing correction could be magically
contrained within their city limits, the negative wealth effects would be
felt countrywide.

The weakened economy will shake through the Midwest and interior states, as
well. Once accelerated job losses associated with the end of the housing
boom hit, their home prices will drop violently downward. A $125K house in
the Midwest that has appreciated $20K in the last nine years has as big a
percentage risk of a decline in price as a $3 million home in Malibu. Houses
do not have to go up in price in order to come down. The prices of many
homes in the Midest will end up lower than they were before the boom.

People have mistakenly tried to compare a national housing collapse to a
bear market in stocks. There is no comparison. The U.S. stock market is
worth some $15 trillion, while RE is worth more than $20 trillion. More
than 75% of all U.S. stocks held by individuals are held by the richest 10%
of Americans, while nearly 70% of Americans own their own homes. A decline
in housing values will be felt more broadly.

Another difference: housing is purchased with more debt leverage. So if
you have 80% debt on your home and the market price drops 10%, you absorbed
a 50% drop in the value of your equity. The net effect on investor wealth
is 5-10x higher for a similar housing price percentage decline as compared
to a stock decline. Even homeowners with equity should watch out: if you
had 40% equity and the market drops 30%, you will see 75% of your equity
wiped out.

Imagine a stock decline so substantial that 50 - 100% of many investors' net
worth evaporated. That has never happened, not even during the crash of
1929. If housing declines in price by 30%, a return to where prices were
just 2 years ago, many people would lose most or all of their net worth.

Nobody has been talking about the magnitude of this possible disaster. The
media has discussed the ramifications of a housing decline that is so
optimistic, involving slight price downturns and soft landings or pauses in
a continually increasing market.

The major impact of an adjustment in housing prices on the economy is not
going to be due to the wealth effect, but from the simple fact that our
economy for the last 5 yeasr has been built on only two foundations: the
housing market and government (mainly military) spending.

The first economic impact is 1 million RE brokers who have been chasing 6%
commissions will become unemployed. Next, 1 million more people working as
mortgage bankers, appraisers, title lawyers, commercial bankers, mortgage
packagers. Remaining employees in this industry will see 35% salary cuts,
as their pay is commission based, and if sales prices fall 35%, so will
their pay.

The next business to dry up is the renovation business. New home
construction will also almost cease.

The construction, home renovation, banking, and real estate industries are
four of the largest industries in America. Layoffs in these industries will
be significant enough to cause a major recession. But unfortunately, the
story is not over.

When Suzie Realtor is laid off, she buys less groceries, attends fewer
movies, buys fewer dresses, vacations, cars, and goes out less to eat. The
pullback in consumption from those who face reduced salaries and layoffs in
the housing industry will pull other healthy industries down with them.
Layoffs will spread, and the economy will begin a serious contraction.

Because the US is such a driving force of the world's total overall
consumption, a recession here is sure to spread globally. No world power can replace the purchasing
power that might evaporate from the US. Our
rercession will be the force that ends up deflating the housing bubbles
worldwide. Global recessions will result. The first rule of developing
countries is: No US growth means no US consumer demand, means no developing
country growth.

But I have not yet told you the worst part. If you are squeamish, stop
reading right now.

Remember that significant amount of debt leverage that homeowners have on
their homes that magnifies any housing price decline and increases the
impact on homeowner equity? There is a counterparty to that debt that
suffers as well. We cannot forget the banks, Fannie Mae, Freddie Mac, and
the other institutional holders of all the mortgage paper we have created.
Since banks have become so aggressive in their lending, much of this
mortgage paper will be fairly worthless when home prices decline.

Fannie Mae and Freddie Mac are leveraged over 100 to 1 in aggregate. That
means their real assets only cover 1% of their loans. Thus, if only 2% of
their portfolio experienced 50% credit losses, they would be technically out
of business. The taxpayer tab could easily run 20% of their assets, or
about $500 billion.

Commercial banks' total assets are 40% in RE, so a decline of only 12% in
the price of their entire portfolios of mortgages and RE assets would wipe
out their toal bank equity, which is typically about 5% of their total

Worse, banks don't actually have to lose money before the real threat is
realized. The real threat is loss of confidence of depositors in the
banking system. Banks have only about 5% in cash on hand to repay
depositors. The rest is in illiquid assets, like loans. The government
does not have liquidity to save all the banks, in case it would come to that

Because this would be the first national housing crash, and because almost
all banks hold a significant amount of their assets in mortgages, the
government would have great difficulty guaranteeing all the depositors'
funds. We are talking trillions of dollars in deposits that might want to
walk out the door in any one day.

This is the end of Talbott's excerpt. May I add this: small cities all
over the US, which had no runup in prices, are already seeing waves of
foreclosure, because ARMs are a nationwide phenomenon. Also affected are
cities hit by poor American competitiveness such as the auto industry: in
Detroit suburbs, where the rich have cut back on gardening, manicures, etc.,
the fallout is felt on those secondary industries. The nursery owner is
having financial difficulty, because the rich clients had to cut back on
their regular big spring gardening expenses.

Another item Talbott overlooked: as interest rates have risen, the MEW
(mortgage equity withdrawal) effect is going to subside. Consumer spending
is 2/3 of the economy, according to economist reports. Imagine what will
happen if that even is cut in half! The MEW wave is dying, and so will
consumer spending along with it.

One last point: The USA, once the greatest productive nation, has become the greatest debtor nation on Earth. Our trade deficit is possible because we have the world's reserve currency. Other nations won't keep sending us money forever. The party will soon be over on that front as well.

Sorry to be so gloomy, but knowing the facts makes us better investors, and we can prepare our finances much better, armed with this full story.

Let's all of us put our brains together, add to this topic, and then pass it along to everyone we care about.

Submitted by powayseller on April 15, 2006 - 7:41am.

USA Today has a story about effect of adjustable rate mortgages across middle America. There are many more articles like this...Let's all be aware that the ARM and subprime lending problems are nationwide.

For 45 years, Robert and Lorraine Brown have lived in their ranch-style home in Florissant, Mo. When they refinanced their home two years ago to pay off some bills, Robert, now 78, was working as a deliveryman. But his employer went out of business last April. Now he and Lorraine, 72, a retired nurse, are both seeking work. The rate on their mortgage has jumped from 7% to 10.5%.

Already, in West Virginia, Alabama, Michigan, Missouri and Tennessee, about one in five homeowners with a high-interest (subprime) ARM was at least 30 days late at the end of last year, according to the Mortgage Bankers Association. After 90 days, the foreclosure clock starts ticking. Most of those foreclosures are related to job losses in auto and garment factories; higher mortgage payments were often the last straw.

In the Atlanta area, credit counselors for The Impact Group say 85% of their calls are now related to ARM or interest-only loans.

In Liburn, GA, Susan Cambero is going to lose her house. She got into trouble after she took out an equity line of credit on her home to pay off her car and other bills.

"Within the last year, I would say 60% to 70% of calls to our hotlines are issues related to ARM (adjustable-rate mortgage) loans," says Chris Krehmeyer, executive director of Beyond Housing, a non-profit group that offers homeownership support services in St. Louis. "That's significantly higher than in years past, because the ARMs are coming home to roost."

Submitted by North County Jim on April 15, 2006 - 8:50am.

Before we get going with any kind of dialogue, you should reread my previous posts and the conclusions you are drawing from them.

1. Nowhere do I state that the unwinding of the RE bubble will not cause a recession. I stated clearly that the unwinding would cause residual damage to the overall economy.

2. While I believe the bubble is confined to selected markets, nowhere did I aver that the fallout would be limited geographically. Again, I thought I made it clear there would be damage to the overall economy.

3. I also clearly did not state or imply that the S&L crisis or telecom/tech crash did not lead to recession. The tech crash clearly did cause a mild recession while the S&L crisis was a factor in the recession of the early 90's.

From my perspective, our differences regarding the fallout from the popping of the RE bubble are a matter of degree. I believe it will be very ugly and painful for many. The probability of a recession will increase as lenders and overleveraged consumers repair their balance sheets.

If I'm reading you correctly, you're expecting a lot worse than that. I just can't bring myself to be that pessimistic.

Submitted by powayseller on April 15, 2006 - 9:24am.

The Wall Street Journal (4/14/06) story writes the highest regional rates of foreclosures are in the entire "East North Central" region of the country, which includes Indiana, Ohio, Michigan, Illinois and Wisconsin.

And what the states hit hardest by mortgage foreclosures have in common is relatively low home-price appreciation (compared with the national average) over the past few years, typically combined with below-trend job growth.

North County Jim, I had wanted to post this topic for a while, so our dialogue the other day was my inspiration. Only time will tell how bad this recession will be. I could be way off base...

Submitted by powayseller on April 15, 2006 - 11:08am.

Another cause of foreclosures is job loss. The WSJ reports on tony Bloomfield Hills. Oakland County, where Bloomfield Hills is located, is the nation's fourth-wealthiest county with a population of more than one million, according to the latest per capita income data from the Commerce Department. In Oakland County, 723 homes are in foreclosure, more than double the 334 in February 2004. Michigan now has twice as many homes in foreclosure as it did in February 2004, and the state's current foreclosure rate is about two-and-a-half times as high as the national average.

Across Bloomfield Hills, residents are changing their lifestyles in ways large and small. The 325-member Forest Lake Country Club says it has a 20-person waiting list to get out of the club. (Last year, there were just four people on this list.) In order to get back a portion of their equity in the club, these members have to pay $540 a month in dues until new blood can be found to take their slots. To lure new members, the club has cut its initiation fee to $15,000 from $45,000. At Erhard BMW in Bloomfield Hills, sales are down 10% to 15% from last year. Stanford Krandall, who lives in Bloomfield Hills, is closing his family's jewelry business, located nearby. Founded by his great-grandfather in 1911, Sidney Krandall & Sons catered to some of the area's richest residents. But sales were down more than 25% since 2003.

Anna DiMaria, 65, ran beauty businesses in the area for nearly four decades. But last summer, she closed down her once-thriving Capelli Spa because she says at least 30% of her wealthy client base had cut back on visits or stopped coming. "Instead of getting facials every month, they'd get them every three months," she says. "They'd say, 'My husband and I have talked it over. We're taking a cut in our luxuries.' "

Some clients were getting their false nails taken off to save the $70 monthly maintenance fee, says Ms. DiMaria. "They'd tell me, 'I want to let my nails breath.' They didn't want to reveal it was an economic decision."

In nearby West Bloomfield, Angelo's Bistro lowered its prices almost 30% in January, and took away the tablecloths and upper-end menu items, such as pasta with lobster. It changed its name to Angelo's Greek Restaurant. (Customers could afford the cheaper greek food.)

The ear-nose-throat physician expects his patient load to fall 10% in the year ahead, as patients skip appointments to cut down on health-care costs. Dr. Succar has been reevaluating his own finances. "I'm definitely cutting expenses," he says. "We're working on a budget now. We're worrying about the future and what's coming."

Read more

Submitted by powayseller on April 20, 2006 - 2:53pm.

I just read the links for today. It turns out that Denver and Austin had high rates of exotic loans as well, and are facing record foreclosures.

This link says (Origination news, bottom)that Georgia and Florida banks are up to 100% - 500% of capital invested in commercial real estate.

Does anyone still think this thing will only hit CA?

Submitted by powayseller on April 20, 2006 - 5:58pm.

Include Oklahoma in the list of "foreclosure states".

Heck, is any state immune from rising foreclosures due to exotic lending programs? It seems we Americans, regardless of state, have bought houses with nothing down, and financed it all. Most of us who purhcased a home in the last few years are on the verge of losing our homes.

Submitted by Jim Brubaker on April 20, 2006 - 7:35pm.

I would argue that this "will be the first national housingcrash"/debacle, it will be the second. I studied the 1929 depression and it happened there first. Everybody then had an interest only 5 year loan.

When I first studied the depression, I wondered why all of the loans were for 5 years, renewable and most were interest only.

When the depression went full force, there was no money left to renew the loan obligation. If you delve further, states declared house foreclosure moratoriums.

I think what you are saying, although inadvertently, is that there is no one around that remembers the last time that this happened. Therefore we are destined to repeat the past.

Submitted by powayseller on April 20, 2006 - 7:39pm.

I haven't studied the depression. I do believe we are set up to go into a recession, and I want to position my portfolio so that it doesn't wipe out my assets. Selling my house was the first step.

I wish that some others would add to this topic. Does anyone else agree? Disagree? Why? How are you positioning your investments at this time?

Submitted by Jim Brubaker on April 20, 2006 - 8:16pm.

Here is what happened in the 1930's. It became against the law to own gold. Everyone had to turn it in. As I've said before, you cannot print gold and silver, there is only a finite amount. Governments will keep on printing money. I always recommend 10% in gold and 10% in highly speculative stocks and/or real estate in a portfolio. Thats not hard to do.

The problem occurs with Mutual Funds, Retirement Funds and Ira's and 401K's. Here is where you will see the most shrinkage of your assets. The Managers of these funds have the same mindset as real estate agents--the market always goes up.

I would like to point out to you that there aren't many money managers that have ever seen a bear market.
How about next to none.

Are these funds federal insured, absolutely not. They are SPCIC insured (a private insurance company)

They have no reason to be conservative, low producers get dropped, therefor max to the hilt on the market going up. Everyone of the 31,000 mutual funds is doing it. Does it sound like there is anything wrong here?

I think that most of the retirement plans, 401k's and Ira's are sitting ducks. Most us baby boomer's are going to "take it in the shorts."

Submitted by picpoule on April 20, 2006 - 8:32pm.

It seems to have already hit Colorado, and we did not experience a bubble. Today Colorado has the top rate of foreclosurese in the country. As I have said in one of my other posts here, the high foreclosure rate did not follow bubble-like appreciation, but rather was due to heavy job losses and a recession we never really recovered from. The link you cite adds to the blame other factors such as more home construction beyond existing demand, ARMS, IOs and unlicensed mortgage brokers. It's here. Next come the falling home prices as sellers find they have to compete with all the foreclosures on the market. What's responsible for the high foreclosure rate here is not what is in play in CA.

Submitted by powayseller on April 20, 2006 - 8:53pm.

Do you think it would be better for CO homeowners without exotic lending?

While Michigan also is reeling from job losses, it's interesting that increasing foreclosures are hitting the nation all at once.

It's going to get really bad next year. This year is just the warmup for the big stuff next year. We have 3x as many ARMs resetting next year, and whenever I read the figures on the ARM resets, I have never read that the problem was confined to CA and FL. It always says, "Nationwide, $1 trillion in ARMs is resetting in 2007". Emphasis on nationwide.

How are retailers faring in CO? Have you seen any impact on the local economy?

Submitted by North County Jim on April 20, 2006 - 10:00pm.

Most of us who purhcased a home in the last few years are on the verge of losing our homes.

This is the pessimism I alluded to earlier. Most is a pretty strong word in this context.

My guess would be that the percentage of those who lose their homes will be several standard deviations above the historical norm. Based on historical foreclosure rates, how many standard deviations would it take for most of the recent home buyers to lose their homes? Hundreds?

Submitted by waitingitout on April 20, 2006 - 10:28pm.

FWIW, I've had the opportunity to chat with my 97 year old grandmother who vividly remembers the housing market from that time period. She refers to the IO loans as "Balloon mortgages" and the idea behind them was that the borrower would supposedly be able to save the money necessary to pay off the balloon payment at the end of the loan period. Not that she thought this was a great idea. She watched the good times turn to job losses, cascading defaults and foreclosures in Los Angeles as a newlywed.

When I explained the exotic financing currently being used in the RE market that is enabling people to stretch their finances into houses they really can't afford, she was absolutely stunned. She couldn't believe that people could be even more foolish all over again.

Too right, Grandma.

Submitted by NotARocketScientist on April 20, 2006 - 11:23pm.

If I thought we were headed toward a full-on depression, I'd be inclined to pull enough money out of savings to pay off my mortgage so I was "free and clear" as my parents used to say.

Their parents learned the hard way when their savings were wiped out in the bank crash of '29. Paper that could be used to buy tangible assets one day lost all value the next.

In that scenario you'd be better off pulling $250,000 in savings out of the bank today to pay off a house that was going to drop in value to $25,000 tomorrow if you knew the savings were going to be wiped out too. Value is relative. And Jim would probably tell you to buy a little gold. Not to make money, but to cover your taxes for a while until things blew over. At least you'd have a place to live.

I'm not saying we're headed for a depression, but as long as we're playing out various doomsday scenarios, I thought I'd throw in my 2 cents.

Other thoughts?

Submitted by NotARocketScientist on April 20, 2006 - 11:47pm.

Grandma rocks!

Submitted by powayseller on April 21, 2006 - 5:30am.

I've thought of that also: paying off your house is better than money in the bank.

But, why would we repeat a Depression? I wasn't alluding to that, although I have no idea why it can't happen. Is a depression possible? Are all the same risk factors in place?

I was suggesting a recession. A recession is not a bad thing at all, just a normal part of economic cycles. Like a forest needs a good fire now and then, an economy needs recessions. Did you know that the redwood seed needs the heat of fire to crack its hard shell and make it sprout? Fire cleanses dead weeds and underbrush and shifts nutrients from flora to the soil. Recessions also have their place, as they curb excesses from the markets.

Submitted by lostkitty on April 21, 2006 - 6:02am.

Watch your slinging of statistics there Jim. Just 3 standard deviations would include 99.73% of a population, 4 st dev = 99.993, and 5, 99.99994. "Hundreds" of standard deviations above the norm you say??? That would be easy to hit - maybe one homeowner? I think even you would agree that the foreclosure rate will be greater than than "hundreds" of standard deviations above the historical mean.

Submitted by powayseller on April 21, 2006 - 6:28am.

The Mortgage Bankers Association estimates that the burden of higher interest costs would fall on about 7 percent to 8 percent of all homeowners.
The rest have either paid off their mortgages or face no immediate increase because they took out fixed-rate mortgages or refinanced their earlier loans
to mortgages that hold rates steady for 5 to 10 years.

I figured that 7-8% of all homeowners represent a majority of recent purchasers. In any case, this is a very high number of homeowners nationwide who are going to be in trouble by the end of 2007.

Submitted by picpoule on April 21, 2006 - 7:16am.

I'd have to research it, but due to our anemic economic situation, the retail sector is probably not exactly robust. The tech sector bust, combined with a downturn after 9/11 really hit CO badly and we've been reeling ever since. I'd say the State economy in general is not doing well. I do know that the State government had a multi-year budget shortfall, which seems ameliorated a bit due to a raise in taxes (sigh). My instinct is that when people lose jobs in CA it's a big enough State that's fairly well diversified that people can find work there again. This is not the situation in CO. There aren't an abundance of jobs here. We're just fly-over country; not very important on a broader view of things. But I doubt CO's poor economic performance over the last years have affected much of the U.S. economy. CO is a small state, unlike CA.

Powayseller, too bad you're not in CO! What you're anticipating to happen in CA seems to be on it's way out here, even without any real estate bubble!

Submitted by North County Jim on April 21, 2006 - 8:27am.

I must be missing something kitty. The average historical foreclosure rate can't be much more than a third of a percent with a pretty small standard deviation. How do three standard deviations get you to 99% of homebuyers?

Submitted by 4plexowner on April 21, 2006 - 7:40pm.

Commodities Bull Market

This is in response to powayseller's question "how are you positioning your investments at this time?"

I wrote this e-mail to my parents this past weekend:

You shared the April 9 Union-Trib business section with me. Probably because the front page has this headline above the fold: “Some would-be gold bugs need to be aware of past volatility.”

We are going to see lots of articles like this in coming years.

Here are some facts for you to consider so you have an idea of what I expect from the current bull market in precious metals and other commodities.

All markets ebb and flow. One aspect of the ebbing and flowing is that commodities and equities take turns being the preferred investment vehicle (ie, when equities are hot, commodities are dogs, and vice-versa).

There have been 5 bull markets in commodities during the last 200 years. The shortest one was 14 years and the longest one was 40 years. The average was 18 years.

The current commodities bull market started in 1999 (when gold finally bottomed in its 20 year bear market) or in 2000 (when the equity markets tanked).

1999 plus 14 years takes us to 2013 so 2013 is the earliest that I believe the bull market in commodities will end.

Given that 3 billion new people (China and India) are trying to reach the living standards of the Western world, the current commodities bull is likely to run for much longer than anyone currently expects (and will likely take prices much higher than anyone expects). Think about all the metals and energy required to make TVs, refridgerators, cell phones, computers, cars, air conditioners, cities, etc and you can understand why demand for commodities is high.

My last point is supported by the behavior of the base metals over the last five years. Aluminum +105% Zinc +230% Lead +263% Copper +287% Nickel +302%

Notice that articles urging caution about the precious metals don’t point out that we are in a commodities bull market and that ALL commodities are surging in price.

So, this is my main point #1: we are in a commodities bull market that is supported by the addition of 3 billion people striving to achieve a western lifestyle – based on past commodities bull markets, the current one is likely to continue until 2013 AT LEAST and probably much longer.

Another significant factor in the current bull market is that commodity production has been in decline for the last 20 years. Low commodity prices caused numerous exploration companies and mining companies to go out of business and/or stop exploring for new resources.

It takes years to bring a new mine into production (5 to 7 years is typical) so it will take several more years before commodity production can ramp up to meet surging demand.

Some commodities (copper) will stop surging in price once supply is ramped up to meet demand – other commodities (uranium, zinc, silver, etc) will probably never be available in amounts large enough to stop them from continually increasing in price.

So, main point #2 is the other side of point #1 – ie, not only do we have surging demand for commodities we also have a lack of supply caused by the previous 20 year bear market in commodities. This lack of supply will take several more years to address.

The last point I’m going to make today has to do with money.

My understanding of monetary history says that fiat currencies have a lifespan of 50-70 years before the people reject them and (usually) move into silver and gold-backed currencies. Bankers and politicians reluctantly follow the people into silver and gold-backed currencies until they can pull the wool back over the people’s eyes and introduce another fiat currency.

The US dollar has been a fiat currency within the US since 1933 (illegal for US citizens to own gold) and outside of the US since 1971 (Nixon closed the gold window) – ie, based on history the US dollar is reaching the end of its lifespan.

This movement from fiat currency to real money (silver and gold) occurs because people lose trust in the governments that are (over)producing the fiat currency.

I won’t bore you with the laundry list of financial issues that the world is facing – let’s just say that part of the current rise in silver and gold prices is due to the poor economic state of ALL the western countries. As people become more aware of these economic issues they move into real money to protect their assets.

This would indicate that one way to stop the rise in silver and gold prices is to fix the economic issues that are causing people to move into real money. In the 1970’s, Paul Volker (Fed Reserve chairman) raised interest rates to 18% before economic issues were ‘fixed’ and the bull market in silver and gold was crushed.

So, from a monetary perspective, I expect the current bull market in silver and gold to continue until the economic issues of the world are fixed or at least addressed in a serious manner.

In the US ‘fixing the economy’ means all three deficits (trade, current account, budget) have to be resolved. In all of the western world, ‘fixing the economy’ means that all the unfunded promises that have been made to people (welfare state) have to be funded or revoked.

I believe it is likely that some country (probably China) will choose to back their currency with silver and gold before all the western countries resolve their economic issues. The next reserve currency for the world will most likely be the first one that is backed by silver and gold.

Point #3 – it isn’t reasonable to expect the bull market in silver and gold to end until the economic issues of the world are resolved and, probably, until some country backs their currency with silver and gold.

Bottom line for me: I’m not going to be swayed from my commodities bull market position until I see economic issues being seriously addressed in western countries or until some country backs their currency with silver and gold. I expect that the soonest this will happen is 2013.

I didn’t discuss it in this e-mail but real estate and equities should be making significant bottoms in the 2010-2012 timeframe and I will probably be moving investment money out of commodities and into real estate and equities when those bottoms occur.

end of e-mail

Hope this helps, powayseller.

Submitted by powayseller on April 21, 2006 - 8:04pm.

This makes a lot of sense. Point #1 and #2 is a summary of the book Hot Commodities by Jim Rogers, and that entire book makes sense. Point #3 makes sense too, and I wonder if you can give us some examples.

What makes you think that China is backing their currency with gold? If they are, could they be responsible for the rise in gold, as they are buying lots of it? Do we know who is buying gold? Is that listed anywhere?

Do you have any explanation for gold's sudden rise? Do you expect profit taking to give us some good buying dips?

If you wish, you can post the answers on the What's Up with gold post.

Submitted by LookoutBelow on April 22, 2006 - 8:03am.

Pessimistic ? are you serious ?

Its not "pessimism...its REALITY ! The numbers are there, just look.

What your experiencing is "Cognitive Dissonance".

Submitted by North County Jim on April 22, 2006 - 10:49am.

I watch numbers every day. I think things will get very ugly. I just don't think that economic Armageddon is around the corner.

Read some of powayseller's posts. Predictions of all kinds of financial failures (pension funds, banks, etc.).

I don't think these events are beyond the realm of possibility. I just don't believe they're likely.

Submitted by powayseller on April 22, 2006 - 10:59am.

I believe the Fed will step in to minimize any damage, so I am certainly not predicting elimination of fiat currency or a Depression. I'm just looking at the data, and realize that unless we change course, we are putting our entire financial system at risk. This is what has been said by Greenspan, Paul Volcker, and many others. I only quote respected economists in my posts. Take it or leave it....

Submitted by lostkitty on April 22, 2006 - 11:01am.

I suppose anything is possible... History verifies the fact that horrible things can, and do, happen. Powayseller is not necessarily stating these things WILL happen, but that they COULD happen. She is gathering information to best protect her nest... and GOOD FOR HER! Let the dialogue continue. This exchange of ideas will benefit us all.

Submitted by North County Jim on April 22, 2006 - 12:22pm.

OK, we can all agree the dangers are there. Protect assets accordingly.

Submitted by privatebanker on April 22, 2006 - 1:45pm.

Hey Jim, how are you doing? I just wanted to touch on a few things you mentioned here from the perspective of someone in the private wealth management world.

You bring up a good point with the having some exposure to gold and other precious metals in your portfolio. We are definitely in a bull market along with other commodities. There's a lot of money to be made going forward. But I wouldn't commit more than 10% of my portfolio to it.

As for money managers always thinking the market will only go up, I think this is untrue. I've had many conversations with portfolio managers and have heard just about the same thing from all of them. Most fund managers seek to outperform their respective benchmarks while minimizing risk. They all realize that everything is cyclical and certain asset classes outperform others during different economic cycles. I've never had a manager tell me that the market is always going up. Over the long term it has but as the old disclaimer goes, past performance is no indication of future results. Alternatively, I've had many debates with real estate agents with their claims of real estate only going up.

Portfolio Managers are usually Chartered Financial Analysts (CFA) and MBAs with thorough knowledge of all the financial markets. As for their tenure and having been in bull & bear markets, I would advise anyone looking to invest in a fund to look for a manager with a long consistent track record in all market cycles. To your point, most big wirehouses will have "rookie" portfolio managers run or be apart of their proprietary funds, which I would recommend avoiding.

I think you are missing the point for investing in mutual funds. Indeed, they are not insured by the federal gov. but that's where risk vs. reward comes to play. Most fed. insured investments have a return that is at or below inflation. To offset those returns, one invests in an asset that can provide more return for the risk assumed. Modern Portfolio Theory implies that by spreading your money across a variety of low correlating asset classes, it will provide consistent returns while minimizing overall portfolio standard deviation. Gold is not insured either and is very volatile, however when mixed with other low correlating investments, the volatility is reduced.

I think "baby boomers" should seek the advice of a successful, intelligent wealth advisor with a CFP or CFA designation that can educate them on diversifying their portfolio to gain exposure to low correlating asset classes such as gold, managed comodities, etc. This will help them hedge against the "dooms day" that I've been seeing everyone talk about lately.

Not that this is a big deal but it's SIPC that protects investors not SPCIC. ;)Sorry, couldn't let that one go by.

Thanks again!

Submitted by powayseller on April 22, 2006 - 3:37pm.

I would be interested in meeting with such a professional. Do you have any recommendations for an average person like me, I mean non-wealthy?

Submitted by privatebanker on April 22, 2006 - 6:10pm.

I'd recommend asking your friends/family if they work with an advisor. If that doesn't uncover anything, you can check the financial planning board site:


That might direct you to someone good. I'd recommend meeting with possibly two or three advisors.

Watch out for advisors that try to only recommend insurance strategies, stock picks, hot dot chasing, etc. They should help you establish a diversified portfolio of low correlating asset classes. Also, pay attention to fees and don't be afraid to ask how they're compensated. Some charge a flat fee and an additional fee for investment implementation. Others charge a fee based assets under management.

Most importantly, do your homework before meeting with them so you cover all of your concerns.

Good Luck!

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