I am not surprised that nationwide, about 2/3 of mortgages are adjustable rate or interest only combined. It is remarkable, however, that 60 + % of new mortgages in California are interest only. I guess the Californians want to stay ahead of the curve! It is hard to imagine anyone buying in that market; definitely short the stock of any bank that would offer a 0-down interest only loan in California.
An article in today's WSJ suggests that people are beginning to leverage debt to buy "investment" real estate. I would have little or no concern if the housing bubble involved homeowners who were about to experience a ten year period of negative equity. If leverage becomes widely used, it might be so fun.
My gut feeling is that this will burst within a couple of years, but the ramifications will be no greater, and probably less than the internet bubble. In the internet bubble, a relatively small group of people lost big dollars, and a large group of people (mutual fund investors, defined contribution plan investors, and indirectly defined benefit pension holders) lost moderate amounts of money. There will be some ripple effect in the fixed income markets, but we should muddle along as always.
An interesting question -- from 1995 - 2000, America's upper middle class, looking for a quick buck, played the stock market; from 2000 - 2005 they have moved to real estate; what comes next?
I'd answer that but am unqualified as I am lower middle class and haven't the slightest clue.
Seriously, for those boomers who can get their money out of RE----I'd say(in the next 10 years) 1. investments that provide a yield 2. vacation/recreation/retirement properties and 3. hospital/medical bills.
<< <i>Yep. Houses are AWFUL investments. I prefer ...... CARS! Now THERE'S something that holds VALUE.
Especially mid-size American sedans. R8 in my book.
>>
Actually, certain American cars have appreciated dramatically in the last few years. An original (restored) 1970 SS-454 LS6 Chevelle convertible will sell for substantially more than $100,000. Some of the "Hemi" 'Cudas and Challengers have sold for close to a million dollars.
Basically, American "muscle" cars from the sixties and early seventies are being snatched up by entusiasts at a rapid pace. They have been the hottest area of the collector car market for the last few years.
In fact, my cars have appreciated more in value (percentage wise) than the coins I had.
If one bought a home, the main reason is life style.
Absolutely correct.
However, the leverage example works both ways. If the $300,000 home's value stayed flat, the $60,000 experienced....
-$9000 to mortgage interest -$9000 to property taxes -$3000 to insurance -$3000 to maintenance +$2000 in Fed tax write offs ? to higher electric, gas, and water bills.
an overall 20+% loss on the investment.... and it recurrs every 12 months like clockwork.
Why are people saying that utility bills are higher in homes than in apartments? Just curious. I view dozens of gas accounts every day and I don't see any difference in natural gas usage.
I heard they were making a French version of Medal of Honor. I wonder how many hotkeys it'll have for "surrender."
<< <i>Why are people saying that utility bills are higher in homes than in apartments? Just curious. I view dozens of gas accounts every day and I don't see any difference in natural gas usage. >>
The electric bill is the main difference. It's much harder to cool a free standing building that it is a section of a building that has cooling going on already on as many as three sides and either the floor or ceiling or both. Not to mention the house is usually quite a bit larger. Years ago I sold my townhome and my electric bill went from $145 average to $400 for rougly 50% more under roof space. That's about twice what you would expect, all things being equal(which they aren't).
"Lenin is certainly right. There is no subtler or more severe means of overturning the existing basis of society(destroy capitalism) than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose." John Marnard Keynes, The Economic Consequences of the Peace, 1920, page 235ff
<<My gut feeling is that this will burst within a couple of years, but the ramifications will be no greater, and probably less than the internet bubble. In the internet bubble, a relatively small group of people lost big dollars, and a large group of people (mutual fund investors, defined contribution plan investors, and indirectly defined benefit pension holders) lost moderate amounts of money. There will be some ripple effect in the fixed income markets, but we should muddle along as always.>>
Giving the timing of the internet boom and the housing market we now find ourselves in, I suppose such comparisons are inevitable. Still, I personally think there are more differences than similarites. Namely, when the bottom fell out of dotcom, there wasn't much left since all that was ever there to begin with was speculation. With houses, like coins, markets may ebb and flow, (sometimes dramatically,) but some value will always be retained; at the very least, you can always take stock in the fact that whatever price you paid for something made the transaction worthwhile to you.
Another thing that makes the housing market different from dotcom, is that while hype surrounding new technologies and new possibilites fueled the tech-boom of the late 90s, there are VERY tangible factors that have each contributed to the present day real-estate boom.
For one thing, in the mid-90s, realestate at least in Los Angeles, was downright depressed due to the shrinking of the defense industry that occured following the end of the cold war. Dotcom, for everything it didn't do, did at least put money back into people's pockets to buy things like realestate.
At the same time, price trend-setting places like New York, San Francisco, and of course Los Angeles have become inarguably better places to live in the past decade. They are cleaner, safer, and more culturally attractive. People are willing to pay more to live there, and in turn that effects prices everywhere.
Another thing that boosted real-estate, was the collapse of dotcom itself. It is a well-known fact that when the stock market becomes uncertain, that people look to shore up their money in safer places like real-estate. As it happened, just as the real-estate market was seeing this infusion of capitol, interest rates fell dramatically, thanks again to unstability of the stock market, and also in no small way to the efforts of Osama Bin Ladin. The rates to which interest rates fell in many cases doubled the purchasing power of the dollar when it came to buying a home.
So will the housing bubble will burst? Personally I think it's more likely to exhale, maybe, but that's it. As people have said, there is a life-style componant to home ownership that people are not going to want to give up. I know I like my house, and would rather wait out any economic downturns here than sell it at a loss.
Also, as I see it, there is something coming that may buoy the market even further: inflation. Without having this dialoge descend into a debate of conservatives vs. liberals, I think we can all agree that inflation may be the inevitable byproduct of rising fuel prices, higher interest rates, and an ever-increasing national debt. As high as home prices are now, I can already hear people saying "A half-million dollars just doesn't buy what it used to." (Or maybe I'm heairng that already because I live in LA.)
In any case, I really like this thread - it's a chance to think about things. I hope I didn't offend anyone, and I readily acknowledge that many of you know more about these things than I do.
I guess its perhaps muddle through the stagflation until we have the deflation?
“What we can say with a certain degree of confidence is that the Fed will keep raising interest rates until they arrive at a "neutral rate," i.e. an interest rate that is neither stimulative nor contractive for the economy. Reality is something different. The Fed can never truly arrive at a neutral rate. They habitually raise rates until something breaks—usually either in the economy or the markets, but in most cases it's both. The days in which the Fed could fine-tune the economy ended several decades ago with the emergence of the financial economy. Today, even more money is injected into the economy and the investment markets outside the traditional banking sector. Last year the US economy added $2,718 billion in debt. However, the broadest measure of the money supply (M3) expanded by only $587.5 billion. For those who are relieved that money supply growth has slowed down, take no comfort. Credit expansion in the US is rampant as reflected in last year's total credit expansion of $2,718 billion.
Along with the redundant talk over the current “soft patch” in the economy, we have benign talk of inflation. The investment markets believe that the Fed will keep inflation contained through its successive rate hikes and there is more talk about deflation in the air. Never before have I seen such abuse of language as it pertains to inflation and deflation. Total credit expansion of $2,718 billion is inflationary not deflationary. A $10 trillion increase of total credit to $36.2 trillion is inflationary. Derivative growth of $50 trillion is inflationary. It is why commodity prices are rising around the globe. It is why the US trade deficits are worsening, and it is why McMansion prices keep going up in the suburbs. The National Association of Realtors reported this week that median prices for previously occupied homes rose at double-digit rates in 66 out of 136 metropolitan areas that it surveys. In Florida, California, Nevada, and New Jersey prices have risen 46%, 33%, 29%, and 23% respectively. This is asset inflation not a bull market.
The confusion today over what constitutes inflation stems from the fact that most analysts only recognize one form of inflation, which is rising prices in an economy. Rising asset prices—whether in the financial markets, in stocks or bonds, or in the real economy with real estate or lower mortgages—is not viewed as inflation. Analysts prefer the term "bull markets." Short-term interest rates below the inflation rate, P/E multiples over 20 on the S&P 500 and as high as 44 on the Nasdaq, dividend yields of 1-2% on the S&P 500 and the Nasdaq, and long-term interest rates of 4.11 to 4.47% on the 10-year note and 30-year bond are not considered to reflect inflationary tendencies. Inflation has and always will be a monetary phenomenon.
Simply put, it is too much money chasing too few goods. In the asset markets, it is too much money chasing too few assets, so the prices of those assets rise. In the real economy, it is too much money chasing too few goods, so the prices of goods rise as we now see in most commodities. A rising and expanding trade deficit is another form of inflation. It is excess demand that is made up by foreign imports. Without those imports, inflation would be a whole lot higher in the US. The burgeoning trade deficit is what has moderated price increases in the US.
Even when it comes to stated inflation rates, as reflected in the CPI and PPI, most experts believe these essentially fictional numbers. Most inflation gauges are highly manipulated by hedonics and by skewing what is measured. One analyst recently exhibited his own ignorance of the CPI by extolling deflation with an example citing the drop in CPI between 2001 and 2003. As I wrote in “Let's Get Fictional,” the drop in the CPI from 2001-2003 was due to the combination of lower rents and lower used car prices. Had the government shown the increase in new car prices and new home prices in the CPI, everyone would have been talking about inflation instead of deflation.
Even with skewing the data, signs of inflation are everywhere from higher food and energy prices, which are routinely excluded, to the rise in import prices or more recently the rise in the PPI. This recent rise has been downplayed by the financial press as a lagging indicator. They expect that as the Fed continues to raise interest rates and as the economy slows down, the growth rate in inflation will subside.
There are a number of issues, which the United States faces today. Each one looms larger as the year progresses. Whether it will be one or a combination of issues that tip the balance is hard to say. But I believe the following tipping points should be red flags to the investor as we head closer to the cliff, leading to a fall...
1. Leveraged Carry Trade 2. Growing Trade Deficit 3. U. S. Consumer Debt 4. Banking Crisis 5. Reliance on Foreign Investment, The Rogue Wave
Loss of Manufacturing Cost Advantage Chinese revaluation of its currency may help the US trade deficit, but I doubt if it will make a major difference. The problem for the US is that the economy of today is not the economy of the 1980s. Our manufacturing base was much stronger back then. When the dollar devalued in 1985-87, the US was able to export its way out of its imbalances. In the 80’s, US exports grew by 5.4% a year and after 1987 they grew by over 10% a year in the following five years. That is because US competition was mainly with industrialized countries where we had a cost advantage. Today the US must compete against emerging nations where we no longer have a cost advantage.
Loss of Manufacturing Base In addition to no longer enjoying a manufacturing cost advantage, our manufacturing base is much smaller today with much greater import penetration in all major categories of personal and industrial consumption. Foreign-made goods now make up 38% of all durable goods, 54.5% of autos, 56% of computers and office equipment, 57% of semiconductors and office equipment, 57% of communication equipment, 71% of consumer electronics, 78% of apparel, and 99% of all footwear. In economic terms, the American consumer has acted as buyer of last resort.
Last year American consumers borrowed $1,017.9 billion, up from $839.4 billion the previous year. Since the year 2000, consumer indebtedness increased by $3,246.2 billion compared to an increase of consumer income of $1,440 billion. Most of this increase has come from mortgage debt. Last year new borrowings on mortgages were $884.9 billion, representing 87% of total debt borrowings.[2] Outstanding consumer debt more than doubled to over $10 trillion between 1992 and 2004. While consumer balance sheets continue to be laden with debt, there are very few signs of savings. Last year savings in the US was only $133 billion, roughly a third of what it was in 1995 when savings was $306 billion. In 1995 the US added $4 of debt for every $1 in savings. Last year that figure expanded to over $20 of debt for every $1 of savings. In effect, the American economy has turned into one giant hedge fund.
Debt is now looked upon by most households as an additional form of disposable income. Home equity extraction is what has kept up consumption in this country at above-normal levels. According to Federal Reserve data, US households owed $881 billion in home equity loans at the end of 2004, up from $492 billion in 2000. This represents an increase of 80%. Last year home equity extraction increased by 29%. It is becoming clear that the housing bubble and the equity extraction it reinforces is what is keeping retail sales pumped.
The problem for most Americans is that taxes and inflation are taking their toll on most households. Income gains aren’t keeping up with inflation, which is grossly understated as a result of hedonics. This has lead to more households turning to debt to pay for a lifestyle their incomes can’t support. The median family income has risen only 11% after adjusting for inflation since 1990. At the same time, median household spending has jumped 30% and outstanding household debt has jumped 80%.
Lower Lending Standards US banking regulators issued a warning to lenders on Monday to tighten up their lending standards. Bankers may be repeating the same mistakes of the last housing bubble of the late 80’s. Lending standards have fallen dramatically. Unlike the last housing bubble of the late 80’s, very little equity is there to cushion the lender. The proliferation of negative amortization and interest-only loans leave lenders with no cushion. The influx of marginal buyers is also putting lenders at risk. Even in the case where homes have appreciated, homeowners are monetizing that appreciation through home equity loans. Bankers are lending up to 100% of the value of a home. In many areas banks and finance companies have lent up to 125% of a home's value.
It's Not Just The Banks Anymore Real estate loans cut across a wide swath of financial institutions. Close to 55% of home equity loans are held by commercial banks, 14% by thrifts, and 7% by credit unions. The balance is held by finance companies that have in many instances made equity loans in excess of a home's value. Despite the rise in interest rates, the bubble in mortgages and real estate, lending continues to expand. According to the Mortgage Bankers Association (MBA), mortgage originations are expected to total $2.5 trillion this year.
Unlike the last real estate cycle, this time around buyers aren’t interested in building equity. The trend is to buy as expensive a home as the lender will allow. Many experts believe that this trend in ARMs and non-traditional loans reflects the end of a housing cycle. These non-traditional loans leave the homeowner and the lender in a high risk situation. If we are approaching the end of the cycle, then falling prices could come next. If that happens, homeowners with negative ARMs or interest-only loans will wind up owing more than the value of their loan. Even if home prices don’t fall off a cliff or just remain stagnant, many borrowers could be squeezed by rising interest rates.
Zero percent equity in a home leaves lenders extremely vulnerable. It is the zero equity borrower who is most likely to walk away from an obligation when their income is no longer able to handle rising mortgage payments. Creative finance has brought a lot of marginal buyers into the housing market during this housing cycle. Unlike the last cycle where 20% down fixed rate mortgages were the norm, this time no money down, variable rate mortgages or interest-rate-only loans have become the norm.
America’s reliance on foreign savings to finance its twin deficits is another tipping point. Total foreign holdings of T-bills, notes and bonds have risen to $1.977 trillion representing more than 44% of our outstanding public debt. Each month this country needs to finance close to $60 billion just to pay for its consumption of foreign goods. Up until recently foreigners, especially Asian central banks, have been willing lenders. But trade friction is at the top of Washington’s agenda. Pressure is being brought to bear on China to immediately revalue its currency or risk tariffs imposed on its exports to the US. Yet China and Japan are two of America’s largest creditors. Lately their appetite for US debt has been waning. Both Japan and China bought less than $5 billion in Treasury securities between January and February. In March both countries were net sellers. In fact foreign central banks sold a net $15 billion in March compared with net purchases of $11.3 billion in February. Norway was the biggest seller dumping $17 billion of US Treasuries. This is the first time since August of 2003 that central banks have been net sellers.
Private foreign investors have stepped up their buying to fill the void. Otherwise interest rates would be rising by now. The big buying has come from Caribbean banking centers—the home of hot money and hedge funds. Caribbean banks increased their holdings of Treasuries in March from $104.7 billion to $137.2 billion. During the first quarter of this year there has been a definite slowing trend in foreign purchases of US securities. Another apparent trend is that whenever private sector investors show up on the "buy" radar, central banks have used the opportunity to offload more of their Treasury holdings. The combined net buying of US securities dropped to $45.7 billion in March, down by nearly half from the previous two months. Buying was down across all categories from Treasuries to stocks. Stock purchases fell in March from $7.5 billion in February to $1.7 billion in March. It is no coincidence that the stock markets fell in March and in April.
American politicians may think twice about angering our largest creditors. With one of the lowest saving rate among industrial economies, the US is totally dependent on foreign savings to finance our economy from consumption to investments. Chinese and Japanese buying is what keeps interest rates low in this country. They also act as a moderating influence over inflation rates by financing our deficits. Without that money, the Fed would have to print a lot more money. A revaluation of the Chinese currency would surely cause interest rates to rise in this country along with inflation rates. It is estimated by some analysts that if Asian central bank buying of Treasuries was cut in half, interest rates on home mortgages would rise by as much as two percentage points. If that was to happen, the impact on housing would be severe. Imagine what the impact would be on the banking industry.
As the Fed rate hikes continue, risk to the financial system increases because all markets are interlinked. Systemic risks to the financial system have increased and may converge. A misplaced bet in structured credit could backfire—causing interest rates to rise. Narrowing credit spreads could cause the carry trade to unwind—forcing leveraged players to dump their bond holdings—leading to a jump in interest rates. A trade war could create friction in the credit markets—forcing central banks to dump their Treasury holdings or go on strike with new buying. A rise in interest rates could make mortgage payments untenable for overburdened households—triggering bankruptcy. Increased bankruptcies would bring more homes on the market—increasing supply and causing home prices to fall. Falling home prices would increase homeowners and lenders risk as equity evaporates. Each tipping point could lead to the next as they are all connected in a daisy chain.” By James J. Puplava May 24, 2005
<< <i>The real con job is spending 200 billion a year playing around in Iraq. Unless this stops, we're going to be bled just like the USSR was bled to bankruptcy in Afghanistan. >>
A drop in the bucket in comparison to all the con jobs this government has sold to which the people have swallowed and even said "than you".
An article by Rob Kirby which shows grossly re-adjusted debt purchases by other nations from January. Out of the blue the govt changed these figures by tens of billions of dollars. It appears to have not been mentioned in the press nor a reason given why we can't track this better. Interesting reading. The 2 charts show it all.
The Carribean Hedge Funds and the UK have "picked" up the buying of our debt now that Japan and China have bowed out. Hmmm. Gold finally bottoming once again?
WOW, the heck with coins we need to be buying REAL-ESTATE in CA.
“NEW YORK (MONEY Magazine) - Twenty-four-year-old Kelly Pearson says the $580,000 ranch-style house she bought near downtown San Diego last August is a dream come true. It is nice: 1,450 square feet, four bedrooms, two baths, crown molding, a big kitchen with an island and -- quick! duck! -- a 737 jet descending upon her roof with what feels like 10 feet to spare.
Pearson barely flinches. You see, her half-million-dollar-plus house sits just 1,000 yards from the airport's single runway. She's grown accustomed to the near-constant flybys, even if visitors must resist the urge to dive for cover when a plane thunders down. The low, barreling boom of the FedEx jets, biggest of the bunch, rattles the windows. "Every morning," she says, "10:45 on the dot."
With no savings, and a college loan to repay, Pearson took out a mortgage for 100 percent of the price of the house. Closing costs were paid for by a $10,000 gift from her parents (money first earmarked for her wedding).
This new definition of house and home is on particular display in San Diego, where home values -- up 138 percent over the past five years -- have risen faster than in any other big-city area.
It's always been a nice place to live. But now families move every few years to ever-grander and larger homes. It's a new land of his-and-hers walk-in closets, flat-panel TVs and backyard patios with outdoor fireplaces and built-in grills.
North Torrey Pines Road runs up the coast just north of San Diego, descending from a cliff to the ocean. It offers a beautiful view of the Carmel Valley.
Much of the valley used to be flower farms and riding trails, but since even a small bungalow in the area's beach communities can now command $2 million, San Diego is rapidly expanding east. Freshly baked stucco homes line Carmel Valley Road far into the desert.
Manuel Altamirano is a 32-year-old software salesman who grew up in Chula Vista, a largely Hispanic neighborhood near the Mexican border. That's where he bought his first house in 1998: a one-story, 1,200-square-footer with three bedrooms and one bath, for $150,000. He and his wife Eva, 33, put $10,000 down, nearly everything they had. Two years ago they sold it for $320,000, netting $150,000 after commissions and fees.
Most of that windfall went into a down payment and upgrades for their current 2,400-square-foot home in Rancho Bernardo, just north of Carmel Valley. The house cost $533,000, but real estate agents tell the Altamiranos it is now worth as much as $800,000 -- meaning their initial $10,000 investment has grown in seven years to about $294,000.
Ryan and Laura Rothschild have also succeeded in San Diego real estate without really trying. As newlyweds, they rented in Carmel Valley. Then in October 2001, looking for a bargain, they moved to San Marcos, one of greater San Diego's northernmost towns, buying a 4,000-square-foot house for $576,000.
Two years later, Ryan, 31, who owns a costume-making company, and Laura, 36, a professional photographer, sold it for $800,000 and moved into a newly constructed 5,600-square-foot house in Santaluz that cost $1.35 million. But new houses -- even multimillion-dollar ones -- come with few frills in San Diego. The Rothschilds spent another $850,000 upgrading their home, adding wood flooring and granite countertops, installing beams across the ceilings and turning mounds of dirt into a lovely garden.
Did they ever feel nervous about spending so much? Not a chance. Brokers tell them their house would now sell for $2.8 million, or $600,000 more than they've spent after renovations.
Occupational therapist Angie Carter-Donovan, 31, persuaded her husband Ted, 42, to buy a 1,900-square-foot mess in La Mesa last May for $396,000. It's her fourth real estate investment in seven years, even though the previous one (a new downtown condo she planned to flip) took six months longer to sell than expected. Still, the couple netted nearly $95,000 from that deal and have been pouring money into the La Mesa house ever since.
It's on three-quarters of an acre, one of the biggest lots in the neighborhood, but it needs work. A lot of work. The front door doesn't open. The pipes make loud noises and shake when the water runs. It has -- how to put it? -- that old-house smell.
Carter-Donovan doesn't mind one bit. She believes it'll cost about $100,000 to gut the place and re-landscape. She's pregnant now and hopes the major improvements will be completed by October, when her baby is due. It'll be well worth the muss and fuss, she says, since the house should be able to sell for $750,000 when everything is done.
Michael and Cheryl Roberts, 39 and 37, have been house hunting for six months. They bought their current home, a four-bedroom, 2.5-bath ranch house that sprawls for 2,650 square feet, for $883,000 in the middle of 2001. At the time, Michael, who owns a flag-making company, and Cheryl had two sons. But the addition of a baby girl last year is starting to make their home -- now worth $2.3 million, they believe -- feel cramped.
The Robertses recently saw a $6 million spread that required too much work. The kitchen was old and small; the house had a poor layout. Michael shakes his head in disbelief. "It's hard," he says, "to swallow $6 million for a teardown." Jerry and Laura Satran's Sunday open house is empty. Their lushly appointed home -- 4,600 square feet in one of Carmel Valley's newest developments -- is the sort of place you'd go out of your way to check out even if you were perfectly happy where you lived.
It has a grand spiral staircase in the front hall. There are five bedrooms and 4.5 baths, formal living and dining rooms, and a game room upstairs that's big enough for a regulation-size pool table. The kitchen has two islands, both with marble countertops.
Jerry, a lawyer, and Laura, a teacher, are asking $1.3 million. But here they are, the second week the house has been on the market, drumming their fingers. The previous Sunday, Jerry says, 40 visitors stopped by.
Two weeks later the Satrans receive an offer: $1.2 million. Not the full asking price. No one seems more disappointed than the neighbors. One woman suggests the Satrans would be hurting the entire block if they settled for less than $1.25 million.
Hays Morning Market Comment Let’s Talk Money May 25, 2005 Bond Market Fighting Fed
by Don R. Hays
Summary: The growth of MZM, the historically most accurate money supply aggregate to predict future economic activity has grown by an abysmal 1.41% over the last one year, and even for the last three years at only a 4.5% annualized rate. For the last 13 weeks, it has actually DECREASED on an annualized basis of 1.75%. In a stable environment, history tells us that a nominal anti-inflationary, healthy GDP growth rate lies in the 5 ½% to 7% range with the upward limit being the long-term norm. Generally, it has taken about the same rate of growth of fuel (money supply) as the growth of the nominal GDP, so you can see that the last year’s fuel supply has been targeted to choke off growth.
Very obviously, the above is a bit simplistic, but over time will prove accurate decade after decade after decade. So the 4.5% growth rate of MZM over the last three years has ALWAYS historically caused either a significant economic slowdown or a RECESSION.
Am I worried? No, because even though the SUPPLY of money appears scary, the indicator that matches supply to demand—the yield curve—is still headed in the right direction, and is just now on the verge of entering the “perfect” zone that historically has produced a balanced supply of money with the demand for money. But we do believe the herd will start very soon to be very concerned that the Fed has gone too far.
Lastly, the stock market rally is still intact, but we still believe that the big bucks are not ready to start showing up in your account’s monthly statement just yet. More volatility should return in the next 3-4 weeks to repair any emerging cracks that might appear in the wall of worry.
Let’s start out by showing our graphs of the growth rate of the MZM aggregate of money supply over three different time frames. The growth rate of each time frame is annualized to put them into comparative illustrations. First, let’s start with the graph that shows the growth over the last one year and the last 13 weeks.
A couple of weeks ago, we were hoping that the one-week increase in MZM (money supply with zero maturity) was a change in direction. But last week took care of that as the weekly stats released each Thursday afternoon revealed another sharp decline. As you review the red line (the last year’s growth) you can see that right after 9-11, the Federal Reserve opened the money spigots as wide open as they would go, producing a huge glut of “free” money. So I wasn’t very concerned in the ensuing months as they started to rein in the growth rate even as they were cutting interest rates.
Many people ONLY follow the Fed policy as to whether they are raising or lowering interest rates, but of course we all know that the fed funds rate is actually an effect of how many dollar reserves are being put into the system. So if there is no demand, even a cut in interest rates (i.e. 2003’s rate cut) can occur while they are reducing the growth of monetary reserves, and vice versa.
The Federal Reserve started to raise their widely watched target for their fed funds rate in July 2004 as they bumped it up from 1% to 1.25%. Since then, on a monthly basis they have ratcheted it up to 3.0% in 8 steps of ¼% each. The Fed is almost always late in their actions, and they also almost always go too far. We believed strongly in October/November 2003 that 26 months after the 9-11 tragedy that forced the Fed to wake up and reliquify the monetary system, like the 26 months after August 1990, that the economy would start to wake up and add jobs. Of course, the election rhetoric was making headlines on the jobless recovery, but sure enough the economy did start to provide an almost perfect rebirth in response to the Fed’s very liquid posture. Here’s that graph of unemployment insurance claims that show the correlation.
It is easy to critique the Federal Reserve, but in truth they are virtually held captive by current news. They would have been lynched way back in late 2003 if they had started to raise the fed funds rate before the headlines and public opinion had caught on to the resurging economic activity. But the vigilantes were giving them strong hints. Let’s look at the commodity prices and the bond market during that time.
You can see that the price of copper and of gold started to move up early in 2002, even as the Fed continued to cut the fed funds rate. By 2003, that rate of increase really started to pick up speed. Now, let’s look at the action by the bond vigilante.
As you look at that last graph, remember bond yields, especially the 10-year T-Note yield, is at its heart a monitor of inflation expectations. Many economists that I admire have calculated that its action is made up of 3/4th inflation expectations and 1/4th economic growth. In the current saga, the trough in the yield of the 10-year T-Note occurred in mid-2003, and by early 2004 had made its first higher high. Almost immediately the Federal Reserve started to raise interest rates. Remember that example, because now I think the next clue might come from when the opposite occurs. In other words, the commodity prices peak out, which they all have in the last two years, with the price of copper and aluminum being the last to make a lower high.
Of course, with oil prices being so widely heralded, the recent decline in the price of oil is VERY important in this process.
In a similar reverse message to the dropping rates in 2001 to 2002, I suspect the Fed will now wait on the bond market to send a very strong warning, by making a lower low in yields….and it is very close to doing so.
The yield on the 10-year T-Note closed yesterday at 4.03% as several dull economic releases hit the headlines. If the Fed raises interest rates one more time, (and it appears they are definitely on that course) it would almost be a certainty that this “lower-low” would be activated. My point is that they really don’t need to do anything. They should stand pat. But hey, Greenspan’s retiring in 7 more months, and he has a legacy to think about.
We have a lame-duck Federal Reserve Chairman, but one who has a tight rein on the Fed’s voting. With Greenspan’s term due to end in 7 months, he is going to make sure he keeps inflation under wraps as his parting memorial. His long-term record shows that he has never been a great predictor of economic activity OR inflation. But Ladies and Gentlemen, don’t despair, we have the three vigilantes in charge, and if he does go overboard they will spank him into submission. They are now just beginning to show him the belt that could administer the “whuppin” (remember, I’m back in Nashville for the summer.)
Now, before I leave this money supply thing, let me show you the 3-year growth rate of MZM that I promised.
Ed (Hyman) and Nancy (Lazar) tell me that there has never been a time when money supply growth has been this weak, and when the year over year Leading Economic Activity index has been negative—as it is now—that there has not been either a significantly weak economy or a recession.
I believe that will occur, but I keep coming back to that 1994 example, I don’t expect it to get so weak as to severely impact earnings. I expect a slowing however to become obvious to the herd as the third quarter ends, hence my guess that we have one more flurry of downside volatility remaining.
The reason I’m not overly concerned is my trusty yield curve. I must be the only guy in the world that looks at the slope of the yield curve the way mathematicians (remember, I’m an engineer, not an economist) define “slope.” We take the yield of the 10-year T-Note and divide that by the yield of the 91-day t-bill. That is slope. Most economists simply subtract one from the other. That makes a huge difference. For instance, most economist would say the slope of the yield curve would be the same for example one; when the 10-year T-Note yield is 16% and the t-bill yield is 14% to example two; when the 10-year T-Note yield is 4% and the t-bill yield is 2%. In both cases the difference would be 2%. I simply can’t buy that. I believe strongly that the slope is what determines the temptation to lengthen maturities in your investment thesis. So if I was getting 14% for t-bills, and scared out of my wits, would I even think about sacrificing my 91-day t-bill for a 10-year tie up of my investment for only an additional 2%? For a measly 2/14 or an additional 14% increased revenue, would that be the same temptation as if I was getting 2% for my t-bill purchase, and the 10-year T-Note was yielding 100% more at 4%.
So this is my logic and it so far has never failed me. I believe strongly that when you divide the yield of the 10-year T-Note by the 91-day t-bill and it comes out above 1.2 it is a slope that still encourages lengthening maturities, or in other words is promoting growth.
Here’s my yield curve graph.
So while the mainstream economists are now worried that the Federal Reserve have now moved the fed funds rate up to where there is only a 1% difference, and in June it will be only 0.75%, I am saying that this barometer that measures the fine balance of supply and demand is now just on the verge of entering the historically “perfect” zone in which it nestles in the 1.2 to 1.4 ratio, as it did coincidentally in 1994-95.
Of course, if they should raise interest rates to a level that would drive this ratio under 1.2, then that would be BAD!! But I don’t think the vigilantes will allow it.
Okay, I see the clock in Nashville sneaks up on me about the same as it did in Naples , and I’ve got to put a wrap on this. The next few weeks are going to be very important. I think this rally has a couple more weeks left in it, and then I am guessing that the emerging negative economic news, and the LAST Federal Reserve increase in interest rates—up to 3 ¼% will put the last scare in the stock market that will clear the way for the next two years of a barn-burner rebirth of the big BULL.
As of now, we’re still fully invested, and don’t intend to sell anything UNLESS we get a stock or two that begins to cross our acceptable guidelines—fundamentally and technically. So far, we have a couple (out of 31 positions) that are under our close surveillance, but as of today are still hanging in there.
There is more we could say about money. We see the U.S. consumer now has a net worth of $49.1 trillion, with $5.1 trillion of that in short-term type financial instruments, i.e. money market funds. The total mortgage debt is around $8 trillion dollars.
I see velocity of money supply is increasing, meaning it is being worked a little harder. This is normal as the economy picks up and the Fed is starting to pinch the supply down. But it can only be worked so hard, so the net effect will start to come home, and we believe it is already starting.
I’ve got to go now, but we’ll be back with you on Friday morning. See you then.
How do you fit 4 bedrooms into 1400 sq ft? These stories crack me up. There definately is a bubble in the major metropolitan areas. The heartland is still just plodding along.
I really dont understand how you can spend $500-1000 per sq ft on a used house. You can build a new one for $200 per sq ft and have almost the best of everything. Smoebody is getting hosed. I bought my 18yr old house in 2002 for $61 per sq foot. That comes with an oversized 3 car garage, 30x50 barn and almost 4 acres of land. I've put about 5k in upgrades in the kitchen and floors and painting. I couldnt rebuild it for that much.
What I noticed most about those stories is the ages of the buyers. They are very young-20's and 30's. They are just starting their careers and families. These are the same people who thought they could get rich in the stock market 5 years ago.
One last comment....What kind of bank loans out $580k to a 24 yr old kid with such a short work history and no assets?
“I mean, inflation is up, but bond yields are down, which is the exact opposite of what you would expect. In fact, the yield on the 10-year T-note is barely over 4%! Foreign demand for US debt is down, yet prices for debt go up, the exact opposite of what you would expect. Inflation is up, yet gold is down, again the exact opposite of what you would expect. Demand for oil is up, yet prices are coming down, the exact opposite of what you would expect. The economy is slowing, yet stocks are soaring, the exact opposite of what you would expect. It just goes on, day after day, item after item.”
Americans buy what they cannot really afford...and the Chinese build factories to produce what their principal customers don't have the money to buy. And the whole world economy advances - apparently - only so long as house prices in America continue to rise at three to five times nominal inflation and an infinite multiple of household income, which went backwards in 2004."
According to the US Department of Commerce, American exports to China in 2004 stood at US$ 34.7 billion while its imports from China came in at US$ 210.5 billion, representing a trade deficit of US$ 175.8 billion against China.
• China has a trade and current account surplus; US has record deficits • China has record-high foreign exchange reserves; US has a record budget-deficit • China is the 2nd largest creditor nation; US is the largest debtor nation in the world • China has a savings rate of 30%; US savings rate sits at a miniscule 1% • China invests in capital formation; US "invests" in consumer spending • China produces more steel than the US and Japan combined • China produces 5 times more cement than the US • China consumes 21% of the world's copper and 27% of the world's iron ore • China's sugar imports doubled in the past year (1.3 million tonnes)
“Donald Rumsfeld, the American Secretary of Defense, has said "The financial reporting systems of the Pentagon are in disarray . . . they're not capable of providing the kinds of financial management information that any large organization would have. A trillion dollar's worth of stuff, including whole airplanes, has disappeared?
"Now, for the first time ever, lending to purchase real estate comprises more than half of all lending in the U.S." Half of all lending is going into buying overpriced houses?
I am waiting for one of our congressmen to say, “you know folks a trillion here and a trillion there and pretty soon you are talking about real money”
I'd answer that but am unqualified as I am lower middle class and haven't the slightest clue.
Seriously, for those boomers who can get their money out of RE----I'd say(in the next 10 years) 1. investments that provide a yield 2. vacation/recreation/retirement properties and 3. hospital/medical bills.
JMHO >>
Well, with regards to healthcare. 8 weeks ago I went into the hospital and 54 hours later, thankfully walked out. The cost of that 54 hours might you ask?
$84,000.00..................and some change.
Thankfully too I have health insurance but really. 85 G's?
<< <i>In fact, my cars have appreciated more in value (percentage wise) than the coins I had. >>
Oh yeah? Well, I'm talkin ..... TAURUS ...... a "sleeper." Not some old gas guzzler crummy GTO ragtop or sumpin.
(My kid has my '72 Monte Carlo that I bought new)
I useta play with cars, but the space and time involved did me in. Had a '65 Mustang ragtop with the close ratio 4-speed. Sorta scarce. Also messed with some Mercedes and an old '29 Chevy.
But, yes..... cars CAN be good.
But the SMART money is doin .............. TAURUSES !!!!!
>>
Ya need 2 of them... One to crap on and one to cover it up with!
this gentleman has a good head on his shoulders. i don't agree with him all the time but atleast he is pleasant to read, unlike the 'earth rising' writers.
*
Silver May 13, 2005
Silver bugs believe that, like gold, silver is money. They also believe that the silver price is going to vastly outperform the gold price because of silver’s supply shortage. But silver is not money; it’s a commodity whose price is far more dependent on industrial demand than on anything else. However, because the silver market is so small, it is entirely possible for silver investors to create their own self-fulfilling prophecy. You need to be nimble, and remember to sell, to take advantage of such an increase in the silver price.
Annual mine production of gold is about 80 million ounces while annual mine production of silver is roughly 600 million ounces, yet gold mining revenues are eight times more than revenues from silver mining at current metal prices.
Why is gold expensive and silver less so? Because gold is money and silver is primarily an industrial commodity. Even though silver has, from time to time, been used as money, its chemical and physical properties make it less desirable than gold as a monetary asset. Among other things, silver oxidizes readily, and it is far more abundant than gold.
Annual fabrication demand for silver is well in excess of eight hundred million ounces a year, of which roughly forty percent is used for industrial applications, just over twenty percent for photography, thirty percent for jewelry, and the rest (less than five percent) for coins and medals.
Because annual fabrication demand exceeds annual mine supply, silver investors believe much higher prices are in store. However, since industrial applications and photography account for roughly two thirds of annual silver consumption, fabrication demand plays a key role in the silver market. The silver price is thus very dependent on changes in annual fabrication demand. As a result, continued economic growth in North America and the rest of the world should help the silver price remain strong and perhaps move up, whereas an economic downturn could be quite detrimental to the silver price.
If we look at gold and silver in US dollars, then the relative strength in the dollar since the early Nineties should have had the same effect on both metals if they were priced as money, and their charts should look the same. But they don’t.
Silver actually performed much better than gold during the Nineties because demand for silver supported its price during the high-tech boom in the latter part of the decade. When the tech boom went bust, silver suffered, and its price barely budged from 2001 to 2003 while the gold price rallied strongly. Since 2003, gold and silver prices have moved more or less in tandem, and that is a result of the weakening US dollar. However, if we see a change in the economic climate, the correlation between the two metals’ prices can easily break down again.
The amount of silver typically used in any given application usually represents a very small component of the overall manufacturing cost. Therefore the demand for silver from both industrial applications and photography is very inelastic, meaning that if silver’s price increases, demand does not decrease.
At the same time, because the silver market is such a small market in dollar terms, a relatively small amount of investment demand can cause the price to spike dramatically. And because fabrication demand is inelastic, fabrication demand will not decline due to the price increase.
So speculators buying silver in anticipation of a move upwards can easily create a self-fulfilling prophecy, causing the silver price to soar. But when they want to sell their metal to take profits, the same lack of liquidity that drove the price up will drive it right back down again.
This combination of a small illiquid market, inelastic demand and feverishly bullish investors could cause the silver price to outperform the gold price at some point. However, you must be wary of an ensuing collapse and remember to sell. Silver’s day in the sun might be very short-lived.
Still, there is no guarantee that the silver market will enjoy the benefit of such a self-fulfilling prophecy. Judging by the silver price since 1990 in relation to what we know was going on in the world, it is entirely possible that silver will suffer along with other base metals and commodities during an economic downturn.
As a side note, there will not be a commentary next week. I will be in Reno for the Geological Society of Nevada symposium and then in New York to speak at the Institutional Gold Conference (see www.paulvaneeden.com for details). Hope to see you there.
Gold no longer has a true monetary function anymore either. Certainly it still has some of the attributes of money but by definition money is widely accepted. Gold is not. Gold may be widely viewed as having value much like gasoline or bread, but most will not accept any of these in lieu of money.
Silver may oxidize a little but it makes a far better money than gold simply because it is more durable and more usable. It is easily coined and most purchases can be made with the metal while a gold coin small enough to by a newspaper or a dinner would re- quire a magnifying glass at point of sale.
While the best thing going for the silver market is the likelyhood of self fullfilled prophesy the fact remains that it is physically impossible to contiunually use more of something than is produced. Also silver has proven to be one of the most usefull elements on the face of the Earth and this is most unlikely to change as the world becomes more electronic, and more optical.
Personal income up 0.7% and spending up 0.6%. Economy still looks decent. So much for no wage growth.
I guess it depends on how you interpret the stats. Inflation injusted income has been falling for years. Don't forget to include credit into the equation as credit has been driving the economy for years now.
From Steve Seville:
In addition to the mixing-up of symptom and disease (effect and cause), there is the issue -- an issue that will likely be overlooked by those who think inflation is an increase in prices -- that during the early and middle stages of an inflation cycle some prices will FALL. In fact, Ludwig von Mises and other great economists of the Austrian School have explained that this particular characteristic of inflation -- the way it affects prices in a non-uniform manner -- is what gives it great appeal to the financial and political elite. After all, if a 10% increase in the money supply immediately pushed all prices higher by 10% then nobody would have the opportunity of benefiting from the inflation. The way it actually works, though, is that the prices of some things will rise earlier and faster than the prices of other things, thus allowing some people to profit from the inflation before others become aware of what is going on. Inflation is, in actuality, a surreptitious means of wealth distribution.
In other words "published" prices can be under control (for the moment) with significant inflation underlying the economy.
Gold no longer has a true monetary function anymore either.
The US govt watches gold like a hawk. The central banks actions certainly demonstrate the monetary function gold peforms. It the CB's did not have any gold bullion left (15,000 tones dispersed) what would that do to world currencies? On a lesser note, what if they just came clean, along with all govt's to have their gold holdings audited and posted? In other words made fully transparent for the first time in decades. The effect would be immediate and quite powerful. It would certainly show the "true" monetary value of gold has not been lost. The fact that the CB's hide their gold holdings and the status of all the various loans and leases indicates the accounting as reported leaves much to be desired. The fact is that CB's could never withstand an audit.
Gold no longer has a true monetary function anymore either.
Roadrunner, I will have to side with Cladking on this statement as it is no longer possible to use Gold or Silver as money, there is just not enough to go around with the amount of free people on the planet. In days of old, common folks just did not have, or were not allowed to own these metals. Things are mush different now to say nothing of the populations.
On the other hand both Gold and Silver are an excellent investment to hold in lieu of all this worthless paper. They both have great benefits, they can be bought in small amounts, easily stored, and all things considered they are still fairly cheap. I think the Fed, and others watch Gold to see if the panic has started!
The roles of both Gold and Sliver has changed drastically since the late 70’s they now only react to how much new paper is being printed in the World, and its continued devaluation.
I think one thing to keep in mind is that eventually there must be a re-call, or collapse of all this paper, and when that happens both Gold and Silver should drop very little in price as currencies around the World are exchanged at different rates, some 100 for one and other 10 for one.
Well Goldsaint, the paper certainly isn't worthless. From the governments constant maipulation of it's values, you will probably have to work many many more years than you should have to.
Gold has been running in perfect step with the US dollar for years now. While it may not be identical to an FRN, it's function is to keep the FRN honest....and that it has been doing. If that doesn't say that gold is currency, and the only real one, I don't know what does.
There is actually enough gold to keep our currency honest. To come up to full price for the abused of the FRN over the past few decades, gold would only have to rise to $1600 or so. The other world's currencies are linked to ours and they can be valued in a % of our currency.
From RR: "On a lesser note, what if they just came clean, along with all govt's to have their gold holdings audited and posted? In other words made fully transparent for the first time in decades. The effect would be immediate and quite powerful."
Interesting statement but when I thought about it I realized that I certainly wouldn't tell anyone if or how much gold I owned so the result of CB's disclosures may indeed have a dramatic effect but to what end and...does it really matter how much gold the CB's actually have because we never have known and things seem to be chugging ahead with a modicum of confidence.
I do know that there is regular discussion in the papers (every month or so) of folks like Central Banks planning on letting go of part of their gold stores but the wierd part about those stories is you never hear that they actually did it or for how much or what the rate was or anything...things that make me go hummmm.
Until something takes it's place, gold is just that...the "gold standard" and everything is measured against gold when you actually get to really measuring. Yes, everybody watches gold and I suspect Mr. Greenspan spends a fair amount of time including gold's situation in his evaluations, it is a critical part of any financial analysis. It's it does seem that is it indeed all about gold, IMO.
The current craziness that is shadowing the financial world right now makes me think of that old Hunter S. Thompson, PhD that said..."when the going gets wierd, the wierd turn pro!".
GATA feels that the CB's sold off half of their gold in the 1990's to sustain currencies strong and keep gold at bay. That means they sold 15,000 tons after starting at 30,000 tons. 50% of what they owned just to keep gold in check. Of course mainsteam financial USA does not buy this number and suggest something much less. To assume otherwise would have weakend paper assets and hindered thier own profits. However there is no way to find out the truth. It's common place for a govt or CB to "lease" (sell off) gold to another country but still carry the gold on the books. It's impossible to tell who owns what. And you can bet that the holders of the gold bullion will not reveal what they own for fear of shaking the market. You can bet however that what they own is less than what they proclaim to have on the books.
It's only a matter of how much short they are. If they had only sold off say 5,000 tons in the past 15 years, they would still be selling gold off and we wouldn't be over $350/oz right now, let alone $400/oz. It would make sense that the abrupt end to CB sales indicates they have sold off way too much gold for way too little benefit. The UK, who gave up all their gold at $265/oz must feel like fools. And now that they are stepping up their buying of US treasury debt to balance off the loss of China and Japan, they must be betting double or nothing. Of course now that they have no gold, they are quick to suggest that others give up theirs, however no one is listening.
More on China...From this mornings op ed section from an American visitor with a business there titled "The China outsiders don't know"
. China has more than 200 cities with populations of more than 1 million and the most populous city in the world, not just China, is Chongqing, located squarely in the center of China.
. Lest anyone forget, China is still a communist country, founded on the prinicple of equalization of economic and other resources. These resources are far more limited than we realize and will hamper economic growth. The poor state of the environment, severe water shortages and a truly scary health-care system could profoundly handicap China, as well as hurt the rest of the world.
. (regarding the revaluation of the Yaun) Realistically, even a massive revaluation, on the order of 30%, would not get U.S. companies now manufacturing in China to shut down and reopen in the U.S. We are in too deep, and China is too entrenched as the world's manufacturing hub.
.China's financial system, particularly its banks, is driven by policy considerations and connections rather than good commercial credit guidelines. In spite of minisculine returns, China's middle class keeps saving, and in fact has achieved the highest savings rate of any country-nearly 40% of income. Chinese have incentives to save, not because of high interest rates but because the world's largest socialist country no longer offers its citizens much of a social safety net.
Our govt suggesting a revaluing of the Yuan is simply fluff to keep the manufacturers happy (and retain their votes). The fact that the Chinese send us cheap imports, and we are hooked on them, has been a boom for our economy. Removing the Yuan's dollar peg will only make those imports rise in price and in the end, cost our dear consumer even more as they scramble to find these goods elsewhere....at more money. The fact that our labor will never be cheap enough to compete overseas in manufacturing still means that our exports can't be competitive. We've made our bed and the link with Asia needs to be maintained for the health of our economy. Putting tarriffs on these imported goods follows the same twisted logic that occured in the early 1930's to worsen the depression.
There has been a deficit in silver for over 20 years now, using approx. 200 million ounces more than we produce. The US gov't, which had a stockpile of something like 10 billion ounces several decades ago, ran out of silver in 2004, thus making us no longer a seller of silver, but a permanent buyer of silver from now on. Most of the silver used in industry, which is the largest market for silver, is used up for good and gone forever. Whereas, most gold above ground only gets re-used. Silver that is used up is gone for good, and with demand outpacing production for some 20 years or so, the world is running out of silver. This by Ted Butler:
WEEKLY COMMENTARY
January 4, 2005
FRIEDMAN’S THEORY
By Theodore Butler
I believe my friend Izzy has discovered a powerful and amazing fact about silver that’s been overlooked. Sometimes you see a thing in front of you, yet don’t focus on it or see it in the proper perspective. Then one day a light bulb goes on in your mind and you see it in an entirely new perspective. That’s when you exclaim to yourself, "Eureka!" I have been fortunate to experience this phenomenon on a number of occasions in my pursuit of knowledge about silver, notably in discovering the fraud and manipulation of metals leasing and the outsized paper short position on the COMEX. It was only by looking at things with a different eye that their true nature emerged.
About the last thing I was looking for lately was a completely new bullish factor in silver that would take my breath away. After all, let’s be realistic, how much more bullish could I get over silver? But, despite not looking for a knockout bullish punch for silver, it found me. This new factor just about knocked my socks off.
Since I’m sensitive to having original research confiscated by others without proper credit, I want to be clear that the source of this new bullish finding is my good friend Izzy Friedman. Simply put, Friedman’s Theory holds that, on a relative and absolute basis, there is less silver remaining underground than any other important metal. There just isn’t that much left anymore. If he is correct, it should make you run, not walk, to buy silver. Because that would mean that not only are we running out of above ground silver, we are also running out of silver below ground (in the earth’s crust) much sooner than anyone has imagined.
So profound is Friedman’s finding that I dismissed it at first, yet given my respect for the man, I investigated his claim. I went to the mineral surveys of the United States Geological Survey (USGS) and reviewed their latest studies on the major metals for 2004.
The following table reflects their information. I was looking for how many years of each metal remained to be mined. I’ve divided current annual world production into known world reserves (reserves that are proven). I’ve also divided annual production into the much larger resource base, which is the amount of silver thought to still exist in the earth. I’ve rounded the numbers in some instances to keep it simple.
I chose the statistics from the USGS because they are comprehensive and free of any known bias. It certainly is not my intention to mislead anyone or distort the information. I believe the USGS statistics to be generally accurate. Any other sources I checked all confirmed the USGS data.
Commodity Production Reserves Resource Base Reserves Resource Base
(………Metric Tons………..) (… .Years Remaining…)
Aluminum 30 million unlimited unlimited 100+ 100+
Copper 14 million 470 million 940 million 33+ 67+
Lead 2.6 million 67 million 140 million 23 48
Nickel 1.4 million 62 million 140 million 44 100
Zinc 8.5 million 220 million 460 million 26 54
Silver 20,000 270,000 570,000 14 29
Gold 2600 43,000 89,000 17 34
PGM 350 70,000 80,000 200 200+
(Platinum+Paladium)
(A couple of notes on the data. The USGS considers the raw material needed for aluminum, bauxite, to be inexhaustible over the next century and beyond, and indicated it’s only a matter of aluminum production capacity that could possibly curtail supply. I was a bit surprised with the reserves and resources in platinum and palladium, which are much larger than I thought, but the Johnson Matthey web site confirmed the data.)
One thing should jump out at you; that on an absolute and relative basis, there is less silver remaining underground than any other metal. In other words, at current production rates, we will run out of silver before we run out of any other metal. The USGS confirms and validates Friedman’s Theory.
These statistics should shock you. I’ve looked at reserve and resource statistics for years, but for some reason never thought the numbers through. Nor had I thought that we might exhaust underground supplies of silver in a relatively short time period (1 to 3 decades). It was enough to contemplate when above-ground supplies would be exhausted. If these statistics are close to being accurate, and I have no reason to doubt them, this changes everything.
Let’s face it; we know all mineral resources are finite in existence. While more resources may be discovered, no new mineral resources are actually being created. Once they are gone, they’re gone. It is common knowledge, however, that we will always find and produce enough of everything, given the correct price incentive. But now that common knowledge may be questionable. In oil, for instance, many experts point to a given production amount (Hubbert’s Peak) where the world faces declining production. The U.S., formerly the world’s largest oil producer, has been producing less oil for decades when oil fields have been depleted. But no study, that I’m aware of, suggests an exhaustion of petroleum reserves and resources in the next one to three decades.
In silver, we face that reality. Not only is total U.S. production down some 30% over the past few years, but what was formerly the largest silver producing state, Nevada, has seen its silver production decline by more than 50% over the past 4 years, due to ore bodies being played out.
Also in silver we have a unique geological circumstance, known as "epithermal deposition", which holds that most of the silver in the earth’s crust was deposited near the surface. Consequently, there is less silver available the deeper you go. For a mineral mined and exploited for five thousand years, it would seem to reaffirm the USGS data.
There is no way we can keep producing at current rates until the moment of complete depletion in any mineral. That would be absurd. But the data indicates there are limits to what can be taken from the ground. And the data clearly shows that there is less silver below ground relative to current production than any other metal.
This is the main point of Friedman’s Theory. While there are more tons of silver in the ground than gold, it’s because so much more silver is extracted annually that silver will be depleted much sooner than any other metal. That’s the shocker.
I don’t doubt for a moment that there will be increased mine production in response to a significant spike in silver prices. But the irony is, if the reserve and resource data are correct, higher production only reduces the number of years minable silver will be available. Therefore, higher silver mine production would, ironically, be bullish.
One other factor should be considered. If it becomes obvious, in time, that the world is running out of silver and other minerals due to depletion of below ground reserves, there will be profound changes in how the remaining reserves are valued and perceived. Countries fortunate enough to hold the majority of the remaining reserves will, undoubtedly, look to husband those reserves and extract maximum value. This will only increase the risk to mining companies of taxation and nationalization. It will only enhance the value of physical silver holdings.
Gold investors should be encouraged with these findings. Next to silver, the USGS indicates there is less gold in the ground than any other metal. The small number of potential years of gold in the ground, at current production rates, was also a surprise. But considering that gold, like silver, has been explored and produced for thousands of years, it makes sense.
But, as I have tried to point out recently, there is a decided difference between gold and silver. Because gold is revered and relatively expensive, it’s principally used is for jewelry and investment, not for industrial consumption. As such, almost all of the gold mined from the earth remains in existence above ground. This is sort of like a giant transfer process, in which gold merely changes classification, from below ground to above ground.
Therefore, even if all the gold is eventually removed from the earth’s crust, all that cumulative gold production will have been added to above ground inventories. Using the above table of USGS data, that means if we were to remove and exhaust all the 89,000 tons in the world resource base over the next 34 years (at current production rates), we would theoretically be left with zero in the earth and three billion ounces added to above ground inventories.
Using USGS data, if we were to remove and exhaust all the silver in the ground, we would theoretically extract 570,000 tons (over 18 billion ounces) over the next 29 years. While 18 billion ounces of silver is truly an enormous amount, it would be consumed at the end of three decades and we will not have added an ounce to above ground inventories. At that point we would theoretically have no silver in the ground, and will have long exhausted above ground inventories. That’s zero below ground silver and zero above ground. The only question is how many zeros we have to add to the price to prevent this from happening. This data is so bullish for silver as to defy description. I implore everyone to study the facts closely, because if you do, you will include silver in your portfolio. It will be impossible not to. Years ago I wrote that the fundamentals of silver were so bullish and so compelling that I couldn’t make them up if I tried. My imagination was not that vivid. This new observation by my friend, Friedman brings that same thought to mind.
Here we have a vital material, known to all men for all time, literally disappearing before our eyes, both above and below ground. It is a material upon which modern life and rising standards of living are dependent. It is beyond indispensable, it is a miracle metal. Due to an obvious manipulation, its price has been kept so low as to defy the law of supply and demand, and logic itself. It is this very manipulation that has created something the world has never witnessed; a long-term structural commodity deficit that has vaporized 5000 years of cumulative production. Now, we are given evidence that we have less of this miracle metal remaining in the ground than anyone imagined. These basic and verifiable facts are unknown to almost all investors and potential investors, creating the opportunity for the select few to position themselves before the truth is widely known. All you have to do is verify the facts, use your common sense and buy silver.
In the spirit of the season, I’d like to say something that I’ve been meaning to say for a while. This research and opinion is distributed at no cost to the reader. I feel fortunate for the opportunity of being heard. I’m confident that many will prosper because of these writings (many already have). Nothing could make me happier than to have many regular people profit from my efforts. If you do find yourself financially enriched by silver, remember those folks in the world with afflictions. Plan on donating to charity a nice slice of whatever profits come your way.
Peace,
coinfool "You broke the bonds and you loosed the chains; carried the cross of my shame, of my shame--you know I believe it..."
One more thing about industry and silver and the alleged demise of industrial silver use due to the digital camera:
WEEKLY COMMENTARY
May 24, 2005
All In
By Theodore Butler
"The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
The most recent Commitment of Traders Report (COT) confirmed the continued powerfully bullish market structure in COMEX silver. For three weeks running, the dealers have maintained their lowest net short position in years, as the tech funds have abandoned the long side and have rushed to the short side in silver. As such, the downside remains limited, and the upside wide open.
While such a constructive silver COT configuration is all one should need to be aggressively long in silver, at any time, the biggest new development has been in the dramatic improvement in the COT structures of related markets, like gold, copper and the dollar. In fact, in addition to the strongly bullish structure in silver, the COTs of these other markets are also in their most bullish configurations in years. And, as bullish as the COTs are in gold, I still maintain that the gold structure is much better than reported, when adjusted for the large and uncommon non-tech fund long position in the non-commercial category.
Unless one believes that the tech funds have somehow come to realize that they have been the patsies and have now tricked the dealers into getting more long and less short than the dealers have been in years, it would appear that the tech funds will once again have their heads handed to them, when we rally in silver, gold and copper, and sell-off in the dollar. The only real question is how much pain the dealers inflict on the tech funds when these funds rush to cover their short positions.
It should be remembered, of course, that the COTs are not a timing device, but more of a directional indicator. As such, we must allow sufficient time for them to work. Just like in tossing horseshoes or hand grenades, close enough in the COTs counts more than pinpoint accuracy. Right now we are structured favorably enough in all the COTs, so as to be "all in" in silver. We may get more favorably configured amid lower prices, but the bigger risk is in missing the coming upside move.
Here’s a quick update on the May COMEX silver delivery situation. The day after last week’s article, the bulk of the then remaining 2000-contract open interest were delivered, as expected. The one real lesson that I think should be learned from the May delivery situation was the apparent unwillingness or difficulty experienced by the shorts in making actual delivery. As it is, there are still 200 contracts open, which represents one million ounces, with only two days until last trading day.
Once again, there is no legitimate economic reason for a short not to deliver as soon as they possibly can, save they don’t have the material. About the best thing one can say about the May COMEX silver delivery is that it is nowhere near as extreme as the May COMEX copper delivery, where there are over 2000 contracts open with the same two trading days remaining. Interestingly, this number of contracts in copper is more than all the total copper in COMEX warehouses, something I have never seen before. This is a very extreme and unusual circumstance. I don’t know what conclusion to reach other than copper is, obviously, very tight and that the management of the COMEX doesn’t seem quite on top of the situation in allowing such a development.
BUTLER IN BARRON’S
The following article appeared in the May 9 issue of Barron’s:
PICTURE THAT!
Digital photos might not sink silver
By Jim Hawe
Ever since Sony unveiled its mavica digital camera in 1981, the prevailing opinion has been that the silver market would fall on hard times as consumers ditch their clunky old film cameras for the exciting new world of digital photography.
But according to recent market studies, a very different picture is developing for silver, one in which traditional and digital photography will likely coexist for years to come, with digital both hurting and contributing to silver demand.
According to a J.P. Morgan report, the photo industry gobbled up 6,428 metric tons of silver in 2002, but demand from this sector is expected to come to only 5,492 metric tons in 2005 as the digital-camera boom takes its toll.
Ted Butler, Florida-based independent silver market analyst, avers that the worst may be over for the metal. He argues traditional silver-halide-based photography will be around for some time, as costly digital applications fail to make big inroads in the high-growth, heavily populated countries like India and China.
Keep in mind that digital-camera users typically use personal computers, printers, battery packs, memory cards and other accessories to produce photos. This can run to hundreds, if not thousands, of dollars, while a disposable will only set you back about $10.
Butler also believes the markets for digital cameras in developed countries could become quickly saturated. One sign: According to Japan’s Camera and Imaging Products Association, Japanese digital-camera exports fell in February for the first time, slipping 0.9% from a year earlier, to 3.29 million units.
A surprising development in the digital boom is the fact that many shutterbugs are taking their prized digital snapshots to processing shops to have them reproduced on glossy, high-quality photography paper, which is loaded with silver.
Digital images printed on plain paper tend to fade and can become easily damaged by moisture. A lot of people are not willing to take these risks with their wedding photos or pictures of the new baby.
Photofinishing News, a market research and publishing group, just completed an extensive report projecting photographic demand for silver through 2010. While this group expects a gradual slide in the number of prints from film cameras, it expects this drop to be offset by a rise in prints of digitally captured images.
While the drop in the number of film rolls being used cuts into silver demand, it also takes a chunk out of supply, as less silver is being recycled from these rolls. "The key point to bear in mind is that photography is a double-edged sword and structural changes affect both demand and supply," says the J.P. Morgan report. "This originates in a large portion of traditional film supply being sourced from recycling and recent trends indicate that while demand from the photography sector has declined, scrap supply from recycled film and flakes has declined simultaneously."
Butler believes this idea of digital photography dooming silver has shifted the focus away from the many compelling reasons why investors might want to add a silver lining to their portfolios.
"There is the continuing market deficit, which is the most bullish condition possible for any commodity," he said, adding silver has the largest short position among speculators of any item in the history in the Commodity Futures Trading Commission’s weekly commitment of traders report. Those bears eventually will have to buy the silver contracts they sold.
The average spot silver price jumped from $4.80 an ounce in 2003 to $6.90 an ounce in 2004, roughly the same time the digital-camera market was exploding. "That’s the craziest thing," says Butler.
J.P. Morgan forecasts an average silver price of $7.10 an ounce in 2005, noting that "the price rally which started in 2003 was a justified price correction that more accurately reflects silver’s fundamental market balance." July Comex silver settled Friday at $6.96 an ounce.
The present risk/reward scenario "looks great!" Butler asserts. "It’s hard for me to see how someone can be hurt with silver right here and how very good things can happen to someone with a long-term perspective," he says, adding that any big move under $7 should be seen as a good time to "load the boat!"
That could make for a nice picture.
Peace,
coinfool "You broke the bonds and you loosed the chains; carried the cross of my shame, of my shame--you know I believe it..."
Although I tend to be very skeptical of metals hype, there are two facts regarding silver that cannot be reasonably disputed in my opinion.
1. The demand for silver exceeds annual supply and has done so for many years. There is no sign this will change anytime soon. 2. Silver has unique chemical properties that cannot be duplicated by any other substance in the universe. It has the highest electrical and thermal conductivity, the highest reflectivity, and the lowest contact resistance of any element. The implications for a world more and more focused on electrical technology is obvious.
That being said, silver has had a very nice gain in the last couple of years and I wouldn't be suprised if there were a few more bumps in the road before it skyrockets. Governments are always short sighted and probably think the recent run up is an excellent opportunity to unload their stockpiles.
"...reality has a well-known liberal bias." -- Stephen Colbert
<< <i>Ted Butler always thinks silver is a Buy. He's like a stock broker in 1999.... >>
Perhaps, but I have YET to meet anyone who can explain, given Iwog's two points, how silver can fail, at some point, to rise dramatically in price. Want to take a crack at it? If we use more than we produce of a commodity and have every year for the last 30 years, and according to the USGS we are running out of silver below ground (not an unlimited supply), how can the price not go up? Supply and demand does not apply to silver?
I heard they were making a French version of Medal of Honor. I wonder how many hotkeys it'll have for "surrender."
With the exception of three spikes and two dips, I'm looking at the same $6/$7 silver that I've been seeing for 20 years. Assets should appreciate over time, especially after 20 years.
Yes, assets should appreciate over time if the markets are left to actual supply and demand. Such is not the case for gold or silver. There is hardly enough actual silver to cover what the contracts traded on the comex sell for on a daily basis. Yet paper contracts (bluffs or gambles) move this market. The same is true of the gold market. The overseas gold market trades much more based on physical gold than does the New York comex. Hence, it is far easier for anyone trading in paper gold to more easily move the market from New York. This is of course advantageous to those who would like to see gold stay level. With very little physical gold, and the threat of paper contracts, the market is easily swayed by small amounts of selling. Isn't it ironic that even though inflation has halved the apparent value of assets since 1980, and the money supply has increased about that much, that gold is selling for the equivalent of $200/oz today (silver for $3.50/ounce). Yes, this makes no sense.
Gold and silver have not traded in a "free" market for 25 years. It will take more time to work these issues to the surface.
Comments
Thanks for references to mortgage date.
I am not surprised that nationwide, about 2/3 of mortgages are adjustable rate or interest only combined. It is remarkable, however, that 60 + % of new mortgages in California are interest only. I guess the Californians want to stay ahead of the curve! It is hard to imagine anyone buying in that market; definitely short the stock of any bank that would offer a 0-down interest only loan in California.
An article in today's WSJ suggests that people are beginning to leverage debt to buy "investment" real estate. I would have little or no concern if the housing bubble involved homeowners who were about to experience a ten year period of negative equity. If leverage becomes widely used, it might be so fun.
My gut feeling is that this will burst within a couple of years, but the ramifications will be no greater, and probably less than the internet bubble. In the internet bubble, a relatively small group of people lost big dollars, and a large group of people (mutual fund investors, defined contribution plan investors, and indirectly defined benefit pension holders) lost moderate amounts of money. There will be some ripple effect in the fixed income markets, but we should muddle along as always.
An interesting question -- from 1995 - 2000, America's upper middle class, looking for a quick buck, played the stock market; from 2000 - 2005 they have moved to real estate; what comes next?
Higashiyama
I'd answer that but am unqualified as I am lower middle class and haven't the slightest clue.
Seriously, for those boomers who can get their money out of RE----I'd say(in the next 10 years) 1. investments that provide a yield 2. vacation/recreation/retirement properties and 3. hospital/medical bills.
JMHO
from a home mortgage into a S&P 500 Mutual fund you would
probably have a nice pile of money in 30 years.
If one bought a home, the main reason is life style.
Additionally, The home has leverage. Say a 300,000 dollar
home appreciates at 5% a year, the house would be worth
315,000 in one year. If you placed 20% down or 60,000
That would be a 25% return on the down payment. Your house can
in time serve a a piggy bank for low cost LOC loans or refi. A home can be
willed to someone and they receive the home at its stepped up value, no tax.
You can sell your home and you and your spouse can pocket up to 250,000 each
tax free. For working people, the home has represented the greatest amassing of wealth
then any other means. IE# a home in California by the ocean sold in 1975 for 53,000. That same
home today, sells for 1,450,000 dollars.This of course is a more extreme example in a hot Cal market,
but I am sure that other areas of the country can sho equally enormous increases in home values.
Camelot
<< <i>Yep. Houses are AWFUL investments. I prefer ...... CARS! Now THERE'S something that holds VALUE.
Especially mid-size American sedans. R8 in my book.
Actually, certain American cars have appreciated dramatically in the last few years.
An original (restored) 1970 SS-454 LS6 Chevelle convertible will sell for substantially
more than $100,000. Some of the "Hemi" 'Cudas and Challengers have sold for
close to a million dollars.
Basically, American "muscle" cars from the sixties and early seventies are being
snatched up by entusiasts at a rapid pace. They have been the hottest area of
the collector car market for the last few years.
In fact, my cars have appreciated more in value (percentage wise) than the coins I had.
PS: Here is my mid-size American sedan:
Absolutely correct.
However, the leverage example works both ways. If the $300,000 home's value stayed flat, the $60,000 experienced....
-$9000 to mortgage interest
-$9000 to property taxes
-$3000 to insurance
-$3000 to maintenance
+$2000 in Fed tax write offs
? to higher electric, gas, and water bills.
an overall 20+% loss on the investment.... and it recurrs every 12 months like clockwork.
<< <i>Why are people saying that utility bills are higher in homes than in apartments? Just curious. I view dozens of gas accounts every day and I don't see any difference in natural gas usage. >>
The electric bill is the main difference. It's much harder to cool a free standing building that it is a section of a building that has cooling going on already on as many as three sides and either the floor or ceiling or both. Not to mention the house is usually quite a bit larger. Years ago I sold my townhome and my electric bill went from $145 average to $400 for rougly 50% more under roof space. That's about twice what you would expect, all things being equal(which they aren't).
John Marnard Keynes, The Economic Consequences of the Peace, 1920, page 235ff
TOPSTUFF
Nice thing about a Taurus is that you can roam around Lawndale incognito.
Giving the timing of the internet boom and the housing market we now find ourselves in, I suppose such comparisons are inevitable. Still, I personally think there are more differences than similarites. Namely, when the bottom fell out of dotcom, there wasn't much left since all that was ever there to begin with was speculation. With houses, like coins, markets may ebb and flow, (sometimes dramatically,) but some value will always be retained; at the very least, you can always take stock in the fact that whatever price you paid for something made the transaction worthwhile to you.
Another thing that makes the housing market different from dotcom, is that while hype surrounding new technologies and new possibilites fueled the tech-boom of the late 90s, there are VERY tangible factors that have each contributed to the present day real-estate boom.
For one thing, in the mid-90s, realestate at least in Los Angeles, was downright depressed due to the shrinking of the defense industry that occured following the end of the cold war. Dotcom, for everything it didn't do, did at least put money back into people's pockets to buy things like realestate.
At the same time, price trend-setting places like New York, San Francisco, and of course Los Angeles have become inarguably better places to live in the past decade. They are cleaner, safer, and more culturally attractive. People are willing to pay more to live there, and in turn that effects prices everywhere.
Another thing that boosted real-estate, was the collapse of dotcom itself. It is a well-known fact that when the stock market becomes uncertain, that people look to shore up their money in safer places like real-estate. As it happened, just as the real-estate market was seeing this infusion of capitol, interest rates fell dramatically, thanks again to unstability of the stock market, and also in no small way to the efforts of Osama Bin Ladin. The rates to which interest rates fell in many cases doubled the purchasing power of the dollar when it came to buying a home.
So will the housing bubble will burst? Personally I think it's more likely to exhale, maybe, but that's it. As people have said, there is a life-style componant to home ownership that people are not going to want to give up. I know I like my house, and would rather wait out any economic downturns here than sell it at a loss.
Also, as I see it, there is something coming that may buoy the market even further: inflation. Without having this dialoge descend into a debate of conservatives vs. liberals, I think we can all agree that inflation may be the inevitable byproduct of rising fuel prices, higher interest rates, and an ever-increasing national debt. As high as home prices are now, I can already hear people saying "A half-million dollars just doesn't buy what it used to." (Or maybe I'm heairng that already because I live in LA.)
In any case, I really like this thread - it's a chance to think about things. I hope I didn't offend anyone, and I readily acknowledge that many of you know more about these things than I do.
Just Wanted To Throw In My $.02
- Artist
>>>My Collection
Knowledge is the enemy of fear
Electric: $35 to $90
Gas: $0
Water: $0
Cable TV: $0 (basic)
2000 sq ft house House utilities: ($400/month)
Electric: $110 to $375
Gas Minimum bill is $20 to $170
Water: $42 to $120
Cable: $45 (basic)
Utility tax: $85
I guess its perhaps muddle through the stagflation until we have the deflation?
“What we can say with a certain degree of confidence is that the Fed will keep raising interest rates until they arrive at a "neutral rate," i.e. an interest rate that is neither stimulative nor contractive for the economy. Reality is something different. The Fed can never truly arrive at a neutral rate. They habitually raise rates until something breaks—usually either in the economy or the markets, but in most cases it's both. The days in which the Fed could fine-tune the economy ended several decades ago with the emergence of the financial economy. Today, even more money is injected into the economy and the investment markets outside the traditional banking sector. Last year the US economy added $2,718 billion in debt. However, the broadest measure of the money supply (M3) expanded by only $587.5 billion. For those who are relieved that money supply growth has slowed down, take no comfort. Credit expansion in the US is rampant as reflected in last year's total credit expansion of $2,718 billion.
Along with the redundant talk over the current “soft patch” in the economy, we have benign talk of inflation. The investment markets believe that the Fed will keep inflation contained through its successive rate hikes and there is more talk about deflation in the air. Never before have I seen such abuse of language as it pertains to inflation and deflation. Total credit expansion of $2,718 billion is inflationary not deflationary. A $10 trillion increase of total credit to $36.2 trillion is inflationary. Derivative growth of $50 trillion is inflationary. It is why commodity prices are rising around the globe. It is why the US trade deficits are worsening, and it is why McMansion prices keep going up in the suburbs. The National Association of Realtors reported this week that median prices for previously occupied homes rose at double-digit rates in 66 out of 136 metropolitan areas that it surveys. In Florida, California, Nevada, and New Jersey prices have risen 46%, 33%, 29%, and 23% respectively. This is asset inflation not a bull market.
The confusion today over what constitutes inflation stems from the fact that most analysts only recognize one form of inflation, which is rising prices in an economy. Rising asset prices—whether in the financial markets, in stocks or bonds, or in the real economy with real estate or lower mortgages—is not viewed as inflation. Analysts prefer the term "bull markets." Short-term interest rates below the inflation rate, P/E multiples over 20 on the S&P 500 and as high as 44 on the Nasdaq, dividend yields of 1-2% on the S&P 500 and the Nasdaq, and long-term interest rates of 4.11 to 4.47% on the 10-year note and 30-year bond are not considered to reflect inflationary tendencies. Inflation has and always will be a monetary phenomenon.
Simply put, it is too much money chasing too few goods. In the asset markets, it is too much money chasing too few assets, so the prices of those assets rise. In the real economy, it is too much money chasing too few goods, so the prices of goods rise as we now see in most commodities. A rising and expanding trade deficit is another form of inflation. It is excess demand that is made up by foreign imports. Without those imports, inflation would be a whole lot higher in the US. The burgeoning trade deficit is what has moderated price increases in the US.
Even when it comes to stated inflation rates, as reflected in the CPI and PPI, most experts believe these essentially fictional numbers. Most inflation gauges are highly manipulated by hedonics and by skewing what is measured. One analyst recently exhibited his own ignorance of the CPI by extolling deflation with an example citing the drop in CPI between 2001 and 2003. As I wrote in “Let's Get Fictional,” the drop in the CPI from 2001-2003 was due to the combination of lower rents and lower used car prices. Had the government shown the increase in new car prices and new home prices in the CPI, everyone would have been talking about inflation instead of deflation.
Even with skewing the data, signs of inflation are everywhere from higher food and energy prices, which are routinely excluded, to the rise in import prices or more recently the rise in the PPI. This recent rise has been downplayed by the financial press as a lagging indicator. They expect that as the Fed continues to raise interest rates and as the economy slows down, the growth rate in inflation will subside.
There are a number of issues, which the United States faces today. Each one looms larger as the year progresses. Whether it will be one or a combination of issues that tip the balance is hard to say. But I believe the following tipping points should be red flags to the investor as we head closer to the cliff, leading to a fall...
1. Leveraged Carry Trade
2. Growing Trade Deficit
3. U. S. Consumer Debt
4. Banking Crisis
5. Reliance on Foreign Investment, The Rogue Wave
Loss of Manufacturing Cost Advantage
Chinese revaluation of its currency may help the US trade deficit, but I doubt if it will make a major difference. The problem for the US is that the economy of today is not the economy of the 1980s. Our manufacturing base was much stronger back then. When the dollar devalued in 1985-87, the US was able to export its way out of its imbalances. In the 80’s, US exports grew by 5.4% a year and after 1987 they grew by over 10% a year in the following five years. That is because US competition was mainly with industrialized countries where we had a cost advantage. Today the US must compete against emerging nations where we no longer have a cost advantage.
Loss of Manufacturing Base
In addition to no longer enjoying a manufacturing cost advantage, our manufacturing base is much smaller today with much greater import penetration in all major categories of personal and industrial consumption. Foreign-made goods now make up 38% of all durable goods, 54.5% of autos, 56% of computers and office equipment, 57% of semiconductors and office equipment, 57% of communication equipment, 71% of consumer electronics, 78% of apparel, and 99% of all footwear.
In economic terms, the American consumer has acted as buyer of last resort.
Last year American consumers borrowed $1,017.9 billion, up from $839.4 billion the previous year. Since the year 2000, consumer indebtedness increased by $3,246.2 billion compared to an increase of consumer income of $1,440 billion. Most of this increase has come from mortgage debt. Last year new borrowings on mortgages were $884.9 billion, representing 87% of total debt borrowings.[2] Outstanding consumer debt more than doubled to over $10 trillion between 1992 and 2004. While consumer balance sheets continue to be laden with debt, there are very few signs of savings. Last year savings in the US was only $133 billion, roughly a third of what it was in 1995 when savings was $306 billion. In 1995 the US added $4 of debt for every $1 in savings. Last year that figure expanded to over $20 of debt for every $1 of savings. In effect, the American economy has turned into one giant hedge fund.
Debt is now looked upon by most households as an additional form of disposable income. Home equity extraction is what has kept up consumption in this country at above-normal levels. According to Federal Reserve data, US households owed $881 billion in home equity loans at the end of 2004, up from $492 billion in 2000. This represents an increase of 80%. Last year home equity extraction increased by 29%. It is becoming clear that the housing bubble and the equity extraction it reinforces is what is keeping retail sales pumped.
The problem for most Americans is that taxes and inflation are taking their toll on most households. Income gains aren’t keeping up with inflation, which is grossly understated as a result of hedonics. This has lead to more households turning to debt to pay for a lifestyle their incomes can’t support. The median family income has risen only 11% after adjusting for inflation since 1990. At the same time, median household spending has jumped 30% and outstanding household debt has jumped 80%.
Lower Lending Standards
US banking regulators issued a warning to lenders on Monday to tighten up their lending standards. Bankers may be repeating the same mistakes of the last housing bubble of the late 80’s. Lending standards have fallen dramatically. Unlike the last housing bubble of the late 80’s, very little equity is there to cushion the lender. The proliferation of negative amortization and interest-only loans leave lenders with no cushion. The influx of marginal buyers is also putting lenders at risk. Even in the case where homes have appreciated, homeowners are monetizing that appreciation through home equity loans. Bankers are lending up to 100% of the value of a home. In many areas banks and finance companies have lent up to 125% of a home's value.
It's Not Just The Banks Anymore
Real estate loans cut across a wide swath of financial institutions. Close to 55% of home equity loans are held by commercial banks, 14% by thrifts, and 7% by credit unions. The balance is held by finance companies that have in many instances made equity loans in excess of a home's value. Despite the rise in interest rates, the bubble in mortgages and real estate, lending continues to expand. According to the Mortgage Bankers Association (MBA), mortgage originations are expected to total $2.5 trillion this year.
Unlike the last real estate cycle, this time around buyers aren’t interested in building equity. The trend is to buy as expensive a home as the lender will allow. Many experts believe that this trend in ARMs and non-traditional loans reflects the end of a housing cycle. These non-traditional loans leave the homeowner and the lender in a high risk situation. If we are approaching the end of the cycle, then falling prices could come next. If that happens, homeowners with negative ARMs or interest-only loans will wind up owing more than the value of their loan. Even if home prices don’t fall off a cliff or just remain stagnant, many borrowers could be squeezed by rising interest rates.
Zero percent equity in a home leaves lenders extremely vulnerable. It is the zero equity borrower who is most likely to walk away from an obligation when their income is no longer able to handle rising mortgage payments. Creative finance has brought a lot of marginal buyers into the housing market during this housing cycle. Unlike the last cycle where 20% down fixed rate mortgages were the norm, this time no money down, variable rate mortgages or interest-rate-only loans have become the norm.
America’s reliance on foreign savings to finance its twin deficits is another tipping point. Total foreign holdings of T-bills, notes and bonds have risen to $1.977 trillion representing more than 44% of our outstanding public debt. Each month this country needs to finance close to $60 billion just to pay for its consumption of foreign goods. Up until recently foreigners, especially Asian central banks, have been willing lenders. But trade friction is at the top of Washington’s agenda. Pressure is being brought to bear on China to immediately revalue its currency or risk tariffs imposed on its exports to the US. Yet China and Japan are two of America’s largest creditors. Lately their appetite for US debt has been waning. Both Japan and China bought less than $5 billion in Treasury securities between January and February. In March both countries were net sellers. In fact foreign central banks sold a net $15 billion in March compared with net purchases of $11.3 billion in February. Norway was the biggest seller dumping $17 billion of US Treasuries. This is the first time since August of 2003 that central banks have been net sellers.
Private foreign investors have stepped up their buying to fill the void. Otherwise interest rates would be rising by now. The big buying has come from Caribbean banking centers—the home of hot money and hedge funds. Caribbean banks increased their holdings of Treasuries in March from $104.7 billion to $137.2 billion. During the first quarter of this year there has been a definite slowing trend in foreign purchases of US securities. Another apparent trend is that whenever private sector investors show up on the "buy" radar, central banks have used the opportunity to offload more of their Treasury holdings. The combined net buying of US securities dropped to $45.7 billion in March, down by nearly half from the previous two months. Buying was down across all categories from Treasuries to stocks. Stock purchases fell in March from $7.5 billion in February to $1.7 billion in March. It is no coincidence that the stock markets fell in March and in April.
American politicians may think twice about angering our largest creditors. With one of the lowest saving rate among industrial economies, the US is totally dependent on foreign savings to finance our economy from consumption to investments. Chinese and Japanese buying is what keeps interest rates low in this country. They also act as a moderating influence over inflation rates by financing our deficits. Without that money, the Fed would have to print a lot more money. A revaluation of the Chinese currency would surely cause interest rates to rise in this country along with inflation rates. It is estimated by some analysts that if Asian central bank buying of Treasuries was cut in half, interest rates on home mortgages would rise by as much as two percentage points. If that was to happen, the impact on housing would be severe. Imagine what the impact would be on the banking industry.
As the Fed rate hikes continue, risk to the financial system increases because all markets are interlinked. Systemic risks to the financial system have increased and may converge. A misplaced bet in structured credit could backfire—causing interest rates to rise. Narrowing credit spreads could cause the carry trade to unwind—forcing leveraged players to dump their bond holdings—leading to a jump in interest rates. A trade war could create friction in the credit markets—forcing central banks to dump their Treasury holdings or go on strike with new buying. A rise in interest rates could make mortgage payments untenable for overburdened households—triggering bankruptcy. Increased bankruptcies would bring more homes on the market—increasing supply and causing home prices to fall. Falling home prices would increase homeowners and lenders risk as equity evaporates. Each tipping point could lead to the next as they are all connected in a daisy chain.”
By James J. Puplava
May 24, 2005
<< <i>The real con job is spending 200 billion a year playing around in Iraq. Unless this stops, we're going to be bled just like the USSR was bled to bankruptcy in Afghanistan. >>
A drop in the bucket in comparison to all the con jobs this government has sold to which the people have swallowed and even said "than you".
Tom
Coin's for sale/trade.
Tom Pilitowski
US Rare Coin Investments
800-624-1870
An article by Rob Kirby which shows grossly re-adjusted debt purchases by other nations from January. Out of the blue the govt changed these figures by tens of billions of dollars. It appears to have not been mentioned in the press nor a reason given why we can't track this better. Interesting reading. The 2 charts show it all.
The Carribean Hedge Funds and the UK have "picked" up the buying of our debt now that Japan and China have bowed out. Hmmm.
Gold finally bottoming once again?
roadrunner
“NEW YORK (MONEY Magazine) - Twenty-four-year-old Kelly Pearson says the $580,000 ranch-style house she bought near downtown San Diego last August is a dream come true.
It is nice: 1,450 square feet, four bedrooms, two baths, crown molding, a big kitchen with an island and -- quick! duck! -- a 737 jet descending upon her roof with what feels like 10 feet to spare.
Pearson barely flinches. You see, her half-million-dollar-plus house sits just 1,000 yards from the airport's single runway. She's grown accustomed to the near-constant flybys, even if visitors must resist the urge to dive for cover when a plane thunders down. The low, barreling boom of the FedEx jets, biggest of the bunch, rattles the windows. "Every morning," she says, "10:45 on the dot."
With no savings, and a college loan to repay, Pearson took out a mortgage for 100 percent of the price of the house. Closing costs were paid for by a $10,000 gift from her parents (money first earmarked for her wedding).
This new definition of house and home is on particular display in San Diego, where home values -- up 138 percent over the past five years -- have risen faster than in any other big-city area.
It's always been a nice place to live. But now families move every few years to ever-grander and larger homes. It's a new land of his-and-hers walk-in closets, flat-panel TVs and backyard patios with outdoor fireplaces and built-in grills.
North Torrey Pines Road runs up the coast just north of San Diego, descending from a cliff to the ocean. It offers a beautiful view of the Carmel Valley.
Much of the valley used to be flower farms and riding trails, but since even a small bungalow in the area's beach communities can now command $2 million, San Diego is rapidly expanding east. Freshly baked stucco homes line Carmel Valley Road far into the desert.
Manuel Altamirano is a 32-year-old software salesman who grew up in Chula Vista, a largely Hispanic neighborhood near the Mexican border. That's where he bought his first house in 1998: a one-story, 1,200-square-footer with three bedrooms and one bath, for $150,000. He and his wife Eva, 33, put $10,000 down, nearly everything they had. Two years ago they sold it for $320,000, netting $150,000 after commissions and fees.
Most of that windfall went into a down payment and upgrades for their current 2,400-square-foot home in Rancho Bernardo, just north of Carmel Valley. The house cost $533,000, but real estate agents tell the Altamiranos it is now worth as much as $800,000 -- meaning their initial $10,000 investment has grown in seven years to about $294,000.
Ryan and Laura Rothschild have also succeeded in San Diego real estate without really trying. As newlyweds, they rented in Carmel Valley. Then in October 2001, looking for a bargain, they moved to San Marcos, one of greater San Diego's northernmost towns, buying a 4,000-square-foot house for $576,000.
Two years later, Ryan, 31, who owns a costume-making company, and Laura, 36, a professional photographer, sold it for $800,000 and moved into a newly constructed 5,600-square-foot house in Santaluz that cost $1.35 million.
But new houses -- even multimillion-dollar ones -- come with few frills in San Diego. The Rothschilds spent another $850,000 upgrading their home, adding wood flooring and granite countertops, installing beams across the ceilings and turning mounds of dirt into a lovely garden.
Did they ever feel nervous about spending so much? Not a chance. Brokers tell them their house would now sell for $2.8 million, or $600,000 more than they've spent after renovations.
Occupational therapist Angie Carter-Donovan, 31, persuaded her husband Ted, 42, to buy a 1,900-square-foot mess in La Mesa last May for $396,000. It's her fourth real estate investment in seven years, even though the previous one (a new downtown condo she planned to flip) took six months longer to sell than expected. Still, the couple netted nearly $95,000 from that deal and have been pouring money into the La Mesa house ever since.
It's on three-quarters of an acre, one of the biggest lots in the neighborhood, but it needs work. A lot of work. The front door doesn't open. The pipes make loud noises and shake when the water runs. It has -- how to put it? -- that old-house smell.
Carter-Donovan doesn't mind one bit. She believes it'll cost about $100,000 to gut the place and re-landscape. She's pregnant now and hopes the major improvements will be completed by October, when her baby is due. It'll be well worth the muss and fuss, she says, since the house should be able to sell for $750,000 when everything is done.
Michael and Cheryl Roberts, 39 and 37, have been house hunting for six months. They bought their current home, a four-bedroom, 2.5-bath ranch house that sprawls for 2,650 square feet, for $883,000 in the middle of 2001. At the time, Michael, who owns a flag-making company, and Cheryl had two sons. But the addition of a baby girl last year is starting to make their home -- now worth $2.3 million, they believe -- feel cramped.
The Robertses recently saw a $6 million spread that required too much work. The kitchen was old and small; the house had a poor layout. Michael shakes his head in disbelief. "It's hard," he says, "to swallow $6 million for a teardown."
Jerry and Laura Satran's Sunday open house is empty. Their lushly appointed home -- 4,600 square feet in one of Carmel Valley's newest developments -- is the sort of place you'd go out of your way to check out even if you were perfectly happy where you lived.
It has a grand spiral staircase in the front hall. There are five bedrooms and 4.5 baths, formal living and dining rooms, and a game room upstairs that's big enough for a regulation-size pool table. The kitchen has two islands, both with marble countertops.
Jerry, a lawyer, and Laura, a teacher, are asking $1.3 million. But here they are, the second week the house has been on the market, drumming their fingers. The previous Sunday, Jerry says, 40 visitors stopped by.
Two weeks later the Satrans receive an offer: $1.2 million. Not the full asking price. No one seems more disappointed than the neighbors. One woman suggests the Satrans would be hurting the entire block if they settled for less than $1.25 million.
It's insane. We're selling in S Fla. Anyone interested???
We made 500% on some land here recently. Took us 15 months to do so.
Tom
Coin's for sale/trade.
Tom Pilitowski
US Rare Coin Investments
800-624-1870
Let’s Talk Money
May 25, 2005
Bond Market Fighting Fed
by Don R. Hays
Summary: The growth of MZM, the historically most accurate money supply aggregate to predict future economic activity has grown by an abysmal 1.41% over the last one year, and even for the last three years at only a 4.5% annualized rate. For the last 13 weeks, it has actually DECREASED on an annualized basis of 1.75%. In a stable environment, history tells us that a nominal anti-inflationary, healthy GDP growth rate lies in the 5 ½% to 7% range with the upward limit being the long-term norm. Generally, it has taken about the same rate of growth of fuel (money supply) as the growth of the nominal GDP, so you can see that the last year’s fuel supply has been targeted to choke off growth.
Very obviously, the above is a bit simplistic, but over time will prove accurate decade after decade after decade. So the 4.5% growth rate of MZM over the last three years has ALWAYS historically caused either a significant economic slowdown or a RECESSION.
Am I worried? No, because even though the SUPPLY of money appears scary, the indicator that matches supply to demand—the yield curve—is still headed in the right direction, and is just now on the verge of entering the “perfect” zone that historically has produced a balanced supply of money with the demand for money. But we do believe the herd will start very soon to be very concerned that the Fed has gone too far.
Lastly, the stock market rally is still intact, but we still believe that the big bucks are not ready to start showing up in your account’s monthly statement just yet. More volatility should return in the next 3-4 weeks to repair any emerging cracks that might appear in the wall of worry.
Let’s start out by showing our graphs of the growth rate of the MZM aggregate of money supply over three different time frames. The growth rate of each time frame is annualized to put them into comparative illustrations. First, let’s start with the graph that shows the growth over the last one year and the last 13 weeks.
A couple of weeks ago, we were hoping that the one-week increase in MZM (money supply with zero maturity) was a change in direction. But last week took care of that as the weekly stats released each Thursday afternoon revealed another sharp decline. As you review the red line (the last year’s growth) you can see that right after 9-11, the Federal Reserve opened the money spigots as wide open as they would go, producing a huge glut of “free” money. So I wasn’t very concerned in the ensuing months as they started to rein in the growth rate even as they were cutting interest rates.
Many people ONLY follow the Fed policy as to whether they are raising or lowering interest rates, but of course we all know that the fed funds rate is actually an effect of how many dollar reserves are being put into the system. So if there is no demand, even a cut in interest rates (i.e. 2003’s rate cut) can occur while they are reducing the growth of monetary reserves, and vice versa.
The Federal Reserve started to raise their widely watched target for their fed funds rate in July 2004 as they bumped it up from 1% to 1.25%. Since then, on a monthly basis they have ratcheted it up to 3.0% in 8 steps of ¼% each. The Fed is almost always late in their actions, and they also almost always go too far. We believed strongly in October/November 2003 that 26 months after the 9-11 tragedy that forced the Fed to wake up and reliquify the monetary system, like the 26 months after August 1990, that the economy would start to wake up and add jobs. Of course, the election rhetoric was making headlines on the jobless recovery, but sure enough the economy did start to provide an almost perfect rebirth in response to the Fed’s very liquid posture. Here’s that graph of unemployment insurance claims that show the correlation.
It is easy to critique the Federal Reserve, but in truth they are virtually held captive by current news. They would have been lynched way back in late 2003 if they had started to raise the fed funds rate before the headlines and public opinion had caught on to the resurging economic activity. But the vigilantes were giving them strong hints. Let’s look at the commodity prices and the bond market during that time.
You can see that the price of copper and of gold started to move up early in 2002, even as the Fed continued to cut the fed funds rate. By 2003, that rate of increase really started to pick up speed. Now, let’s look at the action by the bond vigilante.
As you look at that last graph, remember bond yields, especially the 10-year T-Note yield, is at its heart a monitor of inflation expectations. Many economists that I admire have calculated that its action is made up of 3/4th inflation expectations and 1/4th economic growth. In the current saga, the trough in the yield of the 10-year T-Note occurred in mid-2003, and by early 2004 had made its first higher high. Almost immediately the Federal Reserve started to raise interest rates. Remember that example, because now I think the next clue might come from when the opposite occurs. In other words, the commodity prices peak out, which they all have in the last two years, with the price of copper and aluminum being the last to make a lower high.
Of course, with oil prices being so widely heralded, the recent decline in the price of oil is VERY important in this process.
In a similar reverse message to the dropping rates in 2001 to 2002, I suspect the Fed will now wait on the bond market to send a very strong warning, by making a lower low in yields….and it is very close to doing so.
The yield on the 10-year T-Note closed yesterday at 4.03% as several dull economic releases hit the headlines. If the Fed raises interest rates one more time, (and it appears they are definitely on that course) it would almost be a certainty that this “lower-low” would be activated.
My point is that they really don’t need to do anything. They should stand pat. But hey, Greenspan’s retiring in 7 more months, and he has a legacy to think about.
We have a lame-duck Federal Reserve Chairman, but one who has a tight rein on the Fed’s voting. With Greenspan’s term due to end in 7 months, he is going to make sure he keeps inflation under wraps as his parting memorial. His long-term record shows that he has never been a great predictor of economic activity OR inflation. But Ladies and Gentlemen, don’t despair, we have the three vigilantes in charge, and if he does go overboard they will spank him into submission. They are now just beginning to show him the belt that could administer the “whuppin” (remember, I’m back in Nashville for the summer.)
Now, before I leave this money supply thing, let me show you the 3-year growth rate of MZM that I promised.
Ed (Hyman) and Nancy (Lazar) tell me that there has never been a time when money supply growth has been this weak, and when the year over year Leading Economic Activity index has been negative—as it is now—that there has not been either a significantly weak economy or a recession.
I believe that will occur, but I keep coming back to that 1994 example, I don’t expect it to get so weak as to severely impact earnings. I expect a slowing however to become obvious to the herd as the third quarter ends, hence my guess that we have one more flurry of downside volatility remaining.
The reason I’m not overly concerned is my trusty yield curve. I must be the only guy in the world that looks at the slope of the yield curve the way mathematicians (remember, I’m an engineer, not an economist) define “slope.” We take the yield of the 10-year T-Note and divide that by the yield of the 91-day t-bill. That is slope. Most economists simply subtract one from the other. That makes a huge difference. For instance, most economist would say the slope of the yield curve would be the same for example one; when the 10-year T-Note yield is 16% and the t-bill yield is 14% to example two; when the 10-year T-Note yield is 4% and the t-bill yield is 2%. In both cases the difference would be 2%. I simply can’t buy that. I believe strongly that the slope is what determines the temptation to lengthen maturities in your investment thesis. So if I was getting 14% for t-bills, and scared out of my wits, would I even think about sacrificing my 91-day t-bill for a 10-year tie up of my investment for only an additional 2%? For a measly 2/14 or an additional 14% increased revenue, would that be the same temptation as if I was getting 2% for my t-bill purchase, and the 10-year T-Note was yielding 100% more at 4%.
So this is my logic and it so far has never failed me. I believe strongly that when you divide the yield of the 10-year T-Note by the 91-day t-bill and it comes out above 1.2 it is a slope that still encourages lengthening maturities, or in other words is promoting growth.
Here’s my yield curve graph.
So while the mainstream economists are now worried that the Federal Reserve have now moved the fed funds rate up to where there is only a 1% difference, and in June it will be only 0.75%, I am saying that this barometer that measures the fine balance of supply and demand is now just on the verge of entering the historically “perfect” zone in which it nestles in the 1.2 to 1.4 ratio, as it did coincidentally in 1994-95.
Of course, if they should raise interest rates to a level that would drive this ratio under 1.2, then that would be BAD!! But I don’t think the vigilantes will allow it.
Okay, I see the clock in Nashville sneaks up on me about the same as it did in Naples , and I’ve got to put a wrap on this. The next few weeks are going to be very important. I think this rally has a couple more weeks left in it, and then I am guessing that the emerging negative economic news, and the LAST Federal Reserve increase in interest rates—up to 3 ¼% will put the last scare in the stock market that will clear the way for the next two years of a barn-burner rebirth of the big BULL.
As of now, we’re still fully invested, and don’t intend to sell anything UNLESS we get a stock or two that begins to cross our acceptable guidelines—fundamentally and technically. So far, we have a couple (out of 31 positions) that are under our close surveillance, but as of today are still hanging in there.
There is more we could say about money. We see the U.S. consumer now has a net worth of $49.1 trillion, with $5.1 trillion of that in short-term type financial instruments, i.e. money market funds. The total mortgage debt is around $8 trillion dollars.
I see velocity of money supply is increasing, meaning it is being worked a little harder. This is normal as the economy picks up and the Fed is starting to pinch the supply down. But it can only be worked so hard, so the net effect will start to come home, and we believe it is already starting.
I’ve got to go now, but we’ll be back with you on Friday morning. See you then.
I really dont understand how you can spend $500-1000 per sq ft on a used house. You can build a new one for $200 per sq ft and have almost the best of everything. Smoebody is getting hosed. I bought my 18yr old house in 2002 for $61 per sq foot. That comes with an oversized 3 car garage, 30x50 barn and almost 4 acres of land. I've put about 5k in upgrades in the kitchen and floors and painting. I couldnt rebuild it for that much.
What I noticed most about those stories is the ages of the buyers. They are very young-20's and 30's. They are just starting their careers and families. These are the same people who thought they could get rich in the stock market 5 years ago.
One last comment....What kind of bank loans out $580k to a 24 yr old kid with such a short work history and no assets?
Knowledge is the enemy of fear
But I will choose gold over the hapless dollar. Even considering its technical bounce of late.
The forces against the US are now too strong to slow down......let alone stop.
It... WAS ..... nice.
The biggest forces against the US certainly were't and aren't outside the US.
Tom
Coin's for sale/trade.
Tom Pilitowski
US Rare Coin Investments
800-624-1870
Thanks again for your post.
It’s a Mad Mad Mad financial World,
“I mean, inflation is up, but bond yields are down, which is the exact opposite of what you would expect. In fact, the yield on the 10-year T-note is barely over 4%! Foreign demand for US debt is down, yet prices for debt go up, the exact opposite of what you would expect. Inflation is up, yet gold is down, again the exact opposite of what you would expect. Demand for oil is up, yet prices are coming down, the exact opposite of what you would expect. The economy is slowing, yet stocks are soaring, the exact opposite of what you would expect. It just goes on, day after day, item after item.”
Americans buy what they cannot really afford...and the Chinese build factories to produce what their principal customers don't have the money to buy. And the whole world economy advances - apparently - only so long as house prices in America continue to rise at three to five times nominal inflation and an infinite multiple of household income, which went backwards in 2004."
According to the US Department of Commerce, American exports to China in 2004 stood at US$ 34.7 billion while its imports from China came in at US$ 210.5 billion, representing a trade deficit of US$ 175.8 billion against China.
• China has a trade and current account surplus; US has record deficits
• China has record-high foreign exchange reserves; US has a record budget-deficit
• China is the 2nd largest creditor nation; US is the largest debtor nation in the world
• China has a savings rate of 30%; US savings rate sits at a miniscule 1%
• China invests in capital formation; US "invests" in consumer spending
• China produces more steel than the US and Japan combined
• China produces 5 times more cement than the US
• China consumes 21% of the world's copper and 27% of the world's iron ore
• China's sugar imports doubled in the past year (1.3 million tonnes)
“Donald Rumsfeld, the American Secretary of Defense, has said "The financial reporting systems of the Pentagon are in disarray . . . they're not capable of providing the kinds of financial management information that any large organization would have. A trillion dollar's worth of stuff, including whole airplanes, has disappeared?
"Now, for the first time ever, lending to purchase real estate comprises more than half of all lending in the U.S." Half of all lending is going into buying overpriced houses?
I am waiting for one of our congressmen to say, “you know folks a trillion here and a trillion there and pretty soon you are talking about real money”
<< <i>Higashiyama
I'd answer that but am unqualified as I am lower middle class and haven't the slightest clue.
Seriously, for those boomers who can get their money out of RE----I'd say(in the next 10 years) 1. investments that provide a yield 2. vacation/recreation/retirement properties and 3. hospital/medical bills.
JMHO >>
Well, with regards to healthcare. 8 weeks ago I went into the hospital and 54 hours later, thankfully walked out. The cost of that 54 hours might you ask?
$84,000.00..................and some change.
Thankfully too I have health insurance but really. 85 G's?
Tom
Coin's for sale/trade.
Tom Pilitowski
US Rare Coin Investments
800-624-1870
The kind of bank we all need to avoid having any assets in.
Tom
Coin's for sale/trade.
Tom Pilitowski
US Rare Coin Investments
800-624-1870
<< <i>
Oh no! is the sky falling again?
<< <i>
<< <i>In fact, my cars have appreciated more in value (percentage wise) than the coins I had. >>
Oh yeah? Well, I'm talkin ..... TAURUS ...... a "sleeper." Not some old gas guzzler crummy GTO ragtop or sumpin.
(My kid has my '72 Monte Carlo that I bought new)
I useta play with cars, but the space and time involved did me in. Had a '65 Mustang ragtop with the close ratio 4-speed. Sorta scarce. Also messed with some Mercedes and an old '29 Chevy.
But, yes..... cars CAN be good.
But the SMART money is doin .............. TAURUSES !!!!!
Ya need 2 of them...
One to crap on and one to cover it up with!
Also citibank made a comment saying that they dont see the 10 yr getting above 4.5% for YEARS. Gee...I wonder where you've heard that before
Why...because bonds in the US are still much cheaper than in other countries.
Knowledge is the enemy of fear
this gentleman has a good head on his shoulders. i don't agree with him all the time but atleast he is pleasant to read, unlike the 'earth rising' writers.
*
Silver
May 13, 2005
Silver bugs believe that, like gold, silver is money. They also believe that the silver price is going to vastly outperform the gold price because of silver’s supply shortage. But silver is not money; it’s a commodity whose price is far more dependent on industrial demand than on anything else. However, because the silver market is so small, it is entirely possible for silver investors to create their own self-fulfilling prophecy. You need to be nimble, and remember to sell, to take advantage of such an increase in the silver price.
Annual mine production of gold is about 80 million ounces while annual mine production of silver is roughly 600 million ounces, yet gold mining revenues are eight times more than revenues from silver mining at current metal prices.
Why is gold expensive and silver less so? Because gold is money and silver is primarily an industrial commodity. Even though silver has, from time to time, been used as money, its chemical and physical properties make it less desirable than gold as a monetary asset. Among other things, silver oxidizes readily, and it is far more abundant than gold.
Annual fabrication demand for silver is well in excess of eight hundred million ounces a year, of which roughly forty percent is used for industrial applications, just over twenty percent for photography, thirty percent for jewelry, and the rest (less than five percent) for coins and medals.
Because annual fabrication demand exceeds annual mine supply, silver investors believe much higher prices are in store. However, since industrial applications and photography account for roughly two thirds of annual silver consumption, fabrication demand plays a key role in the silver market. The silver price is thus very dependent on changes in annual fabrication demand. As a result, continued economic growth in North America and the rest of the world should help the silver price remain strong and perhaps move up, whereas an economic downturn could be quite detrimental to the silver price.
If we look at gold and silver in US dollars, then the relative strength in the dollar since the early Nineties should have had the same effect on both metals if they were priced as money, and their charts should look the same. But they don’t.
Silver actually performed much better than gold during the Nineties because demand for silver supported its price during the high-tech boom in the latter part of the decade. When the tech boom went bust, silver suffered, and its price barely budged from 2001 to 2003 while the gold price rallied strongly. Since 2003, gold and silver prices have moved more or less in tandem, and that is a result of the weakening US dollar. However, if we see a change in the economic climate, the correlation between the two metals’ prices can easily break down again.
The amount of silver typically used in any given application usually represents a very small component of the overall manufacturing cost. Therefore the demand for silver from both industrial applications and photography is very inelastic, meaning that if silver’s price increases, demand does not decrease.
At the same time, because the silver market is such a small market in dollar terms, a relatively small amount of investment demand can cause the price to spike dramatically. And because fabrication demand is inelastic, fabrication demand will not decline due to the price increase.
So speculators buying silver in anticipation of a move upwards can easily create a self-fulfilling prophecy, causing the silver price to soar. But when they want to sell their metal to take profits, the same lack of liquidity that drove the price up will drive it right back down again.
This combination of a small illiquid market, inelastic demand and feverishly bullish investors could cause the silver price to outperform the gold price at some point. However, you must be wary of an ensuing collapse and remember to sell. Silver’s day in the sun might be very short-lived.
Still, there is no guarantee that the silver market will enjoy the benefit of such a self-fulfilling prophecy. Judging by the silver price since 1990 in relation to what we know was going on in the world, it is entirely possible that silver will suffer along with other base metals and commodities during an economic downturn.
As a side note, there will not be a commentary next week. I will be in Reno for the Geological Society of Nevada symposium and then in New York to speak at the Institutional Gold Conference (see www.paulvaneeden.com for details). Hope to see you there.
Paul van Eeden
some of the attributes of money but by definition money is widely accepted. Gold
is not. Gold may be widely viewed as having value much like gasoline or bread, but
most will not accept any of these in lieu of money.
Silver may oxidize a little but it makes a far better money than gold simply because
it is more durable and more usable. It is easily coined and most purchases can be made
with the metal while a gold coin small enough to by a newspaper or a dinner would re-
quire a magnifying glass at point of sale.
While the best thing going for the silver market is the likelyhood of self fullfilled prophesy
the fact remains that it is physically impossible to contiunually use more of something than
is produced. Also silver has proven to be one of the most usefull elements on the face
of the Earth and this is most unlikely to change as the world becomes more electronic, and
more optical.
Silver is the metal of the future.
I guess it depends on how you interpret the stats. Inflation injusted income has been falling for years. Don't forget to include
credit into the equation as credit has been driving the economy for years now.
From Steve Seville:
In addition to the mixing-up of symptom and disease (effect and cause), there is the issue -- an issue that will likely be overlooked by those who think inflation is an increase in prices -- that during the early and middle stages of an inflation cycle some prices will FALL. In fact, Ludwig von Mises and other great economists of the Austrian School have explained that this particular characteristic of inflation -- the way it affects prices in a non-uniform manner -- is what gives it great appeal to the financial and political elite. After all, if a 10% increase in the money supply immediately pushed all prices higher by 10% then nobody would have the opportunity of benefiting from the inflation. The way it actually works, though, is that the prices of some things will rise earlier and faster than the prices of other things, thus allowing some people to profit from the inflation before others become aware of what is going on. Inflation is, in actuality, a surreptitious means of wealth distribution.
In other words "published" prices can be under control (for the moment) with significant inflation underlying the economy.
Gold no longer has a true monetary function anymore either.
The US govt watches gold like a hawk. The central banks actions certainly demonstrate the monetary function gold peforms. It the CB's did not have any gold bullion left (15,000 tones dispersed)
what would that do to world currencies? On a lesser note, what if they just came clean, along with all govt's to have their gold holdings audited and posted? In other words made fully transparent for the first time in decades. The effect would be immediate and quite powerful. It would certainly show the "true" monetary value of gold has not been lost. The fact that the CB's hide their gold holdings and the status of all the various loans and leases indicates the accounting as reported leaves much to be desired. The fact is that CB's could never withstand an audit.
roadrunner
Roadrunner,
I will have to side with Cladking on this statement as it is no longer possible to use Gold or Silver as money, there is just not enough to go around with the amount of free people on the planet. In days of old, common folks just did not have, or were not allowed to own these metals. Things are mush different now to say nothing of the populations.
On the other hand both Gold and Silver are an excellent investment to hold in lieu of all this worthless paper. They both have great benefits, they can be bought in small amounts, easily stored, and all things considered they are still fairly cheap. I think the Fed, and others watch Gold to see if the panic has started!
The roles of both Gold and Sliver has changed drastically since the late 70’s they now only react to how much new paper is being printed in the World, and its continued devaluation.
I think one thing to keep in mind is that eventually there must be a re-call, or collapse of all this paper, and when that happens both Gold and Silver should drop very little in price as currencies around the World are exchanged at different rates, some 100 for one and other 10 for one.
That's a crime.
Not worthless.
Tom
Coin's for sale/trade.
Tom Pilitowski
US Rare Coin Investments
800-624-1870
Tom
I guess that is particularly the case if you owe it!
“I owe I owe so off to work I go”
There is actually enough gold to keep our currency honest. To come up to full price for the abused of the FRN over the past few decades, gold would only have to rise to $1600 or so. The other world's currencies are linked to ours and they can be valued in a % of our currency.
roadrunner
Interesting statement but when I thought about it I realized that I certainly wouldn't tell anyone if or how much gold I owned so the result of CB's disclosures may indeed have a dramatic effect but to what end and...does it really matter how much gold the CB's actually have because we never have known and things seem to be chugging ahead with a modicum of confidence.
I do know that there is regular discussion in the papers (every month or so) of folks like Central Banks planning on letting go of part of their gold stores but the wierd part about those stories is you never hear that they actually did it or for how much or what the rate was or anything...things that make me go hummmm.
Until something takes it's place, gold is just that...the "gold standard" and everything is measured against gold when you actually get to really measuring. Yes, everybody watches gold and I suspect Mr. Greenspan spends a fair amount of time including gold's situation in his evaluations, it is a critical part of any financial analysis. It's it does seem that is it indeed all about gold, IMO.
The current craziness that is shadowing the financial world right now makes me think of that old Hunter S. Thompson, PhD that said..."when the going gets wierd, the wierd turn pro!".
To assume otherwise would have weakend paper assets and hindered thier own profits. However there is no way to find out the truth. It's common place for a govt or CB to "lease" (sell off) gold to another country but still carry the gold on the books. It's impossible to tell who owns what. And you can bet that the holders of the gold bullion will not reveal what they own for fear of shaking the market. You can bet however that what they own is less than what they proclaim to have on the books.
It's only a matter of how much short they are. If they had only sold off say 5,000 tons in the past 15 years, they would still be selling gold off and we wouldn't be over $350/oz right now, let alone $400/oz. It would make sense that the abrupt end to CB sales
indicates they have sold off way too much gold for way too little benefit. The UK, who gave up all their gold at $265/oz must feel like fools. And now that they are stepping up their buying of US treasury debt to balance off the loss of China and Japan, they must be betting double or nothing. Of course now that they have no gold, they are quick to suggest that others give up theirs, however no one is listening.
roadrunner
. China has more than 200 cities with populations of more than 1 million and the most populous city in the world, not just China, is Chongqing, located squarely in the center of China.
. Lest anyone forget, China is still a communist country, founded on the prinicple of equalization of economic and other resources. These resources are far more limited than we realize and will hamper economic growth. The poor state of the environment, severe water shortages and a truly scary health-care system could profoundly handicap China, as well as hurt the rest of the world.
. (regarding the revaluation of the Yaun) Realistically, even a massive revaluation, on the order of 30%, would not get U.S. companies now manufacturing in China to shut down and reopen in the U.S. We are in too deep, and China is too entrenched as the world's manufacturing hub.
.China's financial system, particularly its banks, is driven by policy considerations and connections rather than good commercial credit guidelines. In spite of minisculine returns, China's middle class keeps saving, and in fact has achieved the highest savings rate of any country-nearly 40% of income. Chinese have incentives to save, not because of high interest rates but because the world's largest socialist country no longer offers its citizens much of a social safety net.
Interesting...
Putting tarriffs on these imported goods follows the same twisted logic that occured in the early 1930's to worsen the depression.
roadrunner
WEEKLY COMMENTARY
January 4, 2005
FRIEDMAN’S THEORY
By Theodore Butler
I believe my friend Izzy has discovered a powerful and amazing fact about silver that’s been overlooked. Sometimes you see a thing in front of you, yet don’t focus on it or see it in the proper perspective. Then one day a light bulb goes on in your mind and you see it in an entirely new perspective. That’s when you exclaim to yourself, "Eureka!" I have been fortunate to experience this phenomenon on a number of occasions in my pursuit of knowledge about silver, notably in discovering the fraud and manipulation of metals leasing and the outsized paper short position on the COMEX. It was only by looking at things with a different eye that their true nature emerged.
About the last thing I was looking for lately was a completely new bullish factor in silver that would take my breath away. After all, let’s be realistic, how much more bullish could I get over silver? But, despite not looking for a knockout bullish punch for silver, it found me. This new factor just about knocked my socks off.
Since I’m sensitive to having original research confiscated by others without proper credit, I want to be clear that the source of this new bullish finding is my good friend Izzy Friedman. Simply put, Friedman’s Theory holds that, on a relative and absolute basis, there is less silver remaining underground than any other important metal. There just isn’t that much left anymore. If he is correct, it should make you run, not walk, to buy silver. Because that would mean that not only are we running out of above ground silver, we are also running out of silver below ground (in the earth’s crust) much sooner than anyone has imagined.
So profound is Friedman’s finding that I dismissed it at first, yet given my respect for the man, I investigated his claim. I went to the mineral surveys of the United States Geological Survey (USGS) and reviewed their latest studies on the major metals for 2004.
http://minerals.usgs.gov/minerals/pubs/commodity/
The following table reflects their information. I was looking for how many years of each metal remained to be mined. I’ve divided current annual world production into known world reserves (reserves that are proven). I’ve also divided annual production into the much larger resource base, which is the amount of silver thought to still exist in the earth. I’ve rounded the numbers in some instances to keep it simple.
I chose the statistics from the USGS because they are comprehensive and free of any known bias. It certainly is not my intention to mislead anyone or distort the information. I believe the USGS statistics to be generally accurate. Any other sources I checked all confirmed the USGS data.
Commodity Production Reserves Resource Base Reserves Resource Base
(………Metric Tons………..) (… .Years Remaining…)
Aluminum 30 million unlimited unlimited 100+ 100+
Copper 14 million 470 million 940 million 33+ 67+
Lead 2.6 million 67 million 140 million 23 48
Nickel 1.4 million 62 million 140 million 44 100
Zinc 8.5 million 220 million 460 million 26 54
Silver 20,000 270,000 570,000 14 29
Gold 2600 43,000 89,000 17 34
PGM 350 70,000 80,000 200 200+
(Platinum+Paladium)
(A couple of notes on the data. The USGS considers the raw material needed for aluminum, bauxite, to be inexhaustible over the next century and beyond, and indicated it’s only a matter of aluminum production capacity that could possibly curtail supply. I was a bit surprised with the reserves and resources in platinum and palladium, which are much larger than I thought, but the Johnson Matthey web site confirmed the data.)
One thing should jump out at you; that on an absolute and relative basis, there is less silver remaining underground than any other metal. In other words, at current production rates, we will run out of silver before we run out of any other metal. The USGS confirms and validates Friedman’s Theory.
These statistics should shock you. I’ve looked at reserve and resource statistics for years, but for some reason never thought the numbers through. Nor had I thought that we might exhaust underground supplies of silver in a relatively short time period (1 to 3 decades). It was enough to contemplate when above-ground supplies would be exhausted. If these statistics are close to being accurate, and I have no reason to doubt them, this changes everything.
Let’s face it; we know all mineral resources are finite in existence. While more resources may be discovered, no new mineral resources are actually being created. Once they are gone, they’re gone. It is common knowledge, however, that we will always find and produce enough of everything, given the correct price incentive. But now that common knowledge may be questionable. In oil, for instance, many experts point to a given production amount (Hubbert’s Peak) where the world faces declining production. The U.S., formerly the world’s largest oil producer, has been producing less oil for decades when oil fields have been depleted. But no study, that I’m aware of, suggests an exhaustion of petroleum reserves and resources in the next one to three decades.
In silver, we face that reality. Not only is total U.S. production down some 30% over the past few years, but what was formerly the largest silver producing state, Nevada, has seen its silver production decline by more than 50% over the past 4 years, due to ore bodies being played out.
Also in silver we have a unique geological circumstance, known as "epithermal deposition", which holds that most of the silver in the earth’s crust was deposited near the surface. Consequently, there is less silver available the deeper you go. For a mineral mined and exploited for five thousand years, it would seem to reaffirm the USGS data.
There is no way we can keep producing at current rates until the moment of complete depletion in any mineral. That would be absurd. But the data indicates there are limits to what can be taken from the ground. And the data clearly shows that there is less silver below ground relative to current production than any other metal.
This is the main point of Friedman’s Theory. While there are more tons of silver in the ground than gold, it’s because so much more silver is extracted annually that silver will be depleted much sooner than any other metal. That’s the shocker.
I don’t doubt for a moment that there will be increased mine production in response to a significant spike in silver prices. But the irony is, if the reserve and resource data are correct, higher production only reduces the number of years minable silver will be available. Therefore, higher silver mine production would, ironically, be bullish.
One other factor should be considered. If it becomes obvious, in time, that the world is running out of silver and other minerals due to depletion of below ground reserves, there will be profound changes in how the remaining reserves are valued and perceived. Countries fortunate enough to hold the majority of the remaining reserves will, undoubtedly, look to husband those reserves and extract maximum value. This will only increase the risk to mining companies of taxation and nationalization. It will only enhance the value of physical silver holdings.
Gold investors should be encouraged with these findings. Next to silver, the USGS indicates there is less gold in the ground than any other metal. The small number of potential years of gold in the ground, at current production rates, was also a surprise. But considering that gold, like silver, has been explored and produced for thousands of years, it makes sense.
But, as I have tried to point out recently, there is a decided difference between gold and silver. Because gold is revered and relatively expensive, it’s principally used is for jewelry and investment, not for industrial consumption. As such, almost all of the gold mined from the earth remains in existence above ground. This is sort of like a giant transfer process, in which gold merely changes classification, from below ground to above ground.
Therefore, even if all the gold is eventually removed from the earth’s crust, all that cumulative gold production will have been added to above ground inventories. Using the above table of USGS data, that means if we were to remove and exhaust all the 89,000 tons in the world resource base over the next 34 years (at current production rates), we would theoretically be left with zero in the earth and three billion ounces added to above ground inventories.
Using USGS data, if we were to remove and exhaust all the silver in the ground, we would theoretically extract 570,000 tons (over 18 billion ounces) over the next 29 years. While 18 billion ounces of silver is truly an enormous amount, it would be consumed at the end of three decades and we will not have added an ounce to above ground inventories. At that point we would theoretically have no silver in the ground, and will have long exhausted above ground inventories. That’s zero below ground silver and zero above ground. The only question is how many zeros we have to add to the price to prevent this from happening. This data is so bullish for silver as to defy description. I implore everyone to study the facts closely, because if you do, you will include silver in your portfolio. It will be impossible not to. Years ago I wrote that the fundamentals of silver were so bullish and so compelling that I couldn’t make them up if I tried. My imagination was not that vivid. This new observation by my friend, Friedman brings that same thought to mind.
Here we have a vital material, known to all men for all time, literally disappearing before our eyes, both above and below ground. It is a material upon which modern life and rising standards of living are dependent. It is beyond indispensable, it is a miracle metal. Due to an obvious manipulation, its price has been kept so low as to defy the law of supply and demand, and logic itself. It is this very manipulation that has created something the world has never witnessed; a long-term structural commodity deficit that has vaporized 5000 years of cumulative production. Now, we are given evidence that we have less of this miracle metal remaining in the ground than anyone imagined. These basic and verifiable facts are unknown to almost all investors and potential investors, creating the opportunity for the select few to position themselves before the truth is widely known. All you have to do is verify the facts, use your common sense and buy silver.
In the spirit of the season, I’d like to say something that I’ve been meaning to say for a while. This research and opinion is distributed at no cost to the reader. I feel fortunate for the opportunity of being heard. I’m confident that many will prosper because of these writings (many already have). Nothing could make me happier than to have many regular people profit from my efforts. If you do find yourself financially enriched by silver, remember those folks in the world with afflictions. Plan on donating to charity a nice slice of whatever profits come your way.
coinfool
"You broke the bonds and you loosed the chains; carried the cross of my shame, of my shame--you know I believe it..."
WEEKLY COMMENTARY
May 24, 2005
All In
By Theodore Butler
"The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
The most recent Commitment of Traders Report (COT) confirmed the continued powerfully bullish market structure in COMEX silver. For three weeks running, the dealers have maintained their lowest net short position in years, as the tech funds have abandoned the long side and have rushed to the short side in silver. As such, the downside remains limited, and the upside wide open.
While such a constructive silver COT configuration is all one should need to be aggressively long in silver, at any time, the biggest new development has been in the dramatic improvement in the COT structures of related markets, like gold, copper and the dollar. In fact, in addition to the strongly bullish structure in silver, the COTs of these other markets are also in their most bullish configurations in years. And, as bullish as the COTs are in gold, I still maintain that the gold structure is much better than reported, when adjusted for the large and uncommon non-tech fund long position in the non-commercial category.
Unless one believes that the tech funds have somehow come to realize that they have been the patsies and have now tricked the dealers into getting more long and less short than the dealers have been in years, it would appear that the tech funds will once again have their heads handed to them, when we rally in silver, gold and copper, and sell-off in the dollar. The only real question is how much pain the dealers inflict on the tech funds when these funds rush to cover their short positions.
It should be remembered, of course, that the COTs are not a timing device, but more of a directional indicator. As such, we must allow sufficient time for them to work. Just like in tossing horseshoes or hand grenades, close enough in the COTs counts more than pinpoint accuracy. Right now we are structured favorably enough in all the COTs, so as to be "all in" in silver. We may get more favorably configured amid lower prices, but the bigger risk is in missing the coming upside move.
Here’s a quick update on the May COMEX silver delivery situation. The day after last week’s article, the bulk of the then remaining 2000-contract open interest were delivered, as expected. The one real lesson that I think should be learned from the May delivery situation was the apparent unwillingness or difficulty experienced by the shorts in making actual delivery. As it is, there are still 200 contracts open, which represents one million ounces, with only two days until last trading day.
Once again, there is no legitimate economic reason for a short not to deliver as soon as they possibly can, save they don’t have the material. About the best thing one can say about the May COMEX silver delivery is that it is nowhere near as extreme as the May COMEX copper delivery, where there are over 2000 contracts open with the same two trading days remaining. Interestingly, this number of contracts in copper is more than all the total copper in COMEX warehouses, something I have never seen before. This is a very extreme and unusual circumstance. I don’t know what conclusion to reach other than copper is, obviously, very tight and that the management of the COMEX doesn’t seem quite on top of the situation in allowing such a development.
BUTLER IN BARRON’S
The following article appeared in the May 9 issue of Barron’s:
PICTURE THAT!
Digital photos might not sink silver
By Jim Hawe
Ever since Sony unveiled its mavica digital camera in 1981, the prevailing opinion has been that the silver market would fall on hard times as consumers ditch their clunky old film cameras for the exciting new world of digital photography.
But according to recent market studies, a very different picture is developing for silver, one in which traditional and digital photography will likely coexist for years to come, with digital both hurting and contributing to silver demand.
According to a J.P. Morgan report, the photo industry gobbled up 6,428 metric tons of silver in 2002, but demand from this sector is expected to come to only 5,492 metric tons in 2005 as the digital-camera boom takes its toll.
Ted Butler, Florida-based independent silver market analyst, avers that the worst may be over for the metal. He argues traditional silver-halide-based photography will be around for some time, as costly digital applications fail to make big inroads in the high-growth, heavily populated countries like India and China.
Keep in mind that digital-camera users typically use personal computers, printers, battery packs, memory cards and other accessories to produce photos. This can run to hundreds, if not thousands, of dollars, while a disposable will only set you back about $10.
Butler also believes the markets for digital cameras in developed countries could become quickly saturated. One sign: According to Japan’s Camera and Imaging Products Association, Japanese digital-camera exports fell in February for the first time, slipping 0.9% from a year earlier, to 3.29 million units.
A surprising development in the digital boom is the fact that many shutterbugs are taking their prized digital snapshots to processing shops to have them reproduced on glossy, high-quality photography paper, which is loaded with silver.
Digital images printed on plain paper tend to fade and can become easily damaged by moisture. A lot of people are not willing to take these risks with their wedding photos or pictures of the new baby.
Photofinishing News, a market research and publishing group, just completed an extensive report projecting photographic demand for silver through 2010. While this group expects a gradual slide in the number of prints from film cameras, it expects this drop to be offset by a rise in prints of digitally captured images.
While the drop in the number of film rolls being used cuts into silver demand, it also takes a chunk out of supply, as less silver is being recycled from these rolls. "The key point to bear in mind is that photography is a double-edged sword and structural changes affect both demand and supply," says the J.P. Morgan report. "This originates in a large portion of traditional film supply being sourced from recycling and recent trends indicate that while demand from the photography sector has declined, scrap supply from recycled film and flakes has declined simultaneously."
Butler believes this idea of digital photography dooming silver has shifted the focus away from the many compelling reasons why investors might want to add a silver lining to their portfolios.
"There is the continuing market deficit, which is the most bullish condition possible for any commodity," he said, adding silver has the largest short position among speculators of any item in the history in the Commodity Futures Trading Commission’s weekly commitment of traders report. Those bears eventually will have to buy the silver contracts they sold.
The average spot silver price jumped from $4.80 an ounce in 2003 to $6.90 an ounce in 2004, roughly the same time the digital-camera market was exploding. "That’s the craziest thing," says Butler.
J.P. Morgan forecasts an average silver price of $7.10 an ounce in 2005, noting that "the price rally which started in 2003 was a justified price correction that more accurately reflects silver’s fundamental market balance." July Comex silver settled Friday at $6.96 an ounce.
The present risk/reward scenario "looks great!" Butler asserts. "It’s hard for me to see how someone can be hurt with silver right here and how very good things can happen to someone with a long-term perspective," he says, adding that any big move under $7 should be seen as a good time to "load the boat!"
That could make for a nice picture.
coinfool
"You broke the bonds and you loosed the chains; carried the cross of my shame, of my shame--you know I believe it..."
1. The demand for silver exceeds annual supply and has done so for many years. There is no sign this will change anytime soon.
2. Silver has unique chemical properties that cannot be duplicated by any other substance in the universe. It has the highest electrical and thermal conductivity, the highest reflectivity, and the lowest contact resistance of any element. The implications for a world more and more focused on electrical technology is obvious.
That being said, silver has had a very nice gain in the last couple of years and I wouldn't be suprised if there were a few more bumps in the road before it skyrockets. Governments are always short sighted and probably think the recent run up is an excellent opportunity to unload their stockpiles.
Ted Butler always thinks silver is a Buy. He's like a stock broker in 1999....
<< <i>Ted Butler always thinks silver is a Buy. He's like a stock broker in 1999.... >>
Perhaps, but I have YET to meet anyone who can explain, given Iwog's two points, how silver can fail, at some point, to rise dramatically in price. Want to take a crack at it? If we use more than we produce of a commodity and have every year for the last 30 years, and according to the USGS we are running out of silver below ground (not an unlimited supply), how can the price not go up? Supply and demand does not apply to silver?
With the exception of three spikes and two dips, I'm looking at the same $6/$7 silver that I've been seeing for 20 years. Assets should appreciate over time, especially after 20 years.
There is hardly enough actual silver to cover what the contracts traded on the comex sell for on a daily basis. Yet paper contracts (bluffs or gambles) move this market. The same is true of the gold market. The overseas gold market trades much more based on physical gold than does the New York comex. Hence, it is far easier for anyone trading in paper gold to more easily move the market from New York. This is of course advantageous to those who would like to see gold stay level. With very little physical gold, and the threat of paper contracts, the market is easily swayed by small amounts of selling. Isn't it ironic that even though inflation has halved the apparent value of assets since 1980, and the money supply has increased about that much, that gold is selling for the equivalent of $200/oz today (silver for $3.50/ounce). Yes, this makes no sense.
Gold and silver have not traded in a "free" market for 25 years. It will take more time to work these issues to the surface.
roadrunner