Inflation, deflation, gold and currencies

[Higgenbotham]

Gold and silver are no longer cheap vis a vis real estate. In fact, they are extremely expensive vis a vis real estate on a historical basis. Therefore, for my money, any inflation hedges I do buy in the future will be residential real estate, which also will produce an income, though less if there is deflation.

Real estate priced in gold and silver has already crashed 80-90 percent.

You have made a very solid case to move from gold and silver to real estate. But you moved to dollars. So this dollars thing is just a temporary step in the move to real estate? If you get fixed rate 30 year mortgages on real estate at this point I think you will make out like a bandit. After the dollar collapses you get to pay these mortgages back with funny money. It looks like a very good move to me. Only worry would be property taxes, which in some places are rather crazy.

Yes, I plan to gradually move at least some of the money into real estate even if I am expecting deflation to continue. There are several reasons for this. First, safe dollars are earning zero whereas good rental real estate will earn at least 6% net. Therefore, real estate prices would need to deflate more than 6% per year to create any net losses, at least initially. Second, I am renting now and rents are going up due to the fact that people are losing their homes and renting; therefore, buying a home to live in will create the same immediate return and reduce living expenses. Third, even if I expect deflation, it is impossible to buy all of the real estate I want to buy right at the bottom. So I will need to start scaling in gradually. This will also help me to better recognize what may be a likely bottom when it comes and have the expertise to respond (attend auctions, etc.).

A few other notes. By getting out of real estate before the crash, I can get back into optimum locations. For example, the locations that are closer to a price bottom, which would have been unpredictable 7 years ago when I sold my real estate. Or the locations where the incomes of prospective renters are likely to hold up better. Or the locations where there will be less budget stress and therefore fewer tax increases.

I will pay cash for the houses rather than try to gamble on future scenarios. That way, any future scenario is manageable.

[John]

Yes, I plan to gradually move at least some of the money into real estate even if I am expecting deflation to continue. There are several reasons for this. First, safe dollars are earning zero whereas good rental real estate will earn at least 6% net.

I don't know, Higgie. I'm in the midst of writing an article on today's Case/Shiller report,
and the fall in real estate prices is accelerating.

http://www.cnbc.com/id/42764835

John

[Higgenbotham]

I don't know, Higgie. I'm in the midst of writing an article on today's Case/Shiller report, and the fall in real estate prices is accelerating.

http://www.cnbc.com/id/42764835

John

Rapidly falling prices are what I'd like to see until I'm more than 50% to my target allocation. It sure won't do any good to start buying only to hit the bottom of the market right away, then have to chase prices or sell out.

[vincecate]

Yes, I plan to gradually move at least some of the money into real estate even if I am expecting deflation to continue.

I too expect deflation in housing prices. Home buyers have a fixed budget and as interest rates go up the size of the loan they can afford goes down. I expect interest rates to go up, so housing prices will go down. So I can understand staying in cash for a gradual transition to real estate. And if you can pay cash at auctions you should get very good value. Makes sense.

If you got into gold and silver years ago you have great profits already.

[Higgenbotham]

I too expect deflation in housing prices. Home buyers have a fixed budget and as interest rates go up the size of the loan they can afford goes down. I expect interest rates to go up, so housing prices will go down. So I can understand staying in cash for a gradual transition to real estate. And if you can pay cash at auctions you should get very good value. Makes sense.

If you got into gold and silver years ago you have great profits already.

My estimate is that a bottom in real estate prices is 3 to 5 years away. I'm basing that on a few things, one of them being my experience in the "Rust Belt" real estate decline of the 1980s. I think we are just entering into the "give up" phase. This would be where sellers start to concede heavily as they realize there is no hope that the market will recover. This phase should last 2-3 years. As far as buying right, it will be possible at some point to buy for cash at very heavily discounted prices because lenders will not want to make loans on certain properties for fear they will get them back again. I experienced this during the "Rust Belt" real estate decline, where I bought many perfectly good properties in the 10 to 25 thousand dollar range. The last phase of the "give up" decline will see "cash only" "no minimum bid" auctions. Again, I saw this during the "Rust Belt" real estate decline where I witnessed a house get auctioned for $6,500 to a dairy farmer who had a pocketful of money from the USDA. After the end of the "give up" phase, prices stayed low for another 2 years or so with some buying interest occuring in select neighborhoods. I wouldn't say I have great profits but am up about 50% overall since I began transitioning out of real estate. I've had losses shorting the market these past few months and living expenses are ongoing.

[vincecate]

The dollar index is a weighted average of 6 currencies. However, 57.6% is from the Euro. So if the real value of the Euro is going down then the real value of the dollar can go down without getting noticed much.

http://en.wikipedia.org/wiki/U.S._Dollar_Index

[RDRUNR]

I went the US dollar route because, like John and many other on here, I see gold and silver in a massive bubble and see buying gold and silver as a higher risk than buying USD.

This seems to be the big question inflation vs deflation, dollar crash vs gold crash. Do you trust Bernanke or do you trust gold. The people that get this right and invest accordingly will do well and those that get it wrong won't do well.

If gold crashes the world does not really miss a beat. If the dollar collapses the world is mashed up. I think the world is going to mash up.

Major deflation is just not a credible crisis in my book. The world has never seen a pure fiat currency have substantial deflation. If the dollar was too valuable they could print some for each person in the USA, with more each month, till it was not too valuable. Deflation is just too easy to prevent for it to really be a major crisis. Hyperinflation on the other hand happens all the time and there is no easy fix. This would be a major major crisis.

I don't trust gold, thus according to your choices, I must trust Bernake then (but I don't, although I trust gold much less than Bernake).

If the world as you think, is going to mash up, gold is worthless and useless. Do you really think you can trade gold for anything? I've researched this and in WWII people WOULD NOT give up a loaf of bread for an once of gold or handfulls of dollars. I can't see why anyone would trade food/gas or supplies for a useless (but pretty) metal object. I sure wouldn't trade a loaf of bread for a pound of gold either.

I see deflation as currency reduction as a high and growing higher possibilty. Debt defaults by countries, corporations and individuals. How much has US real estate dropped? 33%? That's more money lost (I think) than the US has printed. Now with PIIGS taking default, Icland and maybe even the US and China (as John posted today), that's more cash gone = greater value for cash out there (to pay off remaining debts) = deflation IMO.

I think gov't have 2 choices really:

1. Inflate the currency to pay off debts = kill the value of their currency but save their debt rating.
2. Default on debts = kill their credit rating but defend their currency.

So far #2 is winning and accelerating with twin turbos.

[Higgenbotham]

One thing I should mention once again that is often overlooked in these discussions is that a serious reduction in population due to war, famine or disease could render many investments nearly worthless. If a double digit percentage of the US population is wiped out while most of the structures remain intact, I would guess that housing will be almost free. This possibility shouldn't be neglected in any analysis of inflation, deflation or asset prices. If disease is the means by which population is reduced, then where the plagues hit will be very important. For example, whether they hit rural areas and kill a disproportionate number of farmers or urban areas and kill a disproportionate number of "food eaters".

[RDRUNR]

One thing I should mention once again that is often overlooked in these discussions is that a serious reduction in population due to war, famine or disease could render many investments nearly worthless. If a double digit percentage of the US population is wiped out while most of the structures remain intact, I would guess that housing will be almost free. This possibility shouldn't be neglected in any analysis of inflation, deflation or asset prices. If disease is the means by which population is reduced, then where the plagues hit will be very important. For example, whether they hit rural areas and kill a disproportionate number of farmers or urban areas and kill a disproportionate number of "food eaters".

Great point.

I would also like to add 2 points:

1. The boomer population is now 65 and will be selling their homes to finance retirement. The Gen-X population is smaller (in fact, I think all generations are smaller in size than the boomer (John?)) then there are less people to sell those homes to.

2. As the boomer population ages and passes on there should be less people to replace them with due to lower birth rates of previous generations.

[Higgenbotham]

http://www.sharelynx.com/chartstemp/USHLSPOG.php

A nice chart of the silver and gold ratios to housing prices. Toggle over to the British side to see that lower ratios are possible...according to the data I've looked at, the aproximate minimum ratio of 100 ounces of gold to buy the median house also held during the Great Depression in the US. This is a ratio I tend to hang my hat on - trying to figure out what things will do with respect to dollars in Ben Bernanke's "funny money" house of mirrors is more difficult, especially when he's using his two way mirrors and talking at the same time.