Category: Economics & Investing

Jim: Dr. Kurt Richebächer’s “A Tightening Farce” featured in Wednesday’s September 13th, 2006 edition of The Daily Reckoning makes three salient observations about the way asset inflation in the housing market leads to economic dislocation. Item: “Housing price busts have larger wealth effects on consumption than the equity price busts [do]…” Item: “All major banking crises in industrial countries during the postwar period coincided with housing price busts.” Item: “The disinflation increased the real burden of debt, which exposed inflation-related overinvestment and associated financial frailty." A stock market crash primarily affects discretionary spending; a housing market crash will leave many …

Mr. Rawles: I’ve been following the articles you post about the impending housing bubble burst, and I happened to see this article about Adjustable Rate Mortgages (ARMS) that backs up some info you had posted not too long ago. One interesting statistic I saw on page 4: “More than a fifth of option ARM loans in 2004 and 2005 are upside down — meaning borrowers’ homes are worth less than their debt. If home prices fall 10%, that number would double.” So 40+% of mortgages would be upside down, in an only 10% depressed market? Not looking good. I rent …

James: I’ve been trying to figure out whether we’re going to go hyper-inflationary or depressionary when the ESHTF (Economic Schumer Hits the Fan). We’ve all been watching the .5 to 1 trillion in ARMs that are going to reset in 2007. Will this be what topples our economy? My money says yes. Here’s the housing bubble as I currently understand it. 1) 20% (more in California) of mortgages are adjustable rate mortgages (ARMs) 2) 50% of people lie on the mortgages applications overstating their income 3) Many brokers lie to the borrowers about how fast the payment will go up …

Just a heads-up, lots of folks in place like California where non-recourse loans are mandated by law (at least for homes) feel pretty smug, thinking that even if they get upside down on a mortgage they can walk away without repercussions. Bad news: the IRS considers the amount of the loan “forgiven” by the bank to be income. That means, to use California numbers, if you owe $500,000 on a house which sells at foreclosure for $200,000, you now owe income taxes on your $300,000 in income you just “received”. Just a quick “report from the ground”, I live in …

James, Great site. Keep up the great work. Here are two interesting links about the market dominance of ethanol in Brazil: CBS News and Washington Post. Brazil plans to be energy independent by next year, based on conversion of sugar cane to ethanol. In comparison, the ethanol extracted from corn yields only about 15 to 25 percent more fuel than the fossil fuels that were used to produce it. In Brazil, according to industry studies, the sugar-based ethanol yields about 830 percent more. Sugar cane may not the answer here in the US, but it does show what can happen …

Dear Jim: I am in the process of converting my U.S. Dollar-based Individual Retirement Account (IRA) into a precious metals IRA. 1.) Do you recommend it to be based in silver? Silver bars or Eagles? 2.) Or do you recommend (based on current prices,etc.) it to be in gold? Gold bullion or Eagles? 3.) Or do suggest a combination of both metals? If so what percentages and what types? Thanks again for you considered opinions. B’Shem Yahshua HaMoshiach Sar Shalom (In the Name of Yahshua the Messiah Prince of Peace) – Dr. Sidney Zweibel JWR Replies: If the storage fee …

James: Just a hint to my SurvivalBlog friends, if I had cash in the USA, then I would start buying gold now, and continuing to dollar cost average into the market since it may still go lower than Au @ $600 and Ag @ $11.02. Both are good investments for long term hedge/wealth preservation. Proviso for the record: I would never make a suggestion or advise in financial matters since that carries personal legal risk. I suspect that we are witnessing the final metals manipulation before Euro conversion of some oil trading and inflation driven dollar devaluation. Do some web …

Dear Jim: I respectfully disagree that the housing “bubble has popped”. (You had written in Odds ‘n Sods: “Here in the U.S., the unsold house inventory backlog jumped to 565,000 in April. The housing bubble has popped. There are no more bidding wars for houses. Now its price cut after price cut. In the coastal markets, I anticipate a race to the bottom, most likely starting in September of Aught Six.”) Thankfully the air has been coming out very steadily of this overextended price balloon, without the blow-up or popping that could have occurred. As a Wall Street Journal article …

  Dear Jim, Regarding the metal content of gold bullion tokens: Gold Eagles are 22 karat, as are Krugerrands–the respondent in the old mail you quoted had that point wrong, too. (Where he claimed Eagles were less accepted than “pure gold” kruggerands (sic).) British Sovereigns are also 22 karat, with four coins equaling not quite one ounce of gold. Canadian Gold Maple Leafs, PAMP and Credit Suisse bars, and hallmarked bars and coins with .999 or .9999 are as close to pure as one can find. However, since it’s the gold content that is being traded, and that content is …