patrick.net

Fewlesh,

A lot more would have to happen than massive USD devaluation for the fiat currency system to fail. Keep in mind that even the gold standard was largely a ratchet-pegged fiat system. Every time gold got too out of line with economic fundamentals -- usually petrodollar related -- they just revalued the exchange rates.

I agree on your concerns regarding a world of cheap labor and expensive commodity resources. This would be a dystopian future directly from the pages of whatever scary scifi novel you fancy.

LILLL said:

Basic affordability is not just a numbers game…its a feelinf in your gut. I’m sure the bank will tell me that I can afford a million $ house…but my gut says no. I’m not even comfortable with a $750K house even thogh I have several hundred grand to put down.

I agree completely. I have no doubt we could qualify for something here. The problem is the payments and what we could get for it, which isn't much.

Fewlesh Says:

ZIRP policy for the US. Can anyone actually believe this would be good? Talk about a total destruction of the US currency.

Hmmm. A zero interest rate sounds like an admission of expected deflation. I do not think we can have a negative discount rate, or where people are paid to borrow money. Or can we? Gee, if you think Joe Monthly Payment is irresponsible now............

"...geologists were still testing the house’s soundness."

You've got a friggen' gaping minshaft hole in the middle of the kitchen.

How sound is that?

Still, probably the house is worth a lot of money.
It's California, after all...

A zero-interest rate wouldn't punish savers immediately. If you remained a saver for long enough, however, you'd have your wealth drained into consumption in the form of inflation. That is, you'd be earning a negative real interest rate, so inflation would be like a big tax on your savings going to subsidize spenders.

But, as we head into such a scenario, there should be some pretty wild adjustments to real assets, namely housing. So long as most big-time savers trade in their savings for real assets, including housing assuming it first corrects sufficiently enough, then they'd come out ahead of pre-existing debtors (except for those few savvy and solvent enough to restructure their debt into long-term low fixed rates).

Fewlish,

high commodity price will be very kind to the developed countries like us, Japan, Europe, etc. The reason why China has been able to steal manufacturing base from us is because despite their extremely low productivity and low energy/commodity efficiency, the low commodity price has enabled their extremely low-pay workers to get ahead. But if all workers have to live in an environment of, let's say, 10 times the cost for food and water, then you compete on brain power, not on how cheap you can go. That is the key to success for Japan in a ZIRP environment. Although Japan has been depreciating its currency and subsidizing its export, in a way *inflating* imported resources (Japan is almost 100% reliant on resource imports), it has created an environment that forces its people to be extremely efficient on use of resources, and compete on collective brain power.

The crunch on natural resources won't only put us way ahead of China, but also ahead of Japan, which has no natural resources of its own. We have enough population and resources to just trade within ourselves, or within the Americas when transportation cost gets too expensive, unlike other countries, which will have to rely on international trade. International trade for us is not a necessity, if it enhances our lifestyle, we trade, if not, we shut the door selectively, we trade on our terms.

I have been fully loaded with an anti-dollar position since late 2004, precious metals, commodities and energy, plus a smaller position in FX. The reason I am hesitant to bet big on FX is because if we do get into a free fall situation, which I don't believe we will, all countries will try to do competitive devaluation. We already got a taste of it when Japan and China refused to revalue, and Euro zone refused to hike rate early April despite evidence of inflationary pressure. If no one wants to have a stronger currency and everyone has lots of USD to get rid of, where do they go? The logical answer for me is other benchmark of wealth that are short in supply that cannot be manufactured overnight. So while I believe that USD will devalue against other FX, I am not sure you will see a substantial one, it is probably going to be within 50%, because nobody wants to absorb that 50% shock.

With commodities, I am extremely bullish on agricultural commodities going forward. Loss of land is tremendous around the world in this global asset bubble and transfer of manufacturing base to developing countries. For example, while I was in China a couple of years ago, I saw literally acres and acres of the most productive/fertile land in eastern and southern China giving way to industrialization and residential construction. The same trend is all over in S.E. Asia and South America as well. To make matters worse, land use cannot be changed overnight. If you want to switch an industrial land back to ag purpose, you need to let it "rest" for a few years. Once a food exporter, China is now a net food importer because it doesn't have enough to feed its own population. In the last few years, the trend has been, whatever China buys will shoot up in price, so trend is my friend. If there is a Katrina equivalent happens in China, and probability wise it is very likely because China's environmental balance is already on an extremely fragile balance, bet on China buying ag commodity like nuts, at least it has lots of USD to do so.

Just look around California, land loss is not only spurred by residential construction, but also acreage assigned to winegrape production (same thing happened in Australia), which has already resulted in a worldwide glut of cheap wines. My parents live in NSW and Queesland, and they are telling me that many places that are NOT particularly suitable for growing grapes are now coming online as winegrape acreage, in massive scale. Well, if everyone is growing grapes, who is growing food?

H.Z.,

http://www.washingtonpost.com/wp-dyn/content/article/2005/08/08/AR2005080801243.html

Dollar devaluation is no big deal in the grand scheme of things.

Look at England, after sterling lost its reserve currency status, what happened? Sure, there is a gradual decline in the quality of life, but even if that happens, I would rather sit my ass in America than a lot of other countries much lower on the food chain.

Also regarding China:

The US enjoys a tremendous productivity advantage over China in agriculture. In fact, the US is by far more productive in agriculture than every other major country, including modernized Europe. A large portion of the GDP efficiency differentials come from ag, as do energy/resource usage differentials.

Although the elitists may spit at "factory farming" and "GMOs" as they drive to Whole Foods in their hybrids, we will be thanking the productivity gains the agri-industry has made when the global imbalances shit hits the fan.

A ZIRP policy will only hurt savers if savers allow it to. If a saver moves all his money into commodities, energy and precious metals, he will be compensated by the spike in price in hard assets when inflation hits, so that at least he can hope to come out even if not ahead.

A saver staying in USD cash will be royally screwed in this scenario.

As I read ZIRP, it wouldn't work without coordinated fiscal and monetary policy. Not an easy or very likely event. Worse, the changes to taxation would require massive reform of income taxation regimes. Not just federal, but also states. If the feds ever lowered income taxes to anywhere near zero, the states would simply tax most of the difference. Instead, the feds would have to enact punitive punishments to force states to cooperate with coordinated fiscal maneuveres, perhaps by withholding all federal funds. This would no doubt result in massive Supreme Court challenges to states rights, which the current court is disposed to favor.

I'm not going to stay up worrying about this. I'm still worried about plain, old, no-complications stagflation.

H.Z.,

China is an export-reliant country, most of its GDP (over 60%) is generated by exports into the US, Europe, etc. So compared to a country with plenty of internal demand, and hence the internal pricing power, its GDP is very reflective of the truth worth of its goods in the worldwide market.

Are you willing to pay double the price for anything you buy currently that are made in China? I am not, I won't even pay 10% more, because if China cannot make it at this price, let Vietnam make it, let India make it. Therefore, the unit of GDP measure is a faithful measurement in that country's productivity.

Perhaps I remembered the unit wrong, so I apologize for using the term unit of goods.

Who can argue with this logic from the ZIRP proposal, though:

Fiscal policy should be aimed at deterring investment in non-productive financial assets and increasing productive capital spending and domestic employment. We need more engineers and fewer real estate agents.

Fewer MPs! Now that might make it all worth it.

H.Z.,

I am in BG as a sideplay, while I am still looking for other options to get in. The reason why I am bullish is also because of the energy cost, as oil approaches 80, or even 100, who knows, the energy cost of ag also shoots up, for example, natural gas is the main cost component in fertilizer, and as fertilizer goes up, so will basic food price, because as human beings, food intake is not a choice.

I also agree with the carrying cost, and the perishable nature of ag products. That is why I am more interested in grains. Just judging from the chart of wheat price, it does seem incredibly low at the current level.

I love it when the sellers won't drop their price! This is exactly what I want, for them to hold their price for a long time, so that when they finally get a good taste of reality and start lowering their price, they will be far behind the curve as others have lowered theirs first to catch the fewer buyers (sheep) that are out there. These greedy bastards will get burned the most and they are the ones who deserve it the most! :twisted: :lol:

I'm so sick and tired of reading articles about house prices rising, I haven't seen one of these articles in quite a while, has anyone else? The fun is just beginning!

Here's a good article on the Zeitgeist of "extreme commuting."

http://www.msnbc.msn.com/id/12438812/site/newsweek/

"Last week I saw a guy going down the highway eating a bowl of cereal, reading the paper and steering with his knees," says Dave Givens, 46, who just won Midas's "America's longest commute" contest for his 186-mile drive to his engineering job at Cisco Systems in San Jose, Calif. (Givens drinks only coffee—five cups.) The result of all these drivers behaving badly: more crashes.

Bwahahahaaa!

Sounds like he's the king of Herculean commuting.

But the real question is: is it worth it?

The answer:

Of course! It's California, the land of milk, honey and McMansions.

NO sacrifice is too great and no commute too Herculean to live in Cali.
Everyone knows that!

Just ask Surfer-X. He'll tell ya!

ajh,

If the US ever faced hyperinflation -- and I mean real hyperinflation, not just high inflation -- then this country would default on its debts faster than you can say "just try'n stop us". Hyperinflation can only occur if a country faces huge foreign debt payments, a loss of foreign investor confidence, and still tries to pay those debts by running the presses. It just ain't going to ever happen here because it doesn't have to. Like you said, we could default on our debts and claim we're not with some clever subterfuge. No one could really do much about it, either, because they would know that we won't willingly fall on our sword while we still have a sword.

Randy H writes that agriculture will help our nation when the Great Reckoning comes, because of the efficiency of our commercial agriculture. I have thought about that too, and I agree with Randy.

I think a bushel of wheat is still below the price it sold at during the last Great Reckoning of our dollar during the Arthur Burns & Miller years at the fed.

But Randy, the bad news is, if you are right, and I think that you are, it means that we will be paying a lot more for our food with our depreciated dollars, in order to match the purchasing power of the other currencies for our food. This as in so many other things, our standard of living will go down.

I don't know how bubba can afford it all when the correction comes.

ajh,

speaking of xenophobia, Australia tops the list.

No foreigner can buy Australia land, period. All foreigners are forbidden to buy Australian second hand real estate, and foreign purchase of first hand real estate needs to be approved by FIRB (Foreign Investment Review Board)
http://www.firb.gov.au/content/default.asp

The only way a foreigner can participate in Ozzie property market is to buy the notorious off-the-plan properties which are incredibly scandalous. Mirvac, one of your largest property developer, just screwed over a bunch of foreigners trying to buy some OTP apartments in Southbank, Melbourne.

You want to buy anything else in Australia? Well, you are up for FIRB review. Your FIRB needs to approve any foreign interest in a corporation above 15%. How is that compared to the US?

Any foreigner can buy land, second hand homes, or a minor interest in a US company. Only that when a majority control in key industries are at stake, we preclude them. If China wants to buy some candy bar company, be my guest.

All countries are cautious in fending off foreign control of our asset, nothing wrong with that. If Ozzies want to critisize us on this, you should look at your own Foreign Investment Act 1975 and 1989 first.

But the Dubai Ports bid for P&O? All the international reports I listened to reported that as straight American xenophobia.

Suppose Hu Jintao had asked President Bush last week whether a Chinese company would be allowed to take over GM, or Ford, or both. What would be the answer?

hmm, sounds like distortion of a perfect free market to me. no good can come of that...

China now stands as a country with one of the worst, if not the worst, usage of resources, tons of wastage goes into those Walmart junks, it costs China 6-10 times the same use of natural resources like oil, coal, etc. for producing the same unit of goods compared to US, Japan and Europe, most of their cost savings come from cheap labor at around 1/20 of the US rate.

randy
see my tail-ender post on the previous thread re offshoring, as i don't think anyone understood the gist of the my remarks on the economic knock-on effects of offshoring, as well as pollution issues...

No foreigner can buy Australia land, period. All foreigners are forbidden to buy Australian second hand real estate, and foreign purchase of first hand real estate needs to be approved by FIRB (Foreign Investment Review Board)
http://www.firb.gov.au/content/default.asp

The only way a foreigner can participate in Ozzie property market is to buy the notorious off-the-plan properties which are incredibly scandalous. Mirvac, one of your largest property developer, just screwed over a bunch of foreigners trying to buy some OTP apartments in Southbank, Melbourne.

hee hee

more free market distortions - scandalous...

The recent US-Oz FTA freed up the extent of US investment in Oz, not that you'd want to, but it was seen mostly as a cool way of laundering dirty money for the Mob, and similar. Great work from a bribed US Congress representing vested interests...

By buying property, you have bought land. I think there is a fair amount of foreign purchasing going on, FIRB notwithstanding. There are ways around it too, looking at some of the HK/China connections here. It's almost funny that the off-the-plan pricing is almost two-tier to set foreign investors up for a gouge...

O-O
My parents live in NSW and Queesland, and they are telling me that many places that are NOT particularly suitable for growing grapes are now coming online as winegrape acreage, in massive scale. Well, if everyone is growing grapes, who is growing food?

They've already overshot, there's 40 000 hectares of overplanting and a billion litre wine lake that can't be sold already.

there's an analogous problem with market overshoot in housing as well -- when housing booms, everyone wants to get in on the act, everyone becomes a developer, lots of new starts, but the lengthy construction time means there's suddenly an oversupply that kicks in too late in the boom, potentially leading to a bigger price crash.

my solution is to have govts control land pricing from the start to avoid speculation and to make housing more affordable for more people in the community by preventing landholders setting the price.

*** Disclaimer: not a free market solution ***

Here's the word from the gub'mint. The latest Office of Federal Housing Enterprise Oversight (OFHEO) Quarterly House Price Index (HPI) Report came out 3/1/06.

I believe the big lenders like PMI use these OFHEO numbers for their risk indices correlating median income inter alia to prices.

http://www.ofheo.gov/media/pdf/4q05hpi.pdf

A few Farklese translations and quotes:

Nationally prices rose 12.95% from 4th Qtr ‘04 through 4th Qtr ‘05. The most recent Qtr saw 2.86% (11.4% annualized). These numbers roughly match the 12.55% increase for year ended with 3d Qtr ’05.

“[N]o evidence of a slowdown.”

“Despite recent indications that a slowdown may be forthcoming, … appreciation in ‘05 continued to hover at near-record levels.” (OFHEO Economist Patrick Lawler)

CPI was 4.3%.

“While deceleration continues in some areas, appreciation generally is still extremely strong … Mortgage rates climbed significantly in the second half … but the effect … on … appreciation so far … limited.”

Significant findings….
1. 4th Qtr records in 26 metro areas including Orlando-Kissimmee, FL; El Paso, TX; and Myrtle Beach-Conway-North Myrtle Beach, SC.
2. Phoenix-Mesa-Scottsdale, AZ still fastest at 39.7%.
3. Arizona continues fastest by far at 34.9% from 4th Qtr ‘04 to 4th Qtr ‘05. AZ was more than 8% faster than Florida, the #2.
4. The Mountain Census Division became fastest CD edging out the Pacific. The East North is still slowest (Michigan, Wisconsin, Illinois, Indiana and Ohio.)
5. The South Atlantic (East Coast from Maryland to Florida) saw its fastest growth since ‘75, the first period covered by HPI -- 17.81% from 4th Qtr ‘04 to 4th Qtr ’05.
6. For the first time since 3d Qtr '03, a metro areas experienced a quarterly price decline. “Prices in Burlington, NC fell by about 1% from 4th Qtr '04 to 4th Qtr ‘05.”

Changes in the mix of data from refinancings and purchases can affect the HPI. An index using only US purchase prices shows a bit slower growth from 4th Qtr ‘04 to 4th Qtr ’05. A "sale price index" would’ve increased 10.81%, versus 12.95% for the full HPI.

The quarterly HPI tracks average house price changes in repeat sales or refinancings of the same single-family properties. It’s based on analysis of data obtained from FNMA and Freddie Mac from more than 31.2 million repeat transactions over the past 31 years.

OFHEO uses the mortgage records of Fannie Mae and Freddie Mac, the nation’s largest database of conventional, conforming mortgages. The conforming loan limit for 2005 was $359,650. The limit for 2006 is $417,000.

Next HPI will be posted June 1, 2006. I can't wait.

Farkley’s notes re the BA. I gather that HPI tracks the avg change for each given APN as that specific parcel periodically sells from one year or month to the next. Anyone read that different? It apparently excludes jumbo loans, a large component here, right? Does that skew the HPI for BA?

Just stepping in here..
Randy, it is true that American farmers are perhaps the most prolific productive farmers in the moderm world, but this is due mainly on factors relating to the high risk involved. Just one or two seasons of bad productivity can put a farmer under. As a result, many farms have elaborate systems to prevent this. I'll use my uncle as an example. He has a masters degree in agriculture and electronic engineering. He installed a system on his dairy farm that monitors all the cows via a small plastic computer chip mounted on an ear tag. When the cow comes under a scanning device, the computer knows how much of what certain types of grain it will eat to produce the most milk, if it has special dietary needs, whether it is in need of having medications updated, and even if she is now pregnant. A shuttle on the feeding belt measures the correct amount of food, medicine, and so forth for each specific cow. The farm operates like a efficient factory, with the lives of the cows prolonged, and their productivity maintained with minumal waste of feed and maximum amount of healthcare. Most farmers operate in this manner, and this is why US farmers are as advanced.

I also wanted to mention something I heard this weekend that sums up the stupidity of the American economy in general, including home buying of late. Me and my wife went to Home Depot because I had a gift card from Xmas, and since I hate going there, I haven't used it yet. But while we were in there, a pre-recorded voice came over the PA system:" Do you want to buy a major purchase from the Home Depot? Buy now and pay later!" blah blah blah, no interest for 6 months! blah blah blah. Only at the Home Depot."
My wife turns to me and says:" Did you hear that?" "yup" I said. I couldn't believe how amazingly stupid it sounded, yet it sums up how people"buy" things.They don't buy them at all. They've been conditioned like dumb animals that money is a mysterious concept that exsists in banks somewhere, yet they never actually see any of it.
This weekend I was a little depressed because with the good weather came a TON of open houses. It has been raining for 3 months. Nobody at all had been looking at any houses in those 3 months, but on Saturday, It seemed like it was back to lots of Subaru outback and Volvos filled with purple fleece, running shoe, silly ski hat wearing 30 and 40something yuppies lining up to look at these things. I've even saw a "sale pending" sign hanging from a 850k house that's been for sale since November. I want this thing to crash damn it, and now I'm starting to see the same carnival circus that occured last year.

peterus said:

I think we are going to see hyper-inflation. The apartment manager just told me that my rent (2bd 2ba 1000sf) is going to raise 10% from $1460/month to $1606/month.

This is no where even close to hyperinflation. Hyperinflation is 1% PER DAY average price increases. Your rent would need to rise from $1,460 per month to somewhere around $14,000 per month within 1 year to qualify as hyperinflation.

Keep this in mind. There is a huge difference between inflation, even high inflation, and hyperinflation.

I say invest in seeds, shovels, and ariable land. Gotta' eat..

I understand that CPI includes rental prices, but not house purchase prices. Also, I understand that energy prices are excluded as well. What I'm wondering is, does CPI include home utility bills? What about rents that include utility costs? Does this "allow" energy prices to creep into the rent aspect of CPI?

nomadtoons2,

Take heart shipmate! Couples do what couples do, and when they get bored they go to open houses! My wife and I do from time to time and it doesn't mean a thing. We've fairly committed that we will not look in earnest until at least the fall (that is after the "Summer of George"). Or the "Summer of IT" as George prefers. My big concern right now is getting up to SAFECO Field while the Chicago White Sox are in town. It is the only time this year they will be within driving distance! Who makes up these schedules anyway?

With all of this "ZIRP" talk (and I will get up to speed on that issue) it seems no one noticed the article "They had a plan, then reality intruded". Oh guys, TOO funny! I'm sorry, but when it comes to money (particularly money management) I am way too self conscious to have my name attached to debacle like that. Man, if word ever got out? In brief, four knuckleheads decide at the height of the market to do a flip in Palm Springs. Cost over runs and a market gone south they are now considering "plan B" which includes "renting it out" they're told for as much as $1,500 a week? That's your plan huh?

O.K now here's my plan o.k. DON'T rent these steaming piles out O.K? Please people, please do not bail these guys out! While in Seattle (to see the *2005 WORLD CHAMPION CHICAGO WHITE SOX*) my wife and I will be staying at the BEST WESTERN O.K?

Had "plan A" worked they would have been splitting up 60K. I hate to sound arrogant here guys but I am not driving out to the middle of no where for who knows how many weekends for 15K. I'm not, so when this crash is all over please don't call me saying you want to do a "flip" and would I help hang some drywall or something. Now, when it's completed and "turn key" then I will stop by provided the only thing I'll be asked to do is run to the store and get bamboo skewers Oh, and MORE CORONA then fine. I'm all over it.

John M,

O.K. The crash has been suspended until....... November?

Honestly, I don't think there is any "last minute salvation" even the most bullish among us could cook up to salvage this thing now. Lord only knows we've tried everything under the sun including NAAVLP! Oh wait! There is one thing we haven't tried! The "lease w/option" to buy! With *gauranteed* rental income and none of the hassles of being a landlord!

Correction:

The following site is for FHFB, a whole different set of numbers from OFHEO:

http://www.fhfb.gov/GetFile.aspx?FileID=4437

I think the latest FHFB is due out any day. That may give a more current snapshot than OFHEO. Plus, there may not be the same distortions from excluding Jumbo loans, though I'm not sure about that.

I don't know if FHFB numbers include refinancings. I've decided that including financing "prices" in the OFHEO "price" index is dubious at best (garbage?). How do you get an updated "price" when you re-fi? They must be including the re-financing appraised value. Two problems with that inclusion: 1) you're not gauging the price at the real margin since the re-fi house is not really in the margin 2) result-oriented appraisals.

-including financing “prices” in the OFHEO “price” index is dubious at best (garbage?).

+including re-financing “prices” in the OFHEO “price” index is dubious at best (garbage?).

Garth,
Also, I believe existing home sales for March are due out tomorrow. Should be interesting either way.

Yes, inventory and volume are the pulse rate monitors.

Honestly, I dont' know how I know that, but I do.

Garth,
The one thing I am wondering about with the FHFB reports is something on a more broad scale in terms of housing sales nationally. I have been keeping a close eye on the BA and CA in general, but I also monitor reports coming out of a select few regions across the country mainly because I am eyeing 5-6 diffrent areas to move to since (for now) they are cheaper. In essence, it seems that the accelerated action that has been going in in CA for 5 years is starting to pick up steam in places in TX, NC, and several other smaller metropolitan regions. Last week a report came out from TX that shows a 14% increase in home values. For TX, this is SIGNIFIGANT since they are one of the few places nationally that actually had negative property increases. The word got out that TX and the entire south are" undervalued", which sounds like a repo police auction to flippers and speculators.
I've known for a few years that I would likely move to another state, but my biggest worry was that just like myself, everyone else would make the same conclusion at about the same time. The inflation in prices in TX and other alternative regions are starting to almost outpace my rate of annual savings. The plan was to save enough to buy outright, but if things get out of hand, I might have to move sooner.
Anyhow, I think that while Californians may be looking at Local prices and market slowdowns, other regions unfortunatly might just be getting started, which would explain a national report showing less than dismal news.