patrick.net

Sorry thomas.wong1986, I posted without the refresh (which is funny, as you also mention 1993). My posts are referring to certain neighborhoods in Concord where folks are buying rentals.

>> I disagree. The shaded yellow area is saying “Remaining Bubble Still to Deflate”. If this doesn’t mean home prices are over-valued, what does it mean?

E-man,

The annotations on the graph are not attributable to the Case-Shiller index, nor the persons behind it. Nor is the graph itself an un-adulterated representation of Case-Shiller data. Specifically, someone *else* (see link further up) has divided the price time series with an inflation time series to make a specific point.

So, I repeat, Case-Shiller (the index itself) makes no representation of whether houses are undervalued or not.

You can agree or disagree with the viewpoint behind the annotations, which is that house prices in the long term must reverse to the mean

On top of that, these are 10-city and 20-city composite graphs, not SF or any other metro area. To argue about specific metro areas use specific
curves

Personally I think the bottom will occur well into the yellow band. Exactly where will depend on how successful the Fed is in creating (housing/consumer) inflation. In fact, one could even argue that the higher the CPI inflation relative to housing inflation, the lower the curve has to go! One always must be careful when contemplating inflation-adjusted curves and the future. I hope this clears things up.

ThomasWong - Median home prices in Santa Clara County in 99 were too high for conforming loans as measured by OFHEO. Conforming doesn't mean 30 yr fixed interest 20% down, it means that they were under a certain value, and had some underwriting standards.
Check it out - conforming loan limit in 1999 was $240k: http://ethicalhomes.com/1333/historical-conforming-loan-limits
Median SCC home price in Nov 99 was $400k. So with 20% down the mortgage would be $320k, over the conforming limit. So even if it's a 30 yr fixed rate 20% down, it's a jumbo loan.

Also, you are right in that stocks with a p/e of 100 were not fundamentally sound. Absolutely true. But, the dotcommer who got the cash from his IPO didn't really care at that point, and his cash was fundamentally enabling him/her to buy, raising the prices of houses around here.

So the run up in 98-00 was not a housing bubble, it was a dotcom bubble. But, the run up in housing prices from 01 to 07 was a housing bubble. Housing prices fell from 00 to 01, but not to pre dotcom bubble levels, then rose without fundamental reasons. (although some of the rise was due to money still sloshing around from the dotcom - as I said I still have some of my dotcom money today.)

Forgot the link showing median home price at $400k
http://demopedia.democraticunderground.com/discuss/duboard.php?az=view_all&address=104x4152167

it's a copy of a Mercury News article.

OK, I'll ask you a question. How did the world operate when we WERE on the gold standard? Low inflation, fiscal responsibility, no currency debasing? I don't know - thats sounds good to me.

BTW - GOLD DOES NOT FLUCTUATE WILDLY IN A FREE MARKET. WHAT IS FLUCTUATING IS THE WORTHLESS CURRENCY. This is a basic principal. Housing prices have NOT gone up, the value of our money has gone DOWN. In other words, it takes more money to purchase the same item because our loving government has debased our currency. I'm sorry, you really need some BASIC help in understanding "how money works".

1) It's pretty simple. You allow gold to circulate as a competing currency. This does not eliminate the dollar and other fiat currencies as they exist today. It allows you to keep the current system in place and simply add a new player to the game in the currency market. If individuals would like to accept or make payments in gold, they should be free to do so. America's economy did fine with dozens of competing currencies throughout the 1600s to 1800s. By allowing a competing currency, it will naturally restrict the governments temptation to overheat the printing presses.
This is not really a gold standard but it does allow gold to function as money. I have yet to hear a legitimate response from anyone as to why we can't led the dollar still exist in its current form and allow gold to circulate independently of the Federal Reserve.

This would be no shock to the system and it would be no different than the mechanism in place that allows someone from Europe to use their credit card to pay for something in America right now.

2) This hypothetical scenario would be irrelevant because the dollar will still exist as an independent currency if you followed the solution to #1. Besides, how much did this happen when America was on a gold standard? It didn't.
3) You are wrong here. Gold prices do not fluctuate wildly. The dollar price of gold fluctuates wildly. If you price anything in gold, you see an full order of magnitude less in standard deviation over several time periods (months, decades, centuries). Price oil, wheat, the stock market, or anything else in gold. Then stack it on the same thing priced in dollars. The gold chart looks smoother.

The analogy that "gold fluctuates wildly" is wrong. The old illustration to prove the consistency of the value of gold: one ounce of gold bullion in 1920 would buy top quality men's suit. That same one ounce of gold bullion would accomplish the same today. This illustrates the point that it is not gold that is changing in value, it is in the purchasing power of the fiat dollar. Gold has maintained its purchasing power, whereas the dollar has not.

A return to a semi gold standard in which the amount of dollars printed would be limited in proportion to the amount of gold held by the Treasury. The amount of dollars allowed to be printed would be in direct relation to a fractional amount of gold held. For example: for every trillion dollars in paper money in circulation, the requirement would to be to have at least $100 billion in gold reserves (purely hypothetical). That would be a return, somewhat, to the original intent of the Bretton Woods agreement. As far as establishing the value of gold in relation to the dollar, I would think allowing the value of gold to float on the open market would further serve as a brake on the printing of money and maintaining its value. If the price of gold bullion were to rise, that would force the Treasury to raise interest rates and diminish the supply of currency. That would at least establish some control over the amount of money that is being printed, and would force politicians to reign in on their reckless spending.

So the run up in 98-00 was not a housing bubble, it was a dotcom bubble. But, the run up in housing prices from 01 to 07 was a housing bubble. Housing prices fell from 00 to 01, but not to pre dotcom bubble levels, then rose without fundamental reasons. (although some of the rise was due to money still sloshing around from the dotcom - as I said I still have some of my dotcom money today.)

The same was true with Japan pre-1990. The stock bubble fueled the RE bubble, back to back. In the case of SV, the money cashed from from stock options and highly inflated stock prices fueled the home prices. It was after all free money! There was nothing legit regarding prices back in 2000. They were unsustaible. Its no wonder over 60% of post 2000 sales were using ARM loans.

Publication Date: Wednesday, Sept. 20, 2000 & Friday, Sept. 22, 2000
Breaking into the market
Yes, Virginia, it is possible to buy a first home in this area–if you’re willing to make compromises
by Jocelyn Dong

http://www.paloaltoonline.com/news_features/real_estate/fall2000/2000_09_22.trends.php

SiO2 says

as I said I still have some of my dotcom money today.)

Sure, but YOUR gain, was someone elses near 90% loss if they held it today. And there are many examples of that.

SiO2 says.

Thomas Wong - Are you saying that a Los Gatos house sold for $300k in early 90s, then for $1m in 2000? I can believe that. And it was even supported by fundamentals, in the sense of newly rich dotcommers who wanted to live in Los Gatos. I remember a house in Palo Alto that was listed around $2.5m and sold for $3.5m!

What your saying is the highly inflated stock prices which helped buy up home in 1998-2000 at what ever price the seller wanted were justified, by some fundemental valuation? And Yahoo and other stock like Ariba really were worth $350/share and $400/share! Thats a good one! That is why so many came here post 2000 from the East Coast to ride the next gravy train as the next tech boom happens.
Good luck with that one!

Stock options definitely helped create a lot of new buyers and buyers with a lot of cash. There were a lot of companies that went public, a lot of people cashed out their options, and used the money. A lot rode the market up and then down again. A lot weren't even part of the bay area, they had just invested in the stock market. Yahoo at $350 doesn't need to be justified, it just needs to be understood that people sold their options, and used that money.

Hi Thomas,
You write:
"What your saying is the highly inflated stock prices which helped buy up home in 1998-2000 at what ever price the seller wanted were justified, by some fundemental valuation? "

No, that's not what I meant to say. I said that the dotcom stock prices were not justified. But, also, that the cash that the recipients had was real. So the 1999-2000 home value rise should not be surprising. Pkennedy's got it right.

But note that I agreed with you that price rises from 01 to 07 were not justified for the most part.

Check out Intel's announcement today. someone's making some money now.

"Modern liberalism violates the principles of ordered liberty. Liberal neurosis exhibits signs and symptoms which qualify it as a personality disorder".

The Liberal Mind, by Lyle Rossiter, JR., M.D. Yet another good book.

Nomograph says

theoakman says

Besides, how much did this happen when America was on a gold standard? It didn’t.

That was prior to electronic trading and the emergence of China, India, and other nations as economic competitors. Electronic gold trading on the global market changes everything. How will we protect ourselves from economic attacks on our currency via cornering or flooding the gold market? Do we need a single world currency for this to work?
Also, in a practical sense how will gold become a competing currency? Who has enough gold to form a currency start-up company? Won’t it take billions and billions of dollars worth of gold just to get off the ground? Where do the profits for such an endeavor come from? I can’t really think of how this will happen in a practical sense. Can China start selling gold currency in the US?
Thanks for your reply. At least you’re thinking about these things. I though Honest Abe would have had some ideas, but apparently he just want to have fake Internet battles with imaginary enemies. Poor Nomo. All he wants to do is understand.

This is a hypothetical situation that simply has a 0% probability of occurring. First off, China owns enough dollars to do exactly that with our own fiat currency. If China wants to launch a speculative attack on us by flooding gold into our market, I'm sure we'd be glad to take it and spend it on goods in another country. The end result would be a depletion of China's gold reserves.
We don't need a large private institution to hold gold to let it exist as currency. If a private entity wanted to deal in electronic gold, they could easily accept deposits from people wishing to utilize their service. Likewise, others could make withdrawals. If the market responded positively to this system, it would all come together in the marketplace.

A Libertarian friend sent me this months ago. It really got my naive little mind thinking about the Federal Reserve and banking. Might be old news for most of you but it's interesting none the less.

Money, Banking and the Federal Reserve

http://www.youtube.com/watch?v=iYZM58dulPE

Nomo, apparently you are one of those with liberal neurosis (a personality ndisorder). That expains a lot. Thank you Doctor Rossiter.

Nomograph says

theoakman says

If a private entity wanted to deal in electronic gold, they could easily accept deposits from people wishing to utilize their service. Likewise, others could make withdrawals. If the market responded positively to this system, it would all come together in the marketplace.

Isn’t this essentially what we have right now? I can buy and sell electronic gold with the stroke of a key.

But you can't pay for your groceries with it. You can't pay your taxes with it. It is not legal tender. Furthermore, Gold carries a 25% tax on it for being classified as a "collectible". It can't function as money until legal tender restrictions are lifted and they stop taxing the crap out of it.

Here is a good read: kitco commentaries Paul Nathan April 15 2010

Just google the above and read, it's called "Why Gold?" Then you'll know !!

Good day.

AdHominem says

Nomograph is an ass

Honest Abe says

Nomo, apparently you are one of those with liberal neurosis (a personality ndisorder). That expains a lot. Thank you Doctor Rossiter.

Lovely answers, just what we've come to expect.

Nomograph says

Honest Abe says

Nomo, apparently you are one of those with liberal neurosis (a personality ndisorder). That expains a lot. Thank you Doctor Rossiter.

I didn’t know you Conservative types were so into the touchy-feely pyschobabble stuff.
Neuroses notwithstanding, don’t you have ANY ideas about how to restore the gold standard? I thought that was your crusade. Didn’t your AM talk radio Messiahs get to the part about actual ideas, or do you only listen to the “I blame Libs for my problems” part?

The Neocon embracing of the gold standard is only a recent development that was started with Glenn Beck. Gold companies deliberately target the neocon audience right now because they are sympathetic to the call for less spending and sound fiscal policy.

There has been a strong sect in economics and the libertarian community that has been calling for a sound monetary and fiscal policy for over 10 straight years and has literally been disgusted with the Neocons that ran the country under George Bush/Alan Greenspan. The Right Wing does a great job at hijacking any legitimate movement in this country and turning it into crap. The Tea Party movement had a slight chance of being legitimate until Fox News and Sarah Palin got a hold of it.

It wasn't long ago that Republican ideologues were making fun of people who bought gold. Now they want in on the party. Unfortunately, they have no clue as to why gold is a good investment today and simply buy because advertisers on Fox News convinced them to. As a result, they will have no clue when to sell and they'll be left holding the bags when its time to sell your gold.

Oak--

Maybe you can answer my main question--why does gold have value? What gives it the "intrinsic" value that others keep talking about?

tatupu70 says

Oak–
Maybe you can answer my main question–why does gold have value? What gives it the “intrinsic” value that others keep talking about?

Didn't I already give up on trying to convince you of this in another thread?
Gold retains its value because it is rare, easily divisible, stable in supply, and doesn't degrade and cannot be counterfeited. You cannot find another element on planet earth that meets those specific criteria. No other commodity is able to serve as a stable monetary unit of account like Gold for those reasons. Silver used to meet that criteria until we began using it up in industry.

As hellbent as some people are to try to convince you that "gold is worthless and has no value", the market has disagreed with you for thousands of years and will continue to do so until a Gold comet hits planet earth.

tatupu70 says

Maybe you can answer my main question–why does gold have value? What gives it the “intrinsic” value that others keep talking about?

If you saw a $100 bill and a 1 ounce bullion gold coin on the sidewalk and could only pick up one, which one would you pick up?

theoakman says

Gold retains its value because it is rare, easily divisible, stable in supply, and doesn’t degrade and cannot be counterfeited. You cannot find another element on planet earth that meets those specific criteria.

Well, there are a copule of problems with that as I see it. Meeting those criteria may make it a good currency, but doesn't make it valuable.

And there are several other metals that fit your profile--Rhodium, palladium are metals that come to mind.

I'll ask again--why is it valuable?

Hahaha - you claim not to know. You simply refuse to acknowledge reality. Typical liberal neurosis...a personality disorder - medically documented. Argue all you want, blah, blah, blah, whine, whine whine, but it doesn't change reality. Hahaha.

Let me suggest CESIUM as a store of value!

It's a rare metal with the wonderful quality of becoming liquid at 83F, so even a child can mint coins it's no more difficult than making popsicles, then melt it and return to original form.

(Tune, "Why don't we get drunk..."
with apologies to Jimmy Buffett)

I've got a pound of Cesium,
It's burning gently near.
The sky-blue flame looks lovely,
But it's noise I want to hear.
So darlin' bring some water,
A couple pints'll do.
And why don't we mix up the two?

Why don't we mix up the two?
'Cause Cesium and water,
Really make a wicked brew.
You say I've got a death wish,
But honey, I'm just blue.
So why don't we mix up the two?

---Songs of Cesium #29

Re: OP

over the past half hour I did a little thought experiment...

If I was Ben Bernanke/Tim Geithner (they would probably have to work together on this) and wanted to return America to a sound monetary system (which by the way obviously they do not), here is what I would do:

This first step is not necessary but would make it more fun...
1. Raise interest rates. This "tightening" step would cause the world to believe that we are serious about our sound dollar policy and as a result precious metal prices would drop (for those new to precious metals the dollar and gold have an inverse relationship in general meaning when gold is up the dollar is down and vice versa). As a bonus this would drive housing prices down.

2. After having driven the price of gold down I would take advantage of the secrecy of the FED and use my vast supplies of fiat cash and stealth bank and trading accounts to buy precious metals, starting with futures contracts and then after buying as many of them as I could without pushing the price up too high, I would start buying physical gold where ever I could find it and as much as I could, slowly over time pulling more and more gold into the New Fort Knox. I would roll over the futures contracts in order to suppress the price and not alert the world market that I was pulling off literally tons of gold for the American stockpile (which is of course already the largest in the world if the official story is correct). Then when the time was right I would make one final push to purchase physical gold and let my futures contracts expire demanding delivery. At this point the "world gold market" would probably be exposed as another ponzi scheme where "gold" was traded but there was actually not really much physical gold at all, it was all just paper gold which didn't exist but rather was "traded" to give the illusion of a market.

Anyway to make a long story short I would buy as much gold as I could using my fiat dollars and clean out the gold market. Compared to our national debt or even our military spending this would not take that much money to pull off. It doesn't matter though, I have access to the printing press. When all was said and done I would own all available supplies of gold, America would have a vastly increased majority share of the world's gold and we could initiate the gold standard in earnest.

3. At this point I am torn as to whether or not I would default and screw all foreign investors or just be a nice guy and allow them to benefit from the new gold standard. Most of our debt is actually "owed" not to foreigners but to the Fed and American investors such as pension funds. So it would be Americans that benefited the most by choosing not to default. After deciding (default or honor debt), then and only then would I make known that in fact it was the American Treasury department that had cornered the market on gold.

4. Allow Federal Reserve notes to continue circulating, but also make them redeemable in gold or gold backed trading/debit accounts with an exchange rate based on the ratio of Fiat Federal Reserve notes (theoretically the central bank knows exactly how many dollars are out there right? so this should be easy to do) to actual gold reserves. I don't care to guess what an ounce of gold would be worth but I expect it would be at least a couple thousand dollars. Essentially the Federal Reserve note will become backed by gold. This would force all other nations to devalue/revalue their currency based on the amount of gold in their country's reserves (had we chosen not to default we might have to send some gold overseas to settle our debts. This would help the countries we owed money to, to revalue their currency (which might be good because they would be in a better position to buy American goods if their currency was more valuable).

5. Change the nature of the Federal Reserve from private bank and lender of last resort to National Storehouse. Eliminate fractional reserve banking. Allow the free market to set interest rates based on risk. Encourage and reward savings with actual interest and NO FEAR OF INFLATION.

anyway that was my thought experiment. But before you attack it, as I am sure many will be want to do, please consider that:

-this is by no means a well thought out plan
-it is the only idea anyone on this board has been bold enough to put forward
-Nomograph is an ass
-before you accuse me take a look at yourself
-Cinnamon takes a backseat to no Babka!

AdHominem says

Re: OP
over the past half hour I did a little thought experiment…
.......
-this is by no means a well thought out plan

You wasted a half-hour of your life on that?

tatupu70 says

theoakman says

Gold retains its value because it is rare, easily divisible, stable in supply, and doesn’t degrade and cannot be counterfeited. You cannot find another element on planet earth that meets those specific criteria.

Well, there are a copule of problems with that as I see it. Meeting those criteria may make it a good currency, but doesn’t make it valuable.
And there are several other metals that fit your profile–Rhodium, palladium are metals that come to mind.
I’ll ask again–why is it valuable?

Rhodium, palladium? Maybe you missed that whole "stable in supply" criteria I set forth. Rhodium was in extreme shortage 2 years ago. The industrial catalytic applications of Rhodium and Palladium cause those metals to be heavily used up by industry resulting in an unstable above ground supply. Your money supply would go bonkers if it were tied to these two metals.

The fact that gold is inert (which is why people refer to it as useless) is one of the main reasons it successfully functioned as money. The market has never accepted Rhodium as money and it never will.

theoakman says

The fact that gold is inert (which is why people refer to it as useless) is one of the main reasons it successfully functioned as money.

Not at all. Inert is a good thing--that's why it is used as a contact material in electronics. You are correct about the industrial uses of Rhodium causing it to be more unstable.

Do you understand my question though--scarcity doesn't imply valuable. There has to be demand as well. I still don't see why people believe gold is valuable other than:

1. It is shiny and makes pretty ornaments
2. Historically it was used a currency

What am I missing?

says

Anything that is scarce and has a use (in this case, monetary use) will have value. You are trying to make this more complicated than it is.

But it's not used as money anymore

Gold is valuable as a store of wealth against fiat currencies. As painful as it may be, break open the ole history books and see what happens when countries go off the metal standard (gold/silver).
Gold has no debt. Fiat currency is debt. Take a bill from your pocket and at the top it clearly states
'federal reserve note' well, let me see can I now pay a note with a note. Only until the ponzi scheme implodes. Can I do the same with gold? No, it has no debt. Can't print it either. Electronic gold, sure you can trade in electronic gold. Would highly recommend you know what your doing and have enough of the real stuff to back up the contract(s) your trading. You do the math.

Yes in all probability gold will become fixed in price as a partial reserve to the world reserve currency which will consist of a basket of currencies, no longer exclusive to the us dollar. I have no current conclusion where this fractional value of an IMF or world currency will be, guestimate between 10 & 30%
Can't be more than 30% not enough bullion on the planet. Other alternative back to serfdom and can kiss the feet of the 'nobleman' who owns the castle because he has the gold.

The days of everything for nothing built on credit are over; they were over when they started it just takes a while for cycles to run their term.

Someone earlier said 'you can't spend it' try this. Go to your local auto dealer and talk to the dealer or general manager (someone who understands money) pick out a 35k vehicle and offer him 29 1oz gold eagles with a current spot price of 1160. Guess who just purchased a depreciable asset with an appreciable asset?

Gold has no debt? Amazing. Therefore fractional reserve lending did not exist in the Golden Days prior to 1971. Obviously my texts are wrong.

Your text's wern't wrong - your understanding of fractional reserve lending is.

Since fractional reserve lending was invented, "printing money" i.e. manufacturing more debt/credit out of thin air has been common practice. Whether you pretend you are backing all that paper with gold or not is at best a quibble. The sum total of gold and/or dollars in circulation in 1970 was FAR FAR less than than the sum total of all the assets and debts that represented our national "wealth".

Backing paper money with gold is the specifically the point. If more paper money is issued than an equal amount of gold reserves available to redeem them - then a crime has been committed. So how is gold a debt ???

Is it any different if a priest molests someones son than if the government steals from someones son ??

Honest Abe says

Backing paper money with gold is the specifically the point. If more paper money is issued than an equal amount of gold reserves available to redeem them - then a crime has been committed. So how is gold a debt ???

It's a good question. Paper money only accounts for a small fraction of the money supply. Are you proposing to eliminate fractional reserve along with re-adopting the gold standard?? How about bringing back the outhouse? Or horse drawn carraiges?

CNBC also had similar story and comments. The majority of the contruction is upscale Condos priced $100K well above normal salaries of Chinese consumers $3500-7500/year. Lots of money coming from the US to China as well.

tatupu70 says

Honest Abe says

Backing paper money with gold is the specifically the point. If more paper money is issued than an equal amount of gold reserves available to redeem them - then a crime has been committed. So how is gold a debt ???

It’s a good question. Paper money only accounts for a small fraction of the money supply. Are you proposing to eliminate fractional reserve along with re-adopting the gold standard?? How about bringing back the outhouse? Or horse drawn carraiges?

You seem to think paper money is a symbol of the progression of society. Paper money is an example of the degradation of society. It has already been tried before and has always failed.

says

It has monetary use. That’s why central banks have refused to sell it despite the fact that they haven’t used it to back the currencies for 40 years

First off--central banks have been selling gold. I posted a link to an article about Britain which talked about how their central bank had sold off almost all of its gold because they wanted the money "working" for them-ie earning interest.

Second--What do you mean by monetary use? You can't really use it to buy anything, so I don't follow.