patrick.net

But astrid, house = leverage. Au, unless you play in the future's market, is just bars that you have to pay in full for.

Some other observations.

1) The biggest beneficiaries of the USD demise were Germany and Japan last time, they were also the export powerhouses of the world. I believe Japan and Germany still retain the top spots today in terms of value, while China is definitely the volume winner.

2) CAD didn't do that well, which sort of confirmed my hypothesis that its trade reliance on the US put it in a relatively vulnerable situation as we ran into troubles ourselves. Sterling was also a dog, well, sterling is the former life of USD, they went down the decline much earlier than us.

3) Although DEM, FRF, JPY appreciated against the dollar, the upswing was relatively small compared to commodities, oil and gold. In a sense, all of these currencies went into a competitive devaluation against the real assets.

Pop!, in the long run, it is possible that we'll get into high inflation to wipe out the debts, as I have already alluded to. However, Lord Exchequer of USA Bernanke is currently intent on raising rates. We shall see.

There are other reasons why Au may get busted. But they are beyond the scope of this BB.

Actually, the equilibrium price for Au, 25 years ago, was around $400. The $860 high was reached on a wild overshoot.

GC,

The current system is full of moral hazards. Hopefully, a tightening credit market will repair some of these problems.

Also. I'd rather play the futures market and deal with the risk. Buying a big house with a $10K+ property tax and nearly $5K+ other costs is just not worth it, no matter how good the leverage is.

Fixed rate leverage is cool in a hyper-inflation scenario. Otherwise, I can afford to wait, make a little money elsewhere, and then buy a house when the time is right.

GC: At the meantime, there has to be a solution for the housing debts.

Why can't the solution be:

Loser
1) FB (defaults - loses DP, owe taxes on loan forgiveness)
2) Unhedged Banks
3) MBS Buyer (those Asians)

Winners
1) IRS has claim on FBs soul for next 10 years
2) You if you keep your cash safe for the next 2-5 years and can land a 10-20% mortgage for the remaining 50% of the house

How the Great Depression was recorded in history books should be a subject that every high schoo/college history class should teach.

At the height of depression, unemployment rate was 20%. Not much worse than what happened to Germany in the 90's. The society was quite orderly.

Some folks charged that it was FDR's diddling that caused real problems and it was FDR who led US into war, etc., etc., etc., and that Nazi Germany was not entirely responsible for the outbreak of WWII, and that Japan was forced to attack Pearl Harbour, so on and so forth.

Of course, these are just another kind of conspiracy theories and they are inferior to Michael Moore's, if we judge by the box office and Amazon sales figures.

@Conor, thanks for the info.

I wouldn't go "all in" to any commodity that prone to speculation and wide price swings, but I think you could do far worse than to have a small % of your portfolio in precious metals right now. I have to second yours, Pop!'s & others skepticism about the Fed "getting tough" on inflation and start really hiking interest rates. What a joke. Inflation is their (and the pols') best friend, which can only be bullish for metals.

Dystopian,

That is my concern too. The Chinese have an old saying, it is better to be an animal in times of prosperity than a man in time of war. I fear that with so many weapons in the world, even the smartest amongst us may not be able to save themselves.

It's hard to know how it'll all play out. The wealthiest nations in the world have no interest in war with each other. Nationalism now is pretty benign compared to the 1930s version. However, there are a lot of second tier nations with oversized ambitions and despotic leadership.

Hong Kong market is about to pop. Avoid at all cost.

China Construction Bank (CCB) is now valued at a higher multiple than Citi, HSBC etc. while its bad debt is as horrible as you can imagine. I generally won't touch any Chinese banking stock with a 10-foot pole. Hong Kong stock market right now is exactly the deja vu of 97 right before the crisis, any China-related concept stock (called Red Chips back then) is trading at a ridiculous multiple that can hardly justify itself.

I invest in Nikkei and German stock market because I believe as things blow up around the world, money will be seeking safe havens in the "proven" countries, aka, countries that produce goods that other countries want, and countries with a unique knowhow/skill that cannot be easily replaced. I am personally very bullish on Japan for the next decade, because they are very ahead of the energy conservation curve that the rest of the world will have to climb very soon, but I may be wrong.

GC,

That was back in the 1930s, when people married young and almost no women worked outside of their homes. They also had no social support like the 1990s Germans. A 20% unemployment meant nearly 20% of the families were without economic support other than what they can gleam from their families and friends.

I don't have data of Toronto market dating back more than 10 years.

Based on the data I have, when DOW was going sideways in 1976-1981, the other stock markets that did well were Australia (up about 50%), Japan (up 50%), Germany and Britain both went sideways just like their American counterpart.

From what I've read and seen (on movies), Americans were more resilient and hard than they are now. Decades of affluence and entitlements from civil rights movement did it.

Pop!,

inflation won't get out of control here because America is a resource-rich country and we can manufacture most stuff we consume, if the cost structure is right.

Weimar Republic went into hyperinflation because it had to pay back its war debt in gold, and foreign currencies. We owe foreigners USD, and we have the military power to cancel our debt entirely (although it will certainly look bad for our future generations). So we will see high inflation, but not out-of-control inflation.

Besides, there's nothing one can do. Every so often, wars come about to wipe the slate clean.

If you look at it, China and India, with their combined 2.5 B population, are bound to clash with the developed world. Although many prefer to look away from reality and think economic competition is NOT a zero-sum game, in reality it always is. There is only so much market for so many goods; there is so much resource for x number of people at y level of living standards.

The HISTORY knows only one way to resolve such a conflict: That is WAR. In addition, let me borrow an observation by Richard Maybury, China has excess male population that she must find a way to "employ" and/or get rid of.

Occupation of Iraq -- yours truly realized this long before the shooting began -- was a geopolitical move to position US strategically for highly plaussible military conflict with certain rivals. It had nothing to do with WMD and OIL.

(damn those "less than" dropouts)...

Pop! : Here is a nice and scary read:

Yeah, and it falls into those less than 1% chance of it happening so focus on feeding your family with a reasonably stable US dollar for the forseeable future. His theory implies that after this thing goes down, the next day, I go into Safeway and pull out my credit card and they say "Sorry, but we'll be charging you in Euros today and your icecream is $27,323.23"

Not going to happen, but if it did, you're better off investing in rice, beer and guns than gold. I'm suggesting neither. Fight your bearish instincts - you'll lose your shirt guarding yourself against low probability risks.

NOT FINANCIAL ADVICE

Conor,

Good point about inflation in CA. Higher inflation will just accelerate the trends we already see. The best public school districts will become quasi privatized (huge donations demanded from parents) and the rest of the school districts will be absolutely worthless.

OT. Anyone seen this?

http://www.nytimes.com/2006/05/07/realestate/07california.html?pagewanted=all

Pop: I still keep my portfolio diversified even though things may or may not turn out as ugly as some of my posts might suggest.

and I'm actually a lot more bearish than my posts have made it seem. I've been long in cash ever since August 2000 and it's crucified me. It was the classic "right play" to make before a recession but the recession never really came. It's been crawling at 5% after a house running at 15%. I sure hope Aesop was right...

Dystopian Contrarian echoes many of the things I've learned from Randy H. Has anyone ever seen both of them in the same place at the same time?

Dystopian Contrarian,

Good writing. I enjoyed it.

But I thought the real Depression only came into existence AFTER FDR took power!!

I don't think occupation of France was part of A.H.'s design. It was meant to drive England out of the continent, for the English always liked to meddle in continental affairs and forestall any promising aspirant. A.H.'s real object of expansion is towards the east, if you care to read the historical texts (including that guy's own rumination from a prison).

The US forced Japan into the Pacific War for a number of reasons. Mind you, the US did NOTHING regarding Japan's "incursion" into China proper, prior to the outbreak of WWII in Europe.

China was a hegemony of some sort in Asia, for a long time.

Only after WWII did the act of "intiating a war of aggression" become criminal, provided of course the aggressor lost.

There is no MORALITY in international relations. It's all about power interests.

SFWoman,

Foreign stocks can be extremely volatile. Countries like India and Pakistan do not have the regulatory standards of US. It's hard to trust and evaluate companies from such countries. Recently, for many reasons, the Asian stock markets have been going strong. Increased political stability, benefits of globalization, increased exports, stronger currencies etc. Foreign funds have been pouring into newly opened markets for foreign investors. Take a look at the chart of Bombay stock index BSE on yahoo.

http://tinyurl.com/m9wte

Note that the index - the average - is up 300% over last 2 years. Individual stocks have done way better. It is crazy.

It can end very quickly. Or it may stabilize. Who knows ? IMO, there is only one way to play these markets. Don't time them. Do $ cost averaging, take a long term view and diversify. Use ETF and/or mutual funds after making sure you understand what their strategy is. Some of the ETF's are too concentrated or have very high expense ratios. Some mutual funds have been very recently formed to cash in on the craze. Go with long term track record. Make sure you feel good about that particular countries future.

Same applies to countries from Eastern Europe.

The good thing is, there are lots of options available. You can invest in world stock mutual funds, or Pacific ex-Japan, or just single country ETF like Korea index for example.

US is still the best stock market, and I think it should still have overweight status in a portfolio.

THIS IS JUST MY PERSONAL OPINION. MAY NOT BE SUITABLE FOR YOUR PERSONAL SITUATION. I OWN MANY FOERIGN MUTUAL FUNDS and ETFs. CAVEAT EMPTOR etc.

BTW, A.H. held great admiration for GB and US. I believe a very dark motive for involving US and for England's continued fighting in WWII was to crush a new aspirant.

I don't sympathesize with anyone. It's all about who won and who lost and who loses and how that happened and how we can learn from that.

BTW, Germany between 1870-WWII was looked on upon by many Chinese leaders at the time as the model for China. In their eyes, Germany succeeded in uniting themselves and became both economically and politically strong, after having had the honor to serve as the battleground for European powers for several centuries.

Hell, I am still trying to figure out why anyone would pay that kind of money for a Mainland Chinese bank. I kind of understand the Chinese doing it, because they do not have many better saving avenues, but why would any foreigner possibly touch that hot potato? Where the hell is the upside?

GC,

Bismarck and Hitler are not quite equivalent to each other. While the Germans (and the French, and just about everyone else) don't like the meddlesome English, Bismarck managed to co-exist with Austria Hungary and did not nurse Napoleonic ambitions.

You are treading awfully close to being provacative for the sake of provoking. If someone here ends up being annoyed by your comments, be forewarned that I will erase.

Randy H,

You said: But I have a command on what my “discount rate” is.

I believe you were explaining that you can make your own informed decision in holding a commodities porfolio inlcuding precious metals.

As usual, I have to ask you to dumb it down a bit for me. I'm guessing your discount rate has something to do with the present value of those commodities at some future date if speculative pressures don't change the price. Am I getting warmer? Is your personal discount rate based on the returns you could make in other income generating investments that are available to you?

Dystopian,

I'm not sure FDR truly cured the Great Depression. His programs ameliorated the conditions and some portions of society managed to recover by the late 1930s, but there's no proof that his policy actually pulled the US out of depression.

Of course, he was much more fiscally conservative than Republicans today give him credit for. He didn't spend on borrowed credit. New Deal also built useful stuff, as oppose to those Japanese roads to nowhere.

D.C.,

I read that one long ago, yes, in English, and found it repetitious and boring. I''ll do an online search to validate your claim.

I thought Japan escalated its compaign in the Pacific shortly after they attacked Pearl Harbour. Yes, they were forced into a conflict with US. But once the shooting started, they had no choice but to occupy strategic locations in the Pacific. It's so natural: If you have to fight, fight with all you have and fight to win. Why is it so difficult to understand?

Given the economic strength and freedom, EVERY NATION wants a mighty navy.

That is why I AM VERY CONCERNED ABOUT THE RISE OF CHINA AND INDIA. This rise will cause instability in the world and potentially another GREAT WAR.

Before, it was the rise of German and later re-surrection of Germany and the rise of Japan. Now ......

DID YOU GET MY MESSAGE?

There is no morality in international affairs. It is all about power.

Garth,

You've got one part of it. Discount rates apply both to time and to risk. I think Randy was primarily talking about risk. Usually, there's a discount for higher risk investments. That means the expected return for riskier investments should be higher than the expected return for less risky investments.

Dystopian Contrarian echoes many of the things I’ve learned from Randy H. Has anyone ever seen both of them in the same place at the same time?

Randall Harrison Esq. is no longer available, please forward any inquiries to his admin, Miss Sassy Pants.

surfer-x,

I think that's Randolph...

astrid,

it is the same reason why one would pay 200 P/E or 1000 P/E for dotcoms. At the height of the Red Chip craze in 1997, people were paying >200 P/E for mainland Chinese textile outfits, shipyards, real estate developers, or conglomerates (which means nobody knows what the heck they do). I was asking my friend why they were buying these stocks, they were giving me this stare like I didn't comprehend the basics of economics. Needless to say, these stocks tanked 90-95% after the pop, some even got delisted.

I really don't think the Chinese and the Indians are in a position to do large scale warfare. They've got way too many internal problems to take care of. They're also nowhere as well organized as the Japanese and Germans of the 1930s. They're much more likely to implode than direct their attentions outwards.

20th century warfare is a negative game, nobody wins. Just look at Israel.

People who are so negative on the future need to take a hike around the world and see what kind of condition most people are facing. Being born in this country is already giving you a HUGE head start against people from some countries who will never reach even 1/10 of your living standard no matter how hard they try. They are doomed from the moment of birth.

Americans are spoilt. Nobody needs to eat that much food, eating less that the appetite allows is healthy, nobody needs to drive so much, walking is even better. Nobody needs to live in a house with 1000sf per capita, most people in the world get by with only 1/10 of that, and they are just fine. Nobody needs to buy so much Walmart junk that cycles from the store to the garage and then to the rubbish bin in a matter of days.

I say most Americans are pretty obsessed with self-inflicting pain. If they just scale back some of their unreasonable, larger-than-life expectations, they will be a lot happier and healthier.

SFWoman,

the solution is easy, encourage gay sex. Also, China has a huge prostitution industry, it is a huge part of the GDP that goes unreported. As long as the single guys can get their aggression relieved in other channels, they will be fine.

SFWoman,

The Chinese have a long tradition of female infanticide or simply letting girls die in times of hardship through neglect. This situation had manifested itself in internal instability. Via higher crime rates and greater likelihood of revolutionary behavior.

I suppose the Chinese can try to coopt these futureless young men via military expeditions abroad. But that would be a risky move. Veterans are not a particularly pacific bunch, and China has enough problems without engaging in war abroad. They could not even defeat the Vietnamese!

Owneroccupier,

I think my 7th grade lab partner expressed the sentiment the best. "Americans are born to waste, thats what makes me American."

Owneroccupier,

The Chinese managed to deal with a female shortage since forever - concubinage + relatively few warriers. I guess prostitution is pretty much inevitable. The important thing is to keep these men hoping to marry, then pull the rug from under them when they are 40 or 50 and too old to make trouble.

I have a distant relative in rural Heilongjiang. The family had 5 sons and one daughter. None of the sons married.

D.C.,

Your correction well taken. AH did express admiration for US industrial potential, now I remember, not for the innate propensity to fight that the tommies were so well-known for. But his Bundestag speech was probably aimed at rallying his troops by belittling the Americans. You said the Bundestag was a sham at that time. So it was probably towards the end of the war when American jackboots were already on the European continent. Just my guess.

A starving man only wants a job to feed himself. But when hunger is no longer an issue, he casts his glances at your house, garden, and perhaps your gold coins, too.

That's why the Spartans kept their men in perpetual war-like training and living environment, so as not to lose guard and become soft. Sparta survived a long time.

SFWoman,

Sorry for erasing your target. I have an especial dislike for trolls who keep changing their handles. ;)

GC,

Yes, the lovely Laconians. But when they went out, they did it in an awfully bloody minded way. Besides, the Athenians might have made it if there was no plague. And at least we still remember Athenian contribution to human knowledge. We know basically nothing about the Spartans, except that they oppressed a lot of Helots.