Overvalued housing, bonds, and stocks
Jason Hommel
Friday, July 2, 2004
Housing, bonds, and stocks, in general, are very overvalued.
Home ownership levels are at all time highs,
and the public, always buys at the top, when values are at the
highest. Mass buying by the public creates a top. Home prices are
boosted by the availability of cheap money due to low interest rates,
and easy-to-qualify Federal loans from Freddie Mac and Fannie May. The
easy money from the cheap loans creates extra buying pressure.
Whenever there is extra buying pressure, prices will rise higher.
Whenever most buyers are using borrowed money to buy things, it creates
overvalued prices.
Overvalued home prices are clearly seen in the boom and high value of
home building stocks. If home prices are too high, it will be very
profitable to build homes, and it is. Further evidence is seen as
reckless speculators buy unoccupied houses, with the sole intention of
selling them at higher prices.
Here’s further proof that when people spend borrowed money, it creates
over-valued assets. Remember the stock market of 1929? It crashed,
creating the great depression. Why? Because the Federal Reserve,
which was created in 1914, had created a bunch of new paper money
during the “roaring 20’s”. People borrowed this money, and bought
stocks, on margin. In other words, they were using borrowed money to
buy stocks. Therefore, stocks became overvalued.
Today, almost everyone uses borrowed money to buy a home. That is the
standard, and it is creating the bubble in real estate that must,
therefore, collapse. Don't fool yourself into thinking you are "safe"
if you own your home debt free. Would you want to own stocks in 1929,
just before the crash? No.
Housing and the bond markets are related. Bond values move inversely
to the interest rates. Literally, the bond market creates interest
rates. When interest rates are low, bond values are high. When
interest rates are high, bonds are cheap. The time to sell bonds is
when interest rates are low, and the value of bonds is high, like
today. What is the value of the bond market, and what will bondholders
buy instead? Bonds are the alternative to gold and silver. They say
that "bonds are the safest lowest risk investment," but this is not
true. Today, bonds pay 1-5% in interest, which is lower than the
inflation rate, so you are losing money holding them. Furthermore,
bond values can go to zero value in two ways: either through
hyperinflation or default. In contrast, gold and silver cannot ever go
to zero value. In truth, gold and silver are the safest, lowest risk
investments, not bonds.
The U.S. bond market is $20 trillion. But all the gold ever mined in the history of the world is a mere $1.9 trillion at $400/oz.,
and the remaining identifiable silver supplies of 200-600 million
ounces, at $6/oz. is a mere $1.2 to $3.6 billion, not trillion.
The bond market is propped up higher than it would be for several
reasons. First, other nations are accumulating U.S. bonds. Will that
continue, or will they ever want something real in trade for their
goods? Second, the Federal Reserve is buying bonds in the open market
to keep interest rates low. The Fed activity is uneconomic, and
unsustainable, due to the deficit.
The U.S. government has a $700 billion annual deficit, and that number
likely excludes the interest on the debt, which, since the days of
Clinton, has been excluded from the numbers. So, the actual deficit
may be much higher. How can this be financed unless the Fed SELLS
bonds? Yet, the Fed is buying bonds to prop up the bond market! When
it comes time for the Feds to reverse course, and sell this $700
billion in bonds to the public, the bond market must collapse, as
interest rates rise.
The only alternative for the Fed is to not sell bonds, in which case,
the Fed will basically be “monitizing” the debt, which is extremely
inflationary. And this has been taking place, as can be seen due to
the fact that many basic commodities, such as oil and steel are up
several hundred percent in the last few years.
As bonds collapse in price, and as interest rates rise (when the Fed
reverses course from buying bonds to selling bonds), bondholders will
be forced to try and sell their bonds before the Fed sells their
bonds. Bondholders will need to lock in profits and protect themselves
from the loss of value of their $20 trillion worth of bonds. Their
only viable alternative is gold and silver.
As interest rates rise, it will be much more expensive to make home
payments for all who have adjustable rate mortgages. Many of these
homes will be foreclosed, and as banks repossess these home and sell
them, this will add supply to the housing market. (Foreclosures are already at a 40 year high.)
At the same time, new home loans will be much more expensive, due to
the higher interest rates, and thus, there will be fewer buyers who
qualify for loans, and demand will go down. As home supply goes up,
and as demand for homes go down, there will be a severe collapse in
housing prices.
As interest rates rise, it will cause the bankruptcy of many major companies in corporate America. Ford Motor Company, for example, has $180 billion in debt
to either pay off, or refinance. How will Ford be able to sell bonds
when the Federal Reserve begins to sell $700 billion in bonds after
artificially boosting bond values by buying bonds? Ford Motor company
has a profit of a billion dollars per year. If interest rates rise by
a mere 1%, it will cost Ford another $1.8 billion, and unless Ford can
borrow more money, they will be, effectively, bankrupt.
As companies like Ford Motor Company and GM go bankrupt, their stock
prices will, of course, collapse to zero just like Enron. In addition,
the bondholders who own Ford’s bonds will become the new stockholders
of Ford. The $180 billion in bonds will likely turn into perhaps $30
billion of a reorganized Market Cap of Ford. Thus after bankruptcy,
stockholders will lose everything, and Ford’s bondholders will lose
perhaps 83%.
Stocks are overvalued because price to earnings ratios are outrageously
high, and many companies are in debt beyond hope. When stock markets
collapse, the P/E ratios return to the low 6’s and 7’s. If P/E
ratios are around 20, this means stocks, in general, will collapse by
about 2/3’s, or expressed in another way, will lose at least around 66%
of their value today--and that's if they can maintain current profits
in the midst of a currency collapse and depression.
If the currency collapses completely, it will create another gold and
silver rush, as people would abandon their mortgaged homes to look for
gold in the hills. If that happens, imagine how cheap housing would
be, and how many homes you could buy if you were smart, and invested in
silver or gold now, while they are cheap. Make no mistake: housing
prices are very dependant upon the survival of the fraud of the overvalued dollar.
Further, consider taxes. Many people who own homes, have decided to
own them for the tax advantage. The interest is deductable against
your income, which reduces the income tax. But there are two other
very important tax considerations that I would like to bring to your
attention.
First, there is a property tax levied by the state. You do not really
own your home if you must pay a property tax. If you don’t, or can’t,
pay the property tax, they will put a lien on your house, and even
auction your house off to pay the tax. If the currency collapses, and
home values collapse, and when state governments get into serious
trouble, they will levy a property tax in the form of gold and silver.
Thus, if you do not have gold or silver to pay the property tax, you
may lose all of your real estate holdings, even if you own them
outright and have paid off the mortgages! So, even if you own your
home outright, and it’s paid in full, your asset is not safe. It
might first lose 90% of it's value, and then, you might lose it
entirely if you can't pay taxes if you have no gold or silver.
Second, consider the tax advantage of owning gold and silver.
Officially, there are capital gains taxes on every asset you own that
rises in price, and then sell. Unofficially, there is no way to track
when and at what price you paid for silver when you acquired it.
Therefore, realistically, there is no capital gains tax when you sell
silver or gold after they appreciate. And if they pass any ridiculous
law to try and tax gains on the sale of gold and silver, that will only
cause less selling of gold and silver, which will, in turn, make them
more valuable, and less likely to be used in trade. The only way for
society to emerge from a currency collapse is to pass laws designed to
attract and encourage the trade of gold and silver. So laws that tax
captial gains on the sale of gold and silver should not be feared.
Anyone owning stocks, bonds, or housing needs to seriously consider
diversifying into an asset class that is not overvalued, cannot go to
zero, and that will move up in value. That’s gold and silver.
Most people also really need to consider the entire concept of
diversification. Personally, I don’t put more than 10% of my portfolio
into any one thing. Yet for many people, housing is their entire
investment. This is so risky that you should not do it unless you
really know, from a lot of study, that you are buying something that is
vastly undervalued. I’m so bullish on silver that I can recommend that
people invest 100% of their assets into silver bullion and silver
stocks. I have. But if you are not so aggressive, you should at least
diversify, say, 50%, into silver and silver stocks. So, if you have
$100,000 in home equity, and no other investments, you should at least
have $100,000 worth of silver bullion.
Unfortunately, perhaps one investor in 1000 owns any substantial
holdings of silver bullion, which proves it’s such a great price.
Gold has been moving up in value from $255/oz in 1999-2001 to $400/oz.
today, and remains seriously undervalued. Gold is less than half the
price it was in 1980, and since 1980, M3, the best measure of money
supply, the money in U.S. banks, has exploded upwards five times from
$1.8 trillion to $9.1 trillion.
Thus, the inflation adjusted price of gold in 1980, of $850/oz. is
really $4250 per ounce, and I have no reason to think the gold price
will stop there once the price begins to head there. If the money in
the banks was truly backed by U.S. gold, the price would exceed
$35,000/oz. or exceed $110,000/oz. if you include bonds with that.
Finally, consider carefully the needs of insurance companies who
control trillions of dollars. They must invest in things that go up in
value; therefore they are at severe risk if they invest in real estate,
bonds, or stocks.
But before I discuss the needs of the insurance companies, let me
discuss my bias. I pay for no insurance. I hate insurance, and the
entire concept of insurance. To me, insurance is the process whereby
risks are shared by all those who buy insurance policies, and
therefore, insurance is socialism, and communism. Insurance reflects
a rejection of personal responsibility, and insurance replaces the role
of the Church. Take, for example, life insurance. In theory, it’s
there in case the breadwinner dies, and so the widow will be taken care
of. But the role of the Church is to take care of widows--and only
those over age 60. Therefore, life insurance usurps the role of the
Church, or the family, in society. And consider car insurance. The
purpose is to remove the risks of accidents. Therefore, people will
tend to drive more recklessly. If people knew they had to pay for all
damages they caused, they would be more responsible with their own
actions. Mandadory car insurance is simply communism, there's no other
way to put it. Consider health insurance. If you have it, you care
less about your health, because you have this “back up”. If you don’t
have health insurance, you will take much more care of your own body,
and you will want to exercise, eat right, and take vitamins and herbs
as necessary.
About ten years ago, in my mid 20’s, I took a three day class to study
the various terms of the life insurance industry, and I earned a
license to sell insurance. The idea was to sell cheap term insurance
as opposed to expensive whole life insurance (that has a bad savings
plan attached), and to convince the customer to invest the difference.
After I took the course, I was so disgusted with the entire insurance
industry, I could not, in good conscience, sell any of it. As another
aside, my father sold term life insurance by writing ad copy that went
out in bulk mail. Therefore, I and my father know a lot about
insurance. We both believe that although term insurance is better than
"whole life", all insurance is a scam, and let me reveal to you the
scam. The insurance business will take your money, invest it, and
thus, be able to earn more than enough money needed to pay off the
insurance claims. They only sell it because they profit by doing so.
If they fail to invest wisely, the company goes bankrupt. Regardless
of whether the company has to declare bankruptcy, in the meantime, much
money will be siphoned off of you by all the salesmen and company
executives. Consider the slogan of Prudential. “Get a piece of the
rock!” implying that they are “Solid as a rock,” and not in danger of
insolvency or bankruptcy. In reality, it’s probably more like, “Solid
as a derivative!”
As my father has often said, “There’s a reason that most of the big,
tall, impressive skyscrapers in all major cities are owned by banks and
insurance companies.”
There is also a reason why Warren Buffet, the world’s most successful
investor, is heavily involved in the insurance business, such as Geico,
the cheap car insurance with the talking Gecko as mascot. As a
successful investor, Warren Buffet should be able to allow Geico to
outperform their competitors. There is also a reason why banks,
insurance companies, and brokerage houses were separated as businesses
after the great depression. Think about it.
So, getting back to the insurance companies. They take your money, and
they must invest it successfully, or die. That is their business.
That is their need. Therefore, the insurance companies are literally
forced to invest in market sectors that are proving they have
profitable returns. Like it or not, believe it or not, we are in a
bull market in gold that has lasted 3-5 years now, from 1999 or from
2001. No other market sector has had such great percentage gains in
this time period. In 2003, silver stocks gained 314%! That’s
unparalleled, and cannot be ignored, and is a foreshadow of a great
movement upwards in the silver price. If the investment managers study
the market fundamentals for gold and silver, to see why this has taken
place, they will realize that these markets are still vastly
undervalued, and they must invest in this sector to achieve the gains
necessary to stay in business. This will lead to trillions of dollars
moving into the very tiny precious metals markets, and will help to
push prices way up from here.
Here is one business idea that I will throw out there for my readers.
If someone were to start an insurance company today, and invest the
money into the precious metals sector, specifically silver bullion and
silver stocks, they would be able to charge much less than their
competitors for the same amount of coverage. This, in turn, would help
them get much greater market share, (with their low prices) and thus,
they would end up being in charge of more and more money to invest. As
they get more money to invest, they would be able to buy more and more
silver, which, again, would push prices up.
Consider again the U.S. annual budged deficit. It’s $700 billion. How
can the silver market be smaller than $1 billion at the same time?
It’s insanity, and market madness. It’s not that I’m stupid and don’t
“get it”, and neither are you. It’s that the markets are in severe
imbalance, as the vast majority of Americans and humanity is in the
pursuit of monetary fraud and madness. Literally, today, we are living
in an economic dark age compared to how good things can get once the
insanity is gone.
I believe that sanity will return, and that sanity will prevail, and
that the fraud of the dollar, that has achieved over 99.99% market
penetration, will lose market share. I’m betting that Americans will
return to sanity, and that economic reality will return.
Ultimately, market dynamics will literally force the prices of precious
metals to rise far greater than we can realize. Personally, I could
start up an insurance company, or bank, and invest the proceeds in
precious and ever-more-scarce silver, and do very well. I would not
have to loan out the money or buy stock at all, but simply buy silver
bullion. But morally, I’m against both banks and insurance. I hate
the entire concept of insurance as it is practiced, and thus, I would
never do it. The only forms of insurance that I accept are things like
silver (insurance against the fraud), a safe (insurance against an
attempted theft), a gun (more insurance against an attempted theft),
and good planning. But realistically, I understand and know that other
people in the world will not have my aversion to insurance, and I know
that to stay in business and to get the most business, insurance
companies will be forced to buy into gold and silver bullion and
stocks. Therefore, be forewarned, and invest before they do, today.
About six months ago, I predicted that silver miners would start using
silver as money. A few have begun to do so. Within the next six
months, I predit that not only will many more silver miners do this,
but soon, the insurance companies will start buying silver and gold
bullion and stocks. Like the silver companies, it will start with some
of the smallest insurance companies, and then, demand will grow from
there as price performance will force others to join our party.
A lot of people think they will wait until after silver really begins
to rise in price, and then they plan to buy silver. What these people
do not realize is how hard it is to find silver bullion in bulk, even
today. Please call your local coin dealer, and visit his shop. Ask
him how much silver bullion he has available right now—not how much he
can buy for you. They will always promise to be able to deliver the
moon. But some dealers are now saying there is a one-month wait, or a
6-week wait, some even refusing orders, especially the big orders.
Imagine if ten times as many investors decide to buy silver, so that
not 1 in 1000 investors are buying silver like today, but 1 in 100.
Will the wait for silver bullion extend to ten months, or 60 weeks? Or
will the price rise substantially? Think about it.
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