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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Other essays by Jason Hommel:
25 Reasons To Support The Sound Money Bill - 08 July 2004
I'm Insanely Bullish On Silver - 19 June 2004
Silver Stock Evaluations - 22 May 2004
The Silver Bull Is Back - 04 May 2004
Late April Silver Update - 22 April 2004
Silver Juniors With Cash Flow - 04 March 2004
Major Frauds of the U.S. Monetary System - 26 February 2004
Market Perspective & Cabo Mining - 12 February 2004
Usury Enslaves - 19 January 2004
Sterling Mining - 29 December 2003
The U.S. Trade Advantage With China - 17 December 2003
Rising Gold Prices Will Help The Economy - 02 December 2003
Miners to Use Silver as Cash - 27 November 2003
Private Placements in Silver Companies - 20 November 2003
Is the Silver Market Too Small to Buy? - 13 November 2003
Inflation & Deflation During Hyperinflation - 06 November 2003
Silver Price Expectations of Silver Stock Investors - 30 October 2003
Buying & Tracking Canadian Silver Stocks - 29 October 2003
Canadian Zinc--Silver Potential - 23 October 2003
Silver Stocks--Comparative Valuations - 4 - 13 October 2003
Silver Stocks--Comparative Valuations - 3 - 06 October 2003
Silver Stocks--Comparative Valuations - 2 - 29 September 2003
Silver Stocks--Comparative Valuations - 1 - 22 September 2003
Silver and Cardero Resource - 08 February 2003
The Moral Failures of the Paper Longs - 22 January 2003
CFTC Response to Silver Problem - 14 January 2003
People Talking About $32,567/oz - 10 January 2003
Letter To Authorities of Silver Markets - 06 January 2003
Why no talk of $32,567/oz ? - 02 January 2003
Refuting Myths about Gold - 28 October 2002
Controlling Gold with Paper - 10 June 2002
Impending Gold Futures Default - 29 May 2002
Certain gold stocks are still cheap - 07 May 2002
A Few Supply and Demand Fundamentals of the Dollar and Gold - 06 May 2002
New DROOY Institutional Holdings - 21 February 2002
Hommels View of Gold - 23 March 2001
Gold Price Under Differing Scenarios - 24 June 2000
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