We'll remove the replacement-cost value of structures.
There are three items of note here.
1. The bubble concentrated on the one thing that was supposed to hold its value. We were told time and time again that the value is/was in the land. They aren't making any more of it.
2. The value of the land has seen two lost decades so far. Isn't that something? I can't stress this enough.
3. The bounce off the bottom looks a lot like a dead cat bounce. Look closely at how it is starting to fall again. The last data point is from the end of the third quarter of 2010. Oh oh.
Now let's turn our attention to gold.
That's a hefty price tag. It goes well beyond the $52 billion sitting in GLD. It doesn't even count the value of gold mined before 1900 (perhaps 20% more).
Now let's compare the value of all the gold mined since 1900 to the total value of residential land in America.
At today's $1,409.60 per ounce, gold has risen roughly 15% since the last data point on that chart.
I continue to believe that gold is in a bubble. All the gold mined since 1900 can now buy all the residential land (but not the structures) of the United States nearly two times over.
I suppose we can joke about how we should all move to China in order to avoid our financial mess. In reality, I have absolutely no desire to move to China. The average person in China would not be allowed to read a blog such as this one, much less write one. I'll pass on modern authoritarianism thank you very much.
My interest in owning gold at these prices is similar to my interest in moving to China. I'd need to be forced to do either. I just don't see the value.
Source Data:
USGS: Historical Mineral Statistics
Kitco: Gold
FRB: Flow of Funds Accounts
Warren Buffett remains optimistic about US future
ReplyDeleteHe said a housing recovery will likely begin within the next year, which would help the economy and several Berkshire subsidiaries, including ones that make carpets and bricks.
I am not as optimistic as Warren Buffett, but I will say this. It could happen. He did a good job of pointing the bubble out back in 2005.
I don't think residential land values are in a bubble any longer, I'm not interested in owning gold, and I have no plans to move to China.
That's something I guess. Maybe that means I am *relatively* optimistic too.
"When leverage works, it magnifies your gains. Your spouse thinks you're clever, and your neighbors get envious. But leverage is addictive," Buffett said. "Once having profited from its wonders, very few people retreat to more conservative practices."
I clearly underestimated that. I retreated in 2004 once and for all. I really don't have any complaints in hindsight.
One more thought.
ReplyDeleteHe said that regardless of Berkshire's performance, it could easily and legally "cause net income in any given period to be almost any number we would like."
Most CEOs would not point that out. Go figure.
Warren Buffett does not sell repossessed homes. I do.
ReplyDeleteI'm looking at price reductions of $5,000, $10,000, $15,000 every month. Don't talk to me about a recovery in housing.
Anyway, Mark, I like you and enjoy your website. You put up some interesting charts and graphs. But here you're missing the point.
Most of the residential houses built over the last say 10 years were cheaply constructed in bad locations. They were overpriced, and the buyers, or borrowers, took out toxic loans. Affiliated by appraisal fraud, I might add. It's no wonder the value of these properties is decreasing.
But a well built house in a nice neighborhood, that's say 20 years old. You won't find many of those on the foreclosure list, and very few of them are on the market for sale. You know why? Because their market value has not decreased; in fact, it's increased.
People do not understand real estate. It's not all about location, location, location; it's also about quality of construction.
If you own a well built home in a nice neighborhood, you can sell it for whatever price you ask. Believe me.
If you own a poorly built home in a crappy neighborhood, that you took out a toxic loan to pay twice what it's worth for, it will be sold on the court house steps for half of what you paid for it.
This is reality.
GawainsGhost,
ReplyDeleteI understand where you are coming from but it is the value of the land that fell the most.
The value of the stuff that makes up the house has held on fairly well thanks to the rising price of commodities and thanks to fairly sticky wages used to build the homes (at least so far).
I'm not say that's how it should work, but that's what the data shows.
GawainsGhost,
ReplyDeleteOne more thought.
But a well built house in a nice neighborhood, that's say 20 years old. You won't find many of those on the foreclosure list, and very few of them are on the market for sale. You know why? Because their market value has not decreased; in fact, it's increased.
You just described my house here in the Seattle area. It was built in 1989/1990.
It is a very nice neighborhood. Very little crime. It sits on 1/3rd of an acre. There's only one house for sale in our development right now. No foreclosures that I've seen.
It is down 29% from the peak.
I want to clarify something I said previously.
ReplyDelete"I understand where you are coming from but it is the value of the land that fell the most."
I'm talking about averages across the nation. There are certainly pockets of despair where this is not the case and for the reasons you offered.
Wow, gold sure looks like a bubble in those charts. The climb in price is pretty steep.
ReplyDeleteOf course, it wasn't fueled by fraudulent credit from bank lending. There is certainly some margin money in there, but it wasn't a 0% down option-ARM loan.
However, in this chart compared to Netflix and Apple stock, it looks downright tame over the last 10 years.
Mr Slippery,
ReplyDeleteFor what it is worth, I have no interest in owning Netflix or Apple either. ;)
Also keep in mind that the combined market cap of Apple and Netflix is roughly $331 billion.
Using economic physics, they are far easier to accelerate than a $7.5 trillion gold market. Just saying!
If you really want to compare like things, maybe a comparison of gold to the entire Nasdaq would make more sense?
GLD vs. Nasdaq
GLD might not be the entire gold market, but its price does represent it fairly accurately (by design).
Also keep in mind that the gold bull market did not start when GLD was introduced. It started roughly 5 years earlier at half the price. I already felt like I was late to the party when I bought physical gold in 2004.
And lastly, 10 years into a commodity bull market is becoming more than a bit risky if the 1970s are any indicator.
Just opinions of course. It's not like I am shorting gold. Just watching.
Mark,
ReplyDeleteYou are right about the start of GLD vs. the gold bull, the gold line would show about 400% instead of 200%.
After 10 years, it is long in the tooth. But IMHO, it has more to do with bad government policy than exuberance. If the government cleaned up its act, balanced the budget, let the banking system clear (crash), and let interest rates return to market rates, gold would drop...like a rock.
But what are the chances the government will let their powerful friends sleep in the economic bed they made? What are the chances they will let free markets work and not massively intervene and distort every market?
Mr Slippery,
ReplyDeleteBut what are the chances the government will let their powerful friends sleep in the economic bed they made?
The bond market believes that the Fed will fight inflation as seen in the CPI. If they don't fight it then it is game over. Do you believe the government's powerful friends really want hyperinflation and all lines of consumer credit inflated away? Credit is the "life blood" of our economy.
What are the chances they will let free markets work and not massively intervene and distort every market?
Zero. That's what I think helps create the bubbles that eventually pop.
I turned on the radio last night and the guest said that a CEO of an oil company is predicting $150 oil this summer. Big shocker there. She also expects our grocery food prices to double by the end of the year. In fact, she said we'd be lucky if that's all they did.
I'd take even odds on the other side of those bets. I'd even borrow against my house to do it (and that's saying something).
NOVEMBER 25, 2010
ReplyDeleteBehind Gold's New Glister: Miners' Big Bet on a Fund
Today, GLD is the fastest-growing major investment fund ever, according to research company Lipper Inc., and one of the most active gold traders in the market.
Hi Mark,
ReplyDeleteIt is my impression on bubbles phases: (based loosely on prior readings)
1. TPTB conspire and create a bubble by investing early in a bubble vehicle (R/E, Gold, Tech, etc...). Sometimes legislative changes, or interest rate/currency manipulation aid in the creation of the bubble.
2. TPTB advertise the bubble to the public, further inflating the bubble. During this time, the plebs are told that there is a logical reason for price increases (this time it is different).
3. Transition/profit phase: The goal of this phase is for TPTB to sell/short bubble shares/contracts to the plebs. Various schemes are created to increase pleb participation in the bubble (by gold now!, ARM mortgages, etc...).
4. TPTB advertise and collapse the bubble (sometimes in conjunction with a company failure, rising interest rates etc...)
5. panic selling: the plebs are left holding worthless paper.
Transfer of wealth is complete.
The plebs can continue to make "decent" salaries, but TPTB will take some back every 5-years via a new bubble.
cheers, remy
remy,
ReplyDeleteI would not be the first to heckle your theory.
I'll even toss in a bonus one. The transfer of wealth also happens daily much like it would in a casino.
6. Convincing the average investor that they can do better than the average investor using "advanced" trading tools that aren't nearly as advanced as the truly professional investors use. Further, the house takes its cut in the form of fees every time a bet is made.