Waving the Warning Flags
by Puru Saxena
The eternal truth in the investment world is that every asset class goes
through boom and bust cycles, which typically last for several years.
However, it is ironic that toward the end of any bull-market, when the
risk is extreme, optimism toward the booming asset-class is usually at a
record-high. On the other hand, during the final phase of a bear-market,
when the downside risk is limited, the asset that is selling at a huge
discount is always neglected and hated by the public. The reason for this
irrational behavior is that most people find it hard to foresee and accept
change. The conditions that have been prevalent for a long time are
considered to be permanent, and investment decisions are made accordingly.
In the late 1990's, the entire world was in love with the "new era," which
was inspired by technology. Fund managers, economists, media commentators
and even the shoeshine boys were drooling over the prospects of retiring
young, thanks to their Microsoft and Intel shares. Of course, that turned
out to be the worst time to be invested in the hype as the technology
shares came crashing down to earth in March 2000. Back then, I recognized
that commodities were on the bargain table relative to financial assets.
Therefore, I started buying precious metals, but most people thought that
the "Millennium Bug" had infected me.
"Why are you buying gold? I lost a lot of money in gold 15 to 20 years ago
and I'll never touch it again," were comments I often heard. Once again,
the great majority failed to identify change, thereby ignoring the birth
of a new bull-market.
Once the great technology bubble burst and the United States slipped into
a recession, the central bankers decided to fight the slump by lowering
interest rates to a multi-decade low. In the United States, interest rates
were pulled down to a miniscule one percent. As the cost of borrowing came
down, Americans turned to real estate as the next sure thing. Real estate
prices surged, as demand rose due to cheap and abundant credit. As home
prices continued to rise, Americans started using their real estate as
collateral to borrow money.
Falling interest-rates and appreciating home values also created an
explosion in re-financing activity and the United States embarked on a
gigantic spending spree. It is worth noting that over the recent years,
Americans have extracted a ridiculous amount of equity from their homes.
In fact, since the beginning of this decade - 4.6 trillion U.S. dollars!
To make matters worse, the negative personal savings rate in the United
States highlights the fact that these loans taken out against homes
weren't saved for the proverbial rainy day; instead the money was spent on
consumption.
This recklessness has put the U.S. economy in a precarious situation.
Interest rates are now rising all over the world. After a multi-month
pause, I expect interest rates to continue their upward trend. So far, the
Federal Reserve has raised rates 17 times to 5.25% and the impact is
already being felt on American real estate. I'm afraid the property
industry in the United States is falling into a serious recession. In
June, new home sales fell to 1.49 million units, the lowest since November
2004. It's down 18.1% from the record-high of 1.81 million units during
January 2006. Furthermore, the supply of U.S. homes for sale has recently
jumped to a multi-decade high. In summary, rising-interest rates are
starting to bite into the real estate boom and trouble may be on the
horizon.
I've been warning about housing for several months now and still urge you
to get rid of your investment properties. In my opinion, we are in the
final stages of the housing boom and once again, the majority of people
can't foresee this change. The warning flags are everywhere! Recently, the
stocks of major U.S. homebuilding companies declined sharply and I
consider this an ominous development.
The S&P 500 Homebuilding Index is down 46.2% from its July 2005 record
high! Such a major sell off in this sector is the market's way of
forecasting deteriorating business conditions ahead in the real estate
industry. Moreover, if U.S. housing slips into a recession and prices
decline, consumption will also be badly hurt due an abrupt ending of the
refinancing boom. Remember, consumption accounts for roughly 70% of GDP
growth in the United States and any slowdown in this department may send
its entire economy into a recession.
Furthermore, it is my observation that apart from the United States, real
estate is generally overvalued in the majority of nations. Due to poor
wage growth and rising interest rates, housing simply isn't affordable
anymore. It may deflate over the coming months as demand continues to
evaporate. So, to reiterate, my sincere advice to you is to liquidate your
leveraged properties and invest in the world of natural resources where
the bull market is still in its infancy! A mega change is currently
underway and over the coming years, I envisage major capital flows from
financial assets to commodities.
In my view, every investor must allocate 20% to 25% of his or her total
net-worth to precious metals. This may sound extreme, but in a world where
central bankers continue to inflate the supply of money, gold and other
precious metals offer the best wealth protection.
Over the coming years, I expect the various central banks to print a
ridiculous amount of money. The United States faces a $46 trillion debt
monster and the only way it can remain solvent and pay off its debt is
through monetary inflation. Remember, the easiest way to repay debt is by
diluting the purchasing power of each unit of money. So, through monetary
inflation, the 46 trillion dollars the U.S. owes today may not "feel" like
$46 trillion in 10 years time! To complicate matters further, due to
globalization and international trade, no country wants a strong currency.
So, if every nation continues to print money in order to keep its own
currency weak against a fundamentally weak U.S. dollar, the entire basket
of "paper" currencies will decline against precious metals - the supply of
which can't be increased ad infinitum.
Precious metals are in a gigantic bull market, which is likely to continue
for as long as monetary inflation remains the norm. For sure, no bull
market continues to rise forever, and each boom is punctuated with
multi-month consolidations. After a stellar multi-month surge, the
precious metals bull market witnessed a vicious yet normal pullback in
May.
In my opinion, the worst is behind us now and this is an ideal time to add
to your positions in precious metals. After a few more weeks of
consolidation, I anticipate another strong advance over the coming six to
nine months. The rising geo-political tensions and a possible conflict
between the United States and Iran may cause precious metals to really
shine in the period ahead.
Back in 1980, on an inflation-adjusted basis, gold peaked at $2,100 per
ounce and silver peaked above $100 per ounce. Today, you can buy gold at
$630 per ounce and silver at $12.5 per ounce - absolute bargains, given
the money and credit growth we've seen over the past 26 years!
Regards,
Puru Saxena
Puru Saxena is the editor and publisher of Money Matters,
an economic and financial publication available at www.purusaxena.com
An investment adviser based in Hong Kong, he is a regular guest on CNN,BBC World, CNBC, Bloomberg TV & Radio, NDTV, RTHK Radio 3 and writes forseveral newspapers and financial journals.
The eternal truth in the investment world is that every asset class goes
through boom and bust cycles, which typically last for several years.
However, it is ironic that toward the end of any bull-market, when the
risk is extreme, optimism toward the booming asset-class is usually at a
record-high. On the other hand, during the final phase of a bear-market,
when the downside risk is limited, the asset that is selling at a huge
discount is always neglected and hated by the public. The reason for this
irrational behavior is that most people find it hard to foresee and accept
change. The conditions that have been prevalent for a long time are
considered to be permanent, and investment decisions are made accordingly.
In the late 1990's, the entire world was in love with the "new era," which
was inspired by technology. Fund managers, economists, media commentators
and even the shoeshine boys were drooling over the prospects of retiring
young, thanks to their Microsoft and Intel shares. Of course, that turned
out to be the worst time to be invested in the hype as the technology
shares came crashing down to earth in March 2000. Back then, I recognized
that commodities were on the bargain table relative to financial assets.
Therefore, I started buying precious metals, but most people thought that
the "Millennium Bug" had infected me.
"Why are you buying gold? I lost a lot of money in gold 15 to 20 years ago
and I'll never touch it again," were comments I often heard. Once again,
the great majority failed to identify change, thereby ignoring the birth
of a new bull-market.
Once the great technology bubble burst and the United States slipped into
a recession, the central bankers decided to fight the slump by lowering
interest rates to a multi-decade low. In the United States, interest rates
were pulled down to a miniscule one percent. As the cost of borrowing came
down, Americans turned to real estate as the next sure thing. Real estate
prices surged, as demand rose due to cheap and abundant credit. As home
prices continued to rise, Americans started using their real estate as
collateral to borrow money.
Falling interest-rates and appreciating home values also created an
explosion in re-financing activity and the United States embarked on a
gigantic spending spree. It is worth noting that over the recent years,
Americans have extracted a ridiculous amount of equity from their homes.
In fact, since the beginning of this decade - 4.6 trillion U.S. dollars!
To make matters worse, the negative personal savings rate in the United
States highlights the fact that these loans taken out against homes
weren't saved for the proverbial rainy day; instead the money was spent on
consumption.
This recklessness has put the U.S. economy in a precarious situation.
Interest rates are now rising all over the world. After a multi-month
pause, I expect interest rates to continue their upward trend. So far, the
Federal Reserve has raised rates 17 times to 5.25% and the impact is
already being felt on American real estate. I'm afraid the property
industry in the United States is falling into a serious recession. In
June, new home sales fell to 1.49 million units, the lowest since November
2004. It's down 18.1% from the record-high of 1.81 million units during
January 2006. Furthermore, the supply of U.S. homes for sale has recently
jumped to a multi-decade high. In summary, rising-interest rates are
starting to bite into the real estate boom and trouble may be on the
horizon.
I've been warning about housing for several months now and still urge you
to get rid of your investment properties. In my opinion, we are in the
final stages of the housing boom and once again, the majority of people
can't foresee this change. The warning flags are everywhere! Recently, the
stocks of major U.S. homebuilding companies declined sharply and I
consider this an ominous development.
The S&P 500 Homebuilding Index is down 46.2% from its July 2005 record
high! Such a major sell off in this sector is the market's way of
forecasting deteriorating business conditions ahead in the real estate
industry. Moreover, if U.S. housing slips into a recession and prices
decline, consumption will also be badly hurt due an abrupt ending of the
refinancing boom. Remember, consumption accounts for roughly 70% of GDP
growth in the United States and any slowdown in this department may send
its entire economy into a recession.
Furthermore, it is my observation that apart from the United States, real
estate is generally overvalued in the majority of nations. Due to poor
wage growth and rising interest rates, housing simply isn't affordable
anymore. It may deflate over the coming months as demand continues to
evaporate. So, to reiterate, my sincere advice to you is to liquidate your
leveraged properties and invest in the world of natural resources where
the bull market is still in its infancy! A mega change is currently
underway and over the coming years, I envisage major capital flows from
financial assets to commodities.
In my view, every investor must allocate 20% to 25% of his or her total
net-worth to precious metals. This may sound extreme, but in a world where
central bankers continue to inflate the supply of money, gold and other
precious metals offer the best wealth protection.
Over the coming years, I expect the various central banks to print a
ridiculous amount of money. The United States faces a $46 trillion debt
monster and the only way it can remain solvent and pay off its debt is
through monetary inflation. Remember, the easiest way to repay debt is by
diluting the purchasing power of each unit of money. So, through monetary
inflation, the 46 trillion dollars the U.S. owes today may not "feel" like
$46 trillion in 10 years time! To complicate matters further, due to
globalization and international trade, no country wants a strong currency.
So, if every nation continues to print money in order to keep its own
currency weak against a fundamentally weak U.S. dollar, the entire basket
of "paper" currencies will decline against precious metals - the supply of
which can't be increased ad infinitum.
Precious metals are in a gigantic bull market, which is likely to continue
for as long as monetary inflation remains the norm. For sure, no bull
market continues to rise forever, and each boom is punctuated with
multi-month consolidations. After a stellar multi-month surge, the
precious metals bull market witnessed a vicious yet normal pullback in
May.
In my opinion, the worst is behind us now and this is an ideal time to add
to your positions in precious metals. After a few more weeks of
consolidation, I anticipate another strong advance over the coming six to
nine months. The rising geo-political tensions and a possible conflict
between the United States and Iran may cause precious metals to really
shine in the period ahead.
Back in 1980, on an inflation-adjusted basis, gold peaked at $2,100 per
ounce and silver peaked above $100 per ounce. Today, you can buy gold at
$630 per ounce and silver at $12.5 per ounce - absolute bargains, given
the money and credit growth we've seen over the past 26 years!
Regards,
Puru Saxena
Puru Saxena is the editor and publisher of Money Matters,
an economic and financial publication available at www.purusaxena.com
An investment adviser based in Hong Kong, he is a regular guest on CNN,BBC World, CNBC, Bloomberg TV & Radio, NDTV, RTHK Radio 3 and writes forseveral newspapers and financial journals.
posted by Oil Shock at 7:07 PM
0 Comments:
Post a Comment
<< Home