The Different Context of Similar Prices

So much depends on context.

It is one thing when your wife of 30 years announces that it is time for bed. The words have an entirely different effect, on the other hand, when the 30-year-old blonde you just met in a bar says them.

Our brother is visiting and finds things about the same…and yet very different… in Europe.

“A taxi from the airport costs the same amount. It’s about the same amount in a restaurant. Everything is about the same – I mean the numbers are the same. It costs 30 for a taxi…80 for a nice dinner…etc. But a pound is twice as much as a dollar.

“It makes me think we have it very good in Virginia. You remember that house down near Charlottesville? It sits on a hill overlooking the Rockfish river? It’s a beautiful place, with 60 acres…horse-barns…pastures…and the house was probably designed by one of Jefferson’s followers. It’s got that mellow brick…very pretty place.

“Well, the market is getting soft down there now. Prices are falling, they say. But what is really falling really are people’s expectations. Buyers now expect that they’ll be able to get a reduction. And sellers now no longer expect those huge gains that we saw a couple of years ago.

“Well, I had that place on the market for $1 million. It’s now been more than a year and all we’ve had are a couple of offers around $700,000. But my point is that $1 million buys you a lot in America – even in a hot area like Charlottesville. Of course, this place is a little far out from the city. But over here, a million won’t buy you much of anything.”

Thinking along similar lines, our friend, Steve Sjuggerud has come to the conclusion that the dollar is undervalued. Spending dollars in America, you get a lot more for your money than spending dollars in Europe. In the context of purchasing power, he says, the dollar really ought to be rising.

But think about it like this. Americans spend more than they make, and the U.S. trade deficit is more than three-quarters of a trillion dollars annually. The dollar is, thus, effectively, America’s I.O.U. There are already trillions of these things in stuffed mattresses, wallets and vaults all over the world. People still seem to want them, no doubt, and governments and corporations continue to offer dollar-based debt at a fantastic rate. But as the quantity increases, it only seems fair that the quality should decrease. Each additional I.O.U. must have less in assets behind it. In the context of international monetary exchange, you’d think the dollar would fall.

Up or down? Both is our guess. In the years ahead, and here we’re taking a wild guess, the dollar will probably buy more of some things and less of others. You will probably be able to get more stocks, for example.

Our colleague Christopher Hancock has been recommending an under-the-radar stock to his Free Market Investor readers – a company that has already piled up nearly four times more assets than it has debts. And that asset pile includes a heaping amount of pure cash. That makes this company extremely attractive, to say the least.

The current dividend yield on the S&P is only 1.8%. That is a market where the American already gets little for his dollars. Our guess is that he will get more – a lot more – sometime in the years ahead.

On the other hand, we are not sure he will get more toothpaste…or much more automobile. Production of things is increasing too – but not as fast as the output of dollars. Our guess is that he will get fewer things for his money in the years ahead. Already, we note a disturbing trend. The LA TIMES reports that breakfast is getting more expensive at an 8% per year clip. Why? Corn! Cereal prices generally, and corn in particular, are going up. So, the value of the dollar goes down relative to Kocoa Krispies or Frosted Flakes.

But what about housing? That’s where most Americans have tucked away most of their money. Will the dollar buy more housing in 2010…or less?

Bill Bonner
The Daily Reckoning
London, England
Monday, June 18, 2007

More below…after the news:


Addison Wiggin, reporting from Baltimore…

“The percentage of U.S. mortgages entering foreclosure is the highest in more than 50 years, the Mortgage Banking Association reported on Friday.

“The biggest jumps came in bubble states like California, Florida, Nevada and Arizona. But mortgage defaults were also high in states hit with the loss of manufacturing jobs – Ohio, Michigan and Indiana.

“‘It is tempting to call the bottom,’ wrote in Chris Mayer. ‘But the nature of bubbles is that they reach ridiculous absurd heights that few thought possible. Then when the bubble deflates things usually reach absurd low that few thought possible. They also tend to take some time to unwind. It would be an odd historical anomaly to have a 5- or 6-year housing bull market and then have the thing unwind in a one-year bear market.'”

For the rest of this story, see today’s issue of The 5 Min. Forecast


And continuing our thoughts on the subject of housing…

*** “Bernanke hints at thinking on housing,” says a curious headline in the Financial Times. We wondered why, after all this time, Bernanke would begin to cogitate about housing – or how the FT got wind of it.

Then, reading along, we discovered that the Fed chief had expressed himself on the subject in that great bastion of unremitting thinking – the U.S. Congress. Speaking in cathedra, so to speak, he seems to have given things a little soupcon of actual thought himself. And what he seems to have thought is what we’ve been thinking for many months – that the housing slump may be a bigger problem than people think. When house prices go down, so goes the received wisdom – the “wealth effect” slips into reverse. People realize that they aren’t as wealthy as they used to be. So, they stop spending so much money.

But Ben Bernanke seems to have realized that there is more going on than that. Not only do people begin to think of themselves as poorer, but their ability to spend begins to decrease, as well. Especially at the low end of the income scale, the lumps depend heavily on credit.

When property values sink, so does the easy credit. And when interest rates go up, it’s harder and harder for the subprime borrowers, who were propping up a large part of the real estate market, to make their mortgage payments. These defaults will have a very interesting effect on the economy as a whole.

It’s not as if we’ve never had a housing slump before. The New York TIMES reports that the average house price fell 24% between ’29 and ’33. Since then, there have been several local property crack-ups in America, but not a real nationwide bust. In the early ’80s, a collapse of the oil price hit some parts of the country hard. House prices in Houston fell 22%, for instance. In Lafayette, Louisiana, they went down 40%. Then, in the ’90s, recession and military spending cuts had an effect on both coasts. In the LA/Long Beach area, houses went down 19%. In Hartford, Connecticut, they fell 17%.

And now, the National Association of REALTORS tells us that median house prices across the country are down 4% since the housing market peaked out in October ’05. In certain places, the damage has been much greater. In the Reno, Nevada area, they’re down 8.8%. Around New Orleans, they’re off 11%. And in Florida, around Sarasota and Venice, prices have dropped 12.4%, according to the NAR.

All of which tells us that the dollar IS going up – against housing. How much? Will you be able to buy a lot more house for your dollars in 2010?

We don’t know; but our guess is that you’ll get only a bit more in most places…and maybe a lot more only in a few. Compared to Europe, property in the United States still seems reasonable. In many cases very reasonable.

But we wouldn’t be at all surprised to find it is even more reasonable in the future – especially to foreigners.

Meanwhile, one thing against which the dollar rose sharply last week was bonds. The bond market went down, meaning yields went up. Investors were able to buy more bond yield per dollar. Or to look at it differently, a dollar bought less credit than it did the week before.

When a house changes hands in Lafayette, Lousiana, the world doesn’t even notice. It is a local affair, between willing buyer and eager seller. But when a U.S. Treasury bond gets bought, the whole global financial community watches carefully. They are keeping an eye on both the price of credit and the value of the dollar. When bond yields go up, it means the dollar is a more valuable thing. A dollar, invested in U.S. Treasuries, will bring more in return than it did before.

But it can mean a lot of other things too. It can mean that investors are worried. They are insisting on a higher yield, perhaps because they think that with inflation, the dollar itself will buy less of everything else in the future, and they want higher yields to offset it. At 5%, there’s not much of a cushion. An inflation rate of 2% leaves only 3% in real return. And since the whole 5% is taxable, an investor really only ends up with a piddling return.

Something like fifty percent ($2.2 trillion) of all U.S. Treasury securities held by the public are now bought by foreigners, according to testimony before the House budget committee in January this year. Unlike American buyers, these overseas investors have to worry about another thing – the fall of the dollar against other currencies. All of which put the dollar…and U.S. Treasuries…and U.S. interest rates…and, by extension, the whole U.S. economy…in a rather delicate situation. Right now, the foreigners still feel pretty good about holding American I.O.U.’s. When they change their minds, the United States is in big trouble.

*** What complicates things is that when it comes to money, people don’t have much imagination. They go along with whatever the herd is doing. For instance, these days, the best colleges in America all cost you about $40,000 plus per year. In fact, any private college will cost you about that. Are they really worth it? We don’t think so, but we still send our boys there anyway. Health insurance costs our family hundreds of dollars a month, even though we are also partly sheltered by state-run public health systems in France and England. It can’t be worth it, in our opinion. Still, we can’t imagine going without insurance.

We can imagine doing with a bit less home, though. A few weekends ago, we were doing some work in a small cottage in Normandy. The walls needed to be scraped and painted, so we took our two teenagers, Edward and Jules, out to the country to help us. Painting is a calm and relaxing business. You can do it and think at the same time and what we got to thinking was how nice it would be to stay down there. We looked out one window and saw a green field with cows grazing. In another direction was a small village, with an old graveyard with monuments dating back hundreds of years. And on the other side, we looked out over a park and a grand chateau with a large stable block and alleys of lime trees. There is a town, with restaurants, a bar, a post-office, a grocery store and a hardware shop, only a five-minute bike ride away. And around the cottage there are plenty of flowers and even a vegetable garden.

“How much are you going to rent this for?” we asked Pierre, our overseer.

“Oh…probably about $500 a month…maybe less. You can’t charge much for a place out in the country. Besides, the people out here are all retired. They already have their own homes. I’m hoping to find a young person, maybe someone who is a volunteer fireman. We’re not far from town and he would still be able to hear the siren.”

The brick house has four bedrooms, a fireplace, and two baths and is situated on a 300-acre farm in the heart of Normandy. It is charming, too; far more charming than the average suburban house advertised in America.

In fact, one site we saw recently flaunts a special edition called “Lifestyles of the Poor and Notorious,” featuring America’s junkiest house deals. These places are hardly homes at all. They are trash yards…garbage piles…shacks…chicken coops, without the chickens. And yet, they are priced from $200,000 to $300,000…and up!

Let’s see. Which costs less? At 5%, $500 per month represents only $120,000 worth of capital. Oh dear reader, with a little imagination, a person might sell the $300,000 pile of debris in California’s Inland Empire, put the money into Treasury bonds, and live in a delightful little cottage in France. Ignoring taxes and inflation, $300,000 would yield $15,000 per year. Pay your $500 per month in rent, and you have $750 left over each month. Of course, the same arithmetic would work in West Virginia, Texas, Arkansas…or many other states.


The Daily Reckoning PRESENTS: It is a sad fact to face, but the dollar’s buying power is decreasing as the global demand for oil is increasing. And so we turn to the Mogambo – hiding in his ultra-fortified bunker – for a full assessment of how “Freaking Doomed!” we really are. Read on…


Lest you think that all central bankers are despicable liars, from Bloomberg we learn that New Zealand Reserve Bank Governor Alan Bollard actually blurted out the cure for inflation in prices; raise interest rates so high that nobody can afford to borrow any money to buy anything, or invest in anything, and thus prices will fall as demand withers away, and people are laid off, and lots of businesses and people go bankrupt, and taxes payable to revenue-starved governments will collapse, and there is rioting in the streets as we fall into a dreary, post-Apocalyptic nightmare of economic misery and suffering that will not end until after you are dead, dead, dead.

Well, I admit that he didn’t actually say that in so many words, but he did say “A sustained period of slower growth in domestic activity will be required to alleviate inflation pressures.”

For those of us even passingly familiar with fiat currencies, fractional-reserve banking, the unbelievable levels of distortions and mal-adaptations of the government and the economy that they engender, and the staggering pandemic of corruption in government and in business that is always present at the end of a long boom, one can only say, “In your dreams, loser! That’s the way it used to be, alright, but those days are loonnnnNNNnnnngg over! Since all money is created by debt nowadays, and interest is due on all that money, you have to keep expanding the money supply at faster and faster rates just to achieve an economic standstill, and even more to offset inflation in prices, you witless jerk!”

Well, in what I assume is a slap in the face for The Mogambo at this crude insult, this raising of interest rates to cool down inflation is actually being manifested when “New Zealand’s central bank unexpectedly raised its benchmark interest rate a quarter point to a record 8%, saying housing demand and consumer spending are fanning inflation.”

In actuality, the central bank of New Zealand is a bunch of lying scumbags, too, as the double-digit growth in the New Zealand money supply is what is fanning inflation in prices there.

Then I think I am an idiot for believing any of this silly central bank crap, as Gary Dorsch says that in Australia, right next door to New Zealand, “The Australian bank’s cash rate of 6.25% might sound high compared to other countries, but in reality, the RBA is pursuing a super-easy money policy, allowing its M3 money supply to expand at an explosive 13.7% annualized rate”, which is (I add with a supercilious snarl and sneer) about the same rate of money growth that we idiot Americans have!

And speaking of money supplies expanding – which means that price inflation is coming to gobble people up – the Russian central bank is inflating its money supply at an astounding 57% annualized rate! 57%!!

Enrico Orlandini of actually hears my brain exploding at this astounding revelation, and instead of calling 911 and maybe saving my life, the little bastard sticks a dagger in my heart by saying that it is even worse than that, as “Currently there is no major economic power whose money supply is increasing at less than 10% per year and the US’s money supply is now increasing at a greater than 14%/year clip.” Owwww!

And why are all the banks creating so damned much money and credit? Bill Bonner at explains. “To make a long story short,” he says, “the titanic stimulus given by the U.S. economy has had a worldwide effect. The American – along with many of his cousins in the rest of the English-speaking world – went on a spending spree. Dollars flowed out of the United States…and into foreign countries, where central banks ‘sopped them up’ by printing more of their own currencies. No nation wanted its own money to go down faster than the U.S. brand, because it would put them at a commercial disadvantage. Result – a huge competition to inflate paper currencies.”

And a global race to stoke inflation, too, as all this money goes into prices – as we are seeing – which makes them need to print up even more money!

So it is the dollar that is, at the root, the real stinker amongst currencies, and thus it is no surprise to read from Bloomberg that “The United Arab Emirates may be the next Middle Eastern country to stop pegging its exchange rate to the U.S. dollar.”

How does he know this interesting fact? He said that it is obvious “according to trading in currency forwards.”

And why are they doing this de-linking to the dollar thing? He explains that it is because the currency is losing so much buying power that the price of corn tortillas to make yummy tacos is rising, and people are upset and angry, and are shouting “Mogambo! Save us, Mogambo!” Oops! Sorry! That’s Mexico!

But the problem is exactly the same in the Middle East; prices that people have to pay are rising, as “Middle East currencies have been dragged lower by declines in the dollar, pushing up the cost of imports from Europe and Asia”, and people don’t like it.

And these guys ain’t minor players, either, as we learn from Jody Clark of, who writes that the Gulf Cooperation Council is “an economic bloc made up of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. As a group they have the world’s largest current account surplus.” Wow!

In fact, all this oil money has made them so rich that “Combined they already have the world’s 16th largest economy and by 2015 they should find themselves in the top ten. Their current account surplus is a massive $207 billion – that’s up from $52 billion in 2000 when the oil price was hanging below $30 a barrel. And with global oil demand set to continue this year, the GCC’s coffers should be ringing for some time to come.”

And if oil goes to $100 a barrel? Yikes!

Mogambo Guru
Daily Reckoning
June 18, 2007

Mogambo sez: Gold, silver and oil. If you ain’t buyin’, you ain’t even tryin’, because there has never been a bigger investment lead-pipe cinch than any of these, and to pass them up says that there is something very, very wrong with you.

Editor’s Note: This year, the Mighty Mogambo is actually going to bravely exit his Big Mogambo Bunker (BMB) in order to speak at the Agora Financial Investment Symposium in Vancouver, British Columbia. Don’t miss this opportunity to hear his rants live, on why “We are all Freaking Doomed!”

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.