Oct 20 (Reuters) - The Russian central bank will continue raising the share of gold in its gold and foreign exchange reserves, the central bank First Deputy Chairman Alexei Ulyukayev said on Thursday. "We are not planning to step away from this path. We are acquiring huge volumes (of gold)," Ulyukayev told the parliament.The Case-Shiller 20 city housing index for August was released this morning, showing a greater than expected 3.8% year over year decline. Here's an article LINK That kind of speaks for itself and I don't have a lot to say about it other than housing is still a long way away from finding some sort of "bottom" level. Obviously the housing market ballooned up on the hot air of massive debt financing. As the debt defaults continue to pile up, the value of the housing stock continues to implode. The Case-Shiller chart below shows graphically the degree to which housing values will likely fall:
Tuesday, October 25, 2011
(click on chart to enlarge)
This chart is a few months old. The latest index value was a little above 140. The average long term index value is 100. This index value is based on over 100 years of inflation-adjusted housing data. Unfortunately, just like bubble markets significantly overshoot their "intrinsic" value to the upside, when markets go through a "regression to the mean" correction they often overshoot once again to the downside. If you are a homeowner, you should hope that the mean index value of 100 is the bottom. Of course, as we know, "hope" is not a valid investment strategy.
I just heard another tragic short sale story. A friend of mine lives in an area of Denver that traditionally was very upper middle class, with the average home trading for north $1.5 million during the bubble. One of his neighbors had a huge house listed for $1.2 million. It went into a short-sale contract with $1.7 million of mortgage debt. Based on comps, we believe the contract price is around $800k. The bank will now have to mark to market the mortgage and eat around $900k. The house next to this one is in foreclosure. Apparently several homes in this neighborhood are in various stages of default/foreclosure/short sale. This isn't a newer "faux mansion" development - this is an older money area that had been considered financially stable.
This situation is not unique to just this neighborhood, just Denver, just Colorado. Most of the volume in foreclosures has occurred in the middle/lower end of the housing market. Now the banks are going to have to start working on the higher end. I know of at least 2 different people living in what were originally $1 million-plus homes who have not payed their mortgage for over a year and have not even been contacted by the bank about being in default. When you hear about this, it means the bank is still carrying the mortgage at full value. I have argued many times that the true, mark-to-market financial condition of U.S. banks is substantially worse than is being reported using GAAP financials and the numbers being pimped by Wall Street.
The moral of this is that our system - with or without the impending damage about to be inflicted on the global system by Europe - is headed toward a financial nuclear explosion that will make the Bear/Lehman/AIG explosion look like a hand grenade going off. The next time you drive by a big home with expensive cars piled up in the driveway and you wonder how they are doing "it," the truth is they likely are not and are living on borrowed time. And speaking of "overshooting" intrinsic value. Anyone care to hazard a guess at the price at which gold will be considered to have "overshot" its intrinsic value? I'm on record saying I can easily see $10,000 in intrinsic value for gold (that's for public consumption, I believe the price will be a lot higher). Based on that chart above, gold's "overshoot" price would be $20,000/oz...
Posted by Dave in Denver at 1:13 PM