An interesting article in the Wall Street Journal about Hedge fund tycoon John Paulson may make you think twice about the bond market, as well as housing and gold. Simply put with our nation being the most indebted in the history of the world there is only one way for interest rates to go and that is up, up, up. Realistically it is not a question of if it will happen, it really is more a matter of when and by how much. I believe this is a very cogent assessment on the where the bond market is going.
In fact our team is advising all of our clients if they have the ability to get low interest loan/s, we can and will provide the guidance they need to take advantage of the investment opportunities available in the Silicon Valley real estate market. Though Mr. Paulson’s thoughts on gold seem a little excessive, Janelle and I are even thinking of buying some long term call options along with the rental housing. Here is the article below:
Hedge fund tycoon John Paulson is the man who
made his name, and a fortune, betting against subprime mortgages when
no one else even knew what they were.
And he's just made three big financial calls that you need to know about.
Speaking to the University Club in New York, he said, first, that gold could go to $2,400 an ounce based on the fundamentals–and that momentum could carry it to $4,000 an ounce. Right now it's around $1,300. Second, he said you should get out of bonds while you can: You're much better off investing in blue chip stocks with good dividend yields than bonds.
And third, he said you should buy a home. Now.
"If you don't own a home, buy one," he reportedly said. "If you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home."
(A spokesman for Mr. Paulson did not challenge the accounts of the meeting.)
Among the New York commentariat there's been a lot of head-scratching about Mr. Paulson's take–especially this contrarian stance on housing.
Is he right? If so, what does he know that everyone else doesn't.
Ignore the critics. The odds have to be on his side. The reason is simple: Inflation.
There is a debate raging on Wall Street these days between those warning about deflation and those warning about inflation. We are at, or near, deflation at the moment. It may even get worse before it gets better. But Mr. Paulson sees inflation coming by 2012 or so. Last week, several contrarian money managers I was talking to made the same prediction.
The explanation isn't hard to find.
Forget the usual technical issues economists like to talk about, such as output gaps, labor markets, money supply and the like.
Put simply: We will get inflation because we have to. It doesn't get any more straightforward than that.
We are the most indebted nation in the history of the world.
Data out from the Federal Reserve last week revealed that in the second quarter the total sum of U.S. debts (excluding the financial sector) had risen to a record $35.5 trillion. That is 243% of gross domestic product–barely a smidgen from last year's peak, and off the map by past history. Thirty years ago it was less than 150% of GDP.
The debt orgy has been everywhere. Government debt continues to skyrocket. Corporate debt–contrary to some reports–is rising too. And after two years of brutal retrenchment, defaults and pain, households have managed to slash their debts by a massive, er, 3% from the peak. Household debts are still twice what they were just a decade ago.
There is only one plausible route out of this appalling situation. The government needs inflation. The country needs inflation. That will shrink these debts in relation to the economy, asset prices and incomes.
Deflation would make debts even bigger in real terms. That would be a disaster. We're skirting it at the moment, but it can't be allowed to take hold. That's why Fed chairman Ben Bernanke has just offered more quantitative easing–and if that won't work he'll try something else. Anything else.
That's what Mr. Paulson knows–and what anybody could know if they just take a step back from the day to day details and look at the big picture.
If the government succeeds in stimulating inflation, bonds will be in big trouble. Fixed coupons become a lot less valuable when prices and interest rates rise. At 2.5%, the 10 year Treasury already offers a paltry yield: The risks surely outweigh the rewards. Take profits on your bond funds.
Housing? It isn't just that home prices have fallen a long way. It's also that, if you can get a mortgage, you are basically taking a reverse bet on the bond market. You could be a long-term borrower at fixed rates, instead of a long-term lender. Right now you can borrow for 30 years at around 4.3%. After the mortgage tax deduction, for some people the net effective interest rate is nearer to 3%. That's going to prove an awesome deal if we see inflation again.
As for gold? Mr. Paulson's prediction isn't that extreme. I've seen guesses from perfectly sane people, based on the money supply and other measures, suggesting gold might go even higher.
No one knows, of course. But the bull market seems to be very much alive. And I think there's a chance–a pretty good chance–that gold could be the next Nasdaq. (Is Gold the Next Bubble?)
Naturally, the future is unknown. And most normal people can't afford to risk a lot of their money speculating–especially these days. But you don't want to miss out on a boom.
Article written by Brett Arends, Wall Street Journal