Chris Hordan, Gold Buyer

Buried deep in this WSJ story($) about what the Federal Reserve is likely or not likely to do when they announce the results of their two day policy meeting tomorrow along with updated economic forecasts, after which Fed chief Ben Bernanke will conduct another one of his quarterly press conferences, is the almost throw-away line highlighted below about what one well-to-do American is doing with his money these days.

Chris Hordan, who emerged from the financial crisis financially unscathed, is one of the beneficiaries of Fed policies.

With a good income and pristine credit, he has refinanced the $417,000 mortgage on his home in Hermosa Beach, Calif. three times in 17 months, shaving his monthly payments by $390. Multiply the fruit of cheap credit across millions of households—with healthy portions of interest savings spent on goods and services—and the U.S. should be recovering more quickly, according to textbook economics.

But Mr. Hordan doesn’t need the money to buy things. His electronic test equipment business has annual revenues of roughly $1 million and he could easily pay off his mortgage with savings, he said. But why bother? Borrowed money is cheap—his mortgage rate is 3.875%—and there are tax benefits for paying mortgage interest. Instead of retiring his mortgage, he is investing the money.

“If you don’t need the money, you can get it all day long,” he said. “Thank you, Ben Bernanke.”

One problem is that financially secure households are less likely than lower-income households to spend their interest rate savings. Wealthier households are more likely to save or invest a windfall because they can already consume as much as they want, according to standard economic theory and research.

Mr. Hordan, for example, is spending his mortgage savings on such investments as gold, emerging markets, U.S. stocks and European banks.

I’d be interested to know how gold ended up being mentioned first here. Was it just random or, as you might surmise from the way it’s written, gold is at the front of the list because Mr. Hordan is buying a lot of it?

My guess is the latter.

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Scripomania - America’s First Asset Bubble

I’m still working my way through Washington, A Life and it is now abundantly clear that my initial disappointment with the Revolutionary War ending about halfway through the book was misplaced. Washington as our first President is equally interesting, but, not necessarily because of Washington, rather, because of those around him, namely, Jefferson and Hamilton, who early-on fought over what the federal government should and should not do. 

The sequence of events surrounding the initial sale of U.S. debt and bank shares are fascinating, especially when considering how Hamilton pushed through legislation to form the nation’s first central bank, a move that was opposed by Southerners like Jefferson and Madison who felt that Hamilton had duped them.

Starting in the summer of 1791 the Jeffersonians followed with alarm the rampant speculation in government bonds and bank shares. On July 4, 1791, the treasury had begun selling shares in the new bank of the United States and pent-up demand proved so explosive that the entire subscriptions sold out in a matter of one frantic hour.

Swarms of investors invaded the treasury building, mobbing the clerks. For Hamilton supporters it was dramatic proof of the trust that investors placed in the new institution.

Although the par value of bank stock was $400 per share, Hamilton, to make it affordable to all investors, allowed them to make $25 down payments. In exchange, they received certificates called “scrip” which entitled them to full shares in future installments.

In the next few weeks, as the price of scrip soared, it produced a speculative frenzy that was dubbed “scipomania”. Far from construing it as symptomatic of Hamilton’s success, Madison was appalled by this scramble for so much public plunder. Equally aghast, Jefferson wondered aloud to Washington whether such sums should have been withdrawn from useful pursuits to be employed in gambling.

Hamilton erred in selling most scrip in Philadelphia, Boston, and New York feeding southern fears of a northern hegemony. In August, the price of scrip touched such dizzying heights that Senator Rufus of New York reported that business had ground to a halt as people rushed to buy scrip, with mechanics deserting their shops, shopkeepers sending their goods to auction, and not a few of our merchants neglecting the regular and profitable commerce of the city.

According to Dr. Benjamin Rush, there was madness in Philadelphia as well. “The city of Philadelphia for several days has exhibited the marks of a great gambling house. By August 11th, scrip had zoomed from the $25 offering price to $300 with government bonds also touching delirious new heights.

When bankers drained credit from the market, speculators dumped their scrip. The bubble burst as prices plummeted. Hamilton steadied the market by buying government securities, but Jefferson was convinced that scrip had already worked its evil influence, “the spirit of gaming, once it has ceased a subject is incurable”, he wrote.

This was soon followed by an even bigger bank bubble of some sort, the details of which I’ve yet to learn. I didn’t think much of Hamilton before this book - and I think even less of him now. Of course, to many on Wall Street and in the nation’s capital, he’s like a God.


Housing Starts Down, Permits Up, Do They Matter Yet?

At some point in the perhaps-distant-future, housing starts will matter to the U.S. economy as they once did before the U.S. housing market went from normal, to bubble, to bust. But, until that time, watching what the homebuilders are doing will be a lot like watching Cisco stock as it clunks along the bottom for years and years following the bursting of the asset bubble that preceded the housing bubble.

Nevertheless, since this chart hasn’t been shown in a while, it’s worth noting the Commerce Department reported(.pdf) that housing starts fell 4.8 percent, from an annual rate of 744,000 in March to 708,000 in April, and that permits for new construction jumped 7.9 percent, from a rate of 723,000 to 780,000.

Yes, this marks a recovery high for permits and puts them up nearly 50 percent from the early-2009 low, but it still represents a decline of 66 percent from the peak and is only about half of what would be considered normal, that is, prior to when things started getting out of hand in 2003-2004.

By way of comparison, Cisco stock was up about 100 percent from its 2002-low six years after the dot-com bubble burst in 2000. Of course, at that time it was still down more than 70 percent from its  peak and, today, is down nearly 80 percent from its bubble high.


Tuesday Morning Links

Spanish cost of borrowing jumps at auction - BBC
Spain pleads for ECB rescue as bond markets slam shut - Telegraph
Euro Crisis Shifts to Spain as Merkel Faces G-20 Pressure - Bloomberg
G20 summit: Barroso blames eurozone crisis on US banks - Guardian
New Democracy Victory A Glimmer of Hope for Greece - Spiegel
Many await Fed action to try to lower rates and aid economy - Washington Post
Fed Will Ease Monetary Policy This Week: Goldman’s Hatzius - CNBC
Goldman Warns Of Possibility For $50-$75 Billion “Flow” Program - Zero Hedge
Big Banks Could Rake In Up To $12 Billion Because Of HARP 2.0 - HuffPost
California gasoline prices drop; average falls below $4 a gallon - LA Times
Avoiding a global catastrophe - Summers, Washington Post
Time to Put Finance Back in Its Cage - HuffPost

Oil prices fall on Spain debt concerns - AFP
Gold extends rally; Fed in sharp focus - Reuters
Cheers for the not-so-mighty dollar - MSN Money
Markets Keep Eye on Europe, but Hopes Rest on Fed - CNBC
Investors cling to cash to guard against euro fallout - Reuters
‘There Will Not Be Another Major Bull Market In Our Lifetime’ - Forbes
CME Group to allow physical settlement of weekly gold options - Reuters
Atasay of Turkey to Collect Gold With Banks, Hurriyet Says - Bloomberg
Need to dissuade people from investing in gold: Pranab - IBN Live
Silver spot market fundamentals not driving futures - Commodity Online
Gold: Risk asset or safe haven? - Mineweb

What the Recession Really Cost American Families - Fiscal Times
Deflation much more likely than major inflation - Comstock Partners
Fiscal-Cliff Concerns Hurting Economy as Companies Hold Back - Bloomberg
G20 summit: Leaders alarmed over escalating eurozone crisis - BBC
Household respite as U.K. inflation falls to 2.8pc - Telegraph
German June Investor Confidence Fell More Than Expected - Bloomberg
IMF to receive financial injection from China - China Daily
Suicides, Arrests Show Trouble at Korean Savings Banks - Bloomberg
Observers see sentiment improving in Las Vegas housing market - LVRJ
Weakening Jobs Market Hits Homebuilder Confidence - CNBC
Fed Born of Morgan Bailout Under Scrutiny After Dimon’s Loss - Bloomberg
Two Days Until the Fog Lifts - Fed Watch


Why Reducing the U.S. Deficit is So Hard

A Pew Research survey from late last week shed no new light on how the American public feels about the burgeoning U.S. debt - by an overwhelming majority they think the government should cut spending, but, when asked about specific cuts, they rejected lower spending by an even bigger majority.

You might think that the logical solution then is to raise taxes, but, that isn’t very popular either. In this same survey it was reported that about two-thirds of Americans rejected higher gasoline taxes, reducing federal funding to states, and paying more for healthcare.

It seems the public thinks Uncle Sam’s books can be squared by just cutting foreign aid and jobless benefits along with capping payments to affluent Social Security recipients and salaries for government workers.

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