Trace: Welcome back to the RunToGold Podcast. We have a special guest with us today, Aaron Krowne; he is the founder of ML-implode.com which is the hub in the mortgage lending industry. Welcome, Aaron.
Aaron: Hey Trace. It is good to be back.
Trace: Gold is at an all time record high right now. I remember last time we chatted on the podcast, we were talking about how housing was going to be going down in terms of gold, and it has. So, what gold price represents is the common stock of nations evaporating, just like how BP has lost a tremendous amount of shareholder value as its threatened with potentially even becoming insolvent and bankrupt.
So likewise, the governments are threatened with this similar thing, with gold rising in currency. And so it portends these, as you're talking about before these cracks in the dike. Can you expand a little bit more on that, these cracks in that dike and what you are doing with this right now?
Aaron: Well first of all I would like to say that your point about the common stock of nations is very apt and I've come to think of fiat money as that. The talking heads, the propagandists, tell us that gold is pointless as it stored value as an investment because it doesn't pay dividends.
But what dividend does fiat money pay? By itself it pays nothing, it's just a question of what you've invested in and that's really more of a speculative exercise these days, than anything that could be credibly called storing value. So, it's really just a bogus comparison and in that sense gold ranks very strongly and I think the market is starting to see that the store value function is incredibly important to that common stock of nations which is going the way of BP.
Trace: Yeah. In fact I was in New York about a month ago, one of the Meese's activities and while I was there I met with a couple of the different hedge funds that I work with, and one of them said that the current environment –now this guy runs the biggest Indian hedge fund, you know investment companies over in India, - he said this environment we're in is a return free risk. Which I thought was a clever play on words which gets right exactly what you are talking about, about how this is just a complete speculative game with these little colored coupons.
Aaron: Exactly and that pertains to your question about cracks in the dike, and what we're seeing there now at this time. And it really is about that return free risk that is not gone away. That is the condition of the market and the financial markets in general during the financial panic.
We've seen it time and time again in history, and we are in one of those times now where what predominates is financial panic. And, sure, it can calm things for awhile with government intervention and propaganda. That changes nothing unless the underlining problems, the mass insolvency, the overleveraged character of the most investments out there -- I'm not saying it's actually fixed -- which it hasn't been.
So, about a year ago the stock market started rallying and that makes everybody feel happy, like a big mood ring or something for the financial markets and the economy, and sadly for the society in general, and the national politicians really buy into that and stoke that. So over the past year the zeitgeist has really been about "oh you know things are really recovering and there may be problems but the government is going to take care of them” and whether that's actually stated or not I think that that's been the feeling of people in general.
At the same time there's been this unease the job market is not really coming back, the economy still seems very weak in many ways and many metrics are evidence of that. But those underlining problems haven't been solved and we, and many others in the country, have been writing about that for the past year and pushing articles of that sort of theme and I think now are saying that that's correct. A year later the pundits are starting to talk about some of these forward looking indicators are now starting to falter.
After the trillions have been spent on stimulus, and some of that, essentially, vapor high is wearing off, there is nothing there. There is no foundation, or the foundation is eroding and the cracks in the dike are continuing to spread. We have run out of silly putty, we are resuming the process that was there before and what we've seen with European sovereign debt is just one area where panic set in.
Trace: It’s all fun and games until somebody’s entire lifetime savings goes up and evaporates. And that's what we are seeing with the pension funds...
Aaron: Right, that's also the risk for not only European banks but banks around the world in terms of the sovereign debt they hold. That someone being a large chunk of Europe and the rest of the world is at risk of losing their welfare and the sovereign defaults which cover much of Europe.
Trace: I think 39% of BP is owned by British pension funds and another 40% are owned by American pension funds, one of them being in New York who has lost $100 million on the BP investment.
But really the New York massive budget problems, they've had to borrow money from New York pension funds to make the minimum payments to the pension fund, but that hundred million that they've lost in their BP investment that kind of pales in comparison to your specialty, right?
Aaron: Yes, the housing market. Absolutely. That's one area where we are starting to see those cracks resume their spread, and that is an area where Congress focused a lot of very blatant papering over wallpaper style aid, and they did that with the home buyer tax credits, which are basically...
I have heard them being called the home buyer or home sucker tax bribes, but they basically give you cash for buying a house and it essentially alleviates the need to come up with cash, and put cash into the transaction. You're not supposed to use it as a down payment but you can always move money around so...
Trace: If there's even a transaction. You could also use the 5 dollar gold coin, 10 dollar gold coin, 25 dollar gold coin and 50 dollar gold coin. I've heard that there are quite a few prison inmates who have been claiming the tax credit!
Aaron: These programs are always a complete free-for-all, and they invent them out of thin air and they don't have the resources to administer them and they just want to print money and throw it at the market and try to focus it on a particular sector of the market.
In that sense it worked. It did halt the decline in home prices across the country and some markets may be reversed a little. But the evidence has been out there for months, that thought was wearing off, just another vapor high wearing off. And they had to pass a second tax credit when the first one ended and then they could see sales plummeting and now the second one has run out and of course you have the largest drop in new home sales ever in history over a one-month span, I believe.
So that that was just pretty much pointless, other than to buy the politicians some time for their expensive fee, and of course now their data is indisputable, that that was not a real organic recovery and now the mainstream analysts, the pundits, have to take notice. So that's has really characterized the period we are in now, where the mainstream analysts having to wake up to the fact that nothing has really been fixed. The way they put it, is that we're more able to head into another dip, and it's actually called a double dip recession.
Trace: So where do you see the real estate prices going then, both the housing and commercial?
Aaron: Well as far as residential I have heard of the risk being as much as another 25% to the downside, maybe more, maybe less in some markets, and that's fair.
If you look at the long-term average inflation adjusted you'll see that we’re still actually considerably above the long-term trend line, so another 25% or so relative to the peak in 2006 is certainly... we won't actually get an overshoot, that's the downside. And when that happens in concert with inflation, so a lot of that decline might only show up inflation-adjusted but it will still be a fair, severe bare market in real estate.
Trace: Which we'll see when we price it in gold.
Aaron: But when you price it in gold, yeah exactly, it would be plummeting like a stone, like a gold nugget.
Trace: Well this has been very insightful. Thanks for being on the podcast again!
Aaron: Thank you Trace Mayer.