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A recent article titled ‘Bank-owned Houses: Curb Appeal Goes Out the Window‘ – reading time 3 minutes – includes what I thought was an interesting, and in due course perhaps important, point. I have focused in prior e-mails on what I see as a serious issue with physical deterioration in houses that are not well maintained, and an even more serious issue with those that are not well maintained and not inhabited.  I have also noted in e-mails the issue of the banks having to pay the taxes and some maintenance on houses they have foreclosed, or in some cases are contemplating foreclosing.  I had not known until reading the referenced article that apparently at least four U.S. cities “are taking lenders to court in an effort to force them to take better care of their properties. In separate lawsuits, the cities are seeking hundreds of millions in damages from lenders, to cover increased city maintenance costs and reduced property tax revenues”.

As you are probably aware, these bank foreclosures and resultant vacancies have lead to an entrepreneurial opportunity for those who are ‘housing construction’ knowledgeable – and I think may do so on an escalating scale going forward.  Who suffers in the following ‘real life’ example I outline below, and who gains.  The banks suffer to some degree, investors in bank equities suffer (at least in theory), and the U.S. Government and its agencies, and Government subsidized businesses who in turn subsidize the banks when they write of parts of their outstanding mortgage loans suffer – and of course the home owners who have lost their houses to foreclosure have already suffered and continue to.  Who gains – intelligent, housing knowledgeable and focused entrepreneurs and their sub-contractors.

Real Life Example: I have a friend in the U.S.  (call him ‘Sam’) who is highly entrepreneurial, very street smart, and very financially successful.  He is particularly knowledgeable in house construction, although has been out of that business in any commercial or large way since about 2005, when he saw the sub-prime problems surfacing.  He currently occupies himself entirely in a business context by managing his real estate and other investments.  I spoke with Sam earlier this week about the content of the aforementioned article, and my view that what was going on had to create entrepreneurial opportunity.  He laughed, and said I was absolutely right, but “as usual well behind” the time curve.   He told me he had been periodically buying distressed houses from the banks, improving them, and holding and renting them for at least two years.  He told me that just in the past two months he bought a 1,200 square foot house on over one-half acre in a rural part of the State he lives in from a bank for U.S.$14,500.  The bank’s carrying cost was U.S.$50,000.  Prior to buying that house he found someone who would rent it from him for U.S.$475 per month.  He then spent U.S.$6,000 in renovations.  He now owns a house with a tenant (who, knowing my friend, has a better than average ability to pay their rents on time) that is providing him with an annual return on investment of (U.S.$475 X 12) / (U.S.$14,500 + U.S.$6,000) = 27.8%.  While the numbers aren’t large, do that same thing enough times and they become so.  Consider the business proposition.  My friend has no employees, he hires arm’s length contractors to do the renovations.  Once the tenant is in place, he sees the rent as a form of annuity he can collect while sitting on the beach and accessing his bank account from his Ipad.

Something to think about.

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A recent short article titled ‘In Zimbabwe a Country of Starving Billionaires, Gold is the only King‘ includes a 3 minute video that you might find interesting – watching and listening time 3 minutes.  You all will be well aware of Zimbabwe’s astonishing inflation rates over the past several years.  My wife and I visited Victoria Falls in late February 2008.  In the preceding three weeks the Zimbabwe inflation rate had tripled.  U.S.$3 could be exchanged for Z$10 million, on the ‘black market’, or as I recall Z$300 thousand at the local banks.  I doubt many local banks got much ‘exchange business’.  I have a few crisp Z$10 million bills to remind me of what real hyperinflation can mean.  Each of those bills has the words “Issued January, 2008, Expires June, 2008″ printed on its face.  In February 2008 I was told a loaf of bread cost local residents Z$6 million.

My wife and I played nine holes of golf while there.  There were no other golfers playing that Sunday morning.  The nine hole round, which included rented golf clubs and a caddy fee, cost U.S.$20 per person – U.S.$1 of which was the caddy fee.  My caddy, a 39 year old who spoke excellent English and whom I assessed as having a good intellect, had a wife and two small children.  My children are his age, and my grandchildren are the same ages as his children.  Aside from the U.S.$10 tip I gave him, as best I can tell – and I am quite cynical in my assessment of such things – caddying was his only job, and because tourism was down and virtually no one was playing golf, he had made less than U.S.$5 that month.

Subsequent to our visit the Zimbabwe inflation rate ‘really took off’, until the Zimbabwe dollar was officially abandoned in mid-April, 2009.  It then was replaced by use of foreign currencies including the Botswana Pula, the British Pound, the South African Rand, and the U.S. Dollar.  The current reported Zimbabwe inflation rate is reported at 2.7%, in circumstances where currently the population is about 13 million (with about 25% of those living outside the country), and the unemployment rate is reported at about 70%.  Civil servants earn U.S.$150 – $200 per month, and in the past few days it was announced there would be no pay raise for them this month where the ‘poverty datum line’ is estimated at U.S.$502 per month.

You have heard the saying ‘money isn’t worth the paper it is printed on’.  For a recent real-life example, consider taking 3 minutes and watching the referenced video, which shows a progression after 2007 of the face value of Zimbabwe currency.

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An article yesterday titled ‘Taking Issue with Some Gold Bugs‘ – reading time 4 minutes – is written by Jordan Roy-Byrne of The Daily Gold blog.  In the article, Roy-Byrne, a self-confessed “gold bug both philosophically and in terms of investing” takes exception to a number of ‘gold bug’ headlines and talking points, being:

·    ‘there will be system wide meltdown as U.S. enters hyperinflation’. Roy-Byrne opines that, in his view, the odds of hyperinflation are very low, and hyperinflation talk is nonsense.  A few days ago I commented on the criteria that must be met to meet the definition of hyperinflation in a fiat currency environment – being at root that a compound inflation rate of 26% must occur over a consecutive three year period.  I don’t think this is likely to happen in the U.S. in the foreseeable future, and accordingly, am in Roy-Byrne’s camp on this;

·    ‘gold & silver have bottomed, and there will be a ‘summer explosion’ ahead’. Roy-Byrne believes gold and silver both will find new highs going forward, but that won’t happen for gold until at least August, and won’t happen for silver for as long as 12 months from now.  From my perspective (and I think importantly) all gold and silver future price estimates, be they Roy-Byrne’s or anyone else’s, are nothing more or less than forms of ‘proxies on unstated specific future macro-economic conditions’.  As a result, I don’t pay attention to them.  I focus for purposes of my own investments on my own view of macro-economic trends, about which I currently am on the side of pessimism – which current view leads me to conclude that the trend price of gold will be up from here, without me having or assuming a target price.  As I have said repeatedly in these e-mails, I find physical silver to have a far more complex supply/demand interaction with the global economy than I find physical gold to have.  Accordingly, while I indirectly own both, my indirect holdings are far more weighted to physical gold than they are to physical silver.  That said, as every investor’s risk profile and strategy needs to be specific to him/her, I strongly believe you should not participate in either the physical gold or physical silver markets without first seeking your own ‘fact-specific’ investment advice;

·    ‘hedge funds are ‘shorting’ the gold stocks and the juniors’. Roy-Byrne doesn’t’ believe this, and believes that the reason gold producer and gold explorer stocks are lagging the price of gold currently has to do with ‘risk aversion’.  I have been working on an e-mail commentary setting out my views on the reason for what many equity market observers have seen since the end of April as being a dichotomy between the physical gold price and the market price of gold producer and explorer stocks.  I plan to include my commentary in an e-mail later this week.  For now, suffice to say that at a high level I agree with Roy-Byrne’s conclusion as to ‘risk aversion’; and,

·    ‘bonds will crash without QE, interest rates will skyrocket’. Roy-Byrne expects “continued debt monetization, currency depreciation and inflation but (disagrees) that Bonds are going to collapse anytime soon”.  Based on what I am reading and thinking, Roy-Byrne’s comment currently is consistent with my own views assuming Roy-Byrne is using the term inflation in the context of the U.S. Federal Reserve’s current guideline of 2% or less.  In all the attendant circumstances (U.S. unemployment rate, monthly trade deficits, consumer confidence, etc.) if the reported U.S. inflation rate climbs significantly past 2% to me that will signal near-term ‘bad things economic’.

As if out of a page ‘from my own book’, Roy-Byrne concludes by saying “one-way thinking with sensational statements can be dangerous and deadly to your portfolio. It is more sensible to be cautious, entertain foreign ideas and explain both sides of the coin“.  I find it refreshing to find an admitted ‘gold bug’ express what I think to be a balanced view, and will pay more attention to Roy-Byrne’s comments going forward than I have in the past.

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An article yesterday titled ‘Fort Knox Gold Audit‘ – reading time 1 minute, with a 5 minute accompanying video – says that it has been suggested it would take 400 people six months to count (and I assume properly record) what is said to be the 700,000 gold bars held in Fort Knox.  The video says that would cost U.S. taxpayers about U.S.$15.0 million.  I added the following comment to the article:

If there really are only 700,000 gold bars in Fort Knox there has to be something seriously wrong with the idea it would take 400 people 6 months to count it.  Unless American arithmetic works differently than Canadian arithmetic 700,000 divided by 400 is 1,750.  I am 69 years old.  I would have thought it would be an easy task to count 500 gold bars per day, and simultaneously account for the serial numbers on each.  Assuming 5 working days per week, working at a rate of counting and recording 500 bars per day, it would take one person (700,000 / 500 / 5) 280 weeks to count the gold said to be in Fort Knox.  That equates to 70 properly supervised people working for 4 weeks to count 700,000 gold bars.  What am I missing?

Even if I am wrong by more than 50%, and it would be possible only to count and record gold bar serial numbers at a rate of 30 per hour, assuming a 7 hour working day it would take 700,000/(7X30) = 3,333 working days, or 70 properly supervised people 3,333/70 = 48 (rounded) days, or 12 weeks, to count the gold bars said to be in Fort Knox.  At that count rate, if 400 people working for 6 months would cost U.S.$15.0 million (an annual imputed income rate of U.S.$75,000 per person), 70 people working for 3 months would cost slightly over U.S.$1.3 million.  It seems to me:

·    even at my assumed lower counting rate, U.S.$1.3 million plus supervisory costs would be a small price to pay to satisfy the American public and the world that Fort Knox indeed has the physical gold claimed; and,

·    if the cost estimates quoted were generated by U.S. civil servants, and the implication in the video is that they were: (1) this is a blatant example of the view of at least one or two U.S. government civil servants as to ‘productivity expectations’ of government employees, (2) and if representative of general ‘U.S. civil servant productivity expectations’ there may well be a lot more U.S. civil servants ‘on the dole’ as productivity demands on remaining civil servants is increased as U.S. Federal, State and Local Governments work to cut their respective deficits.

Visit Stock Research Portal for free stock market data, analysis, and research on over 1,600 Mining, Oil and Gas Companies listed on the Toronto and Venture Exchanges. See our Legal Disclaimer.

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