Gold has worked its way back above $1500 an ounce, ending last week at $1508.90. Silver, on the other hand, which used to be hovering around $50 an ounce, can’t seem to work its way above about $35. And oil dropped nearly 1% to 112.39.
What I want to suggest here is that the inflation hypothesis may not be quite as strong as many advocates have been suggesting. Yes, gold is strong—but it’s primarily because of its status as an “alternative currency” in a time when major currencies may be weakened by one or more of many problems, not least of which is the apparent impossibility of making Greece whole again. (The financing of its sovereign debt is now costing the country nearly 17%.) Oil and silver are sitting on their heels, meantime.
I am just not satisfied with the argument that we have an either/or situation here. Either inflation or something like deflation. Either we should all be hiding from inflation in a cave somewhere with our wealth in the form of gold or we should join Bill Gross with our wealth in the form of Treasury bonds (because we agree they will be hurt the least by the forces of deflation).
I’m not sure I can get away with this, but I’m playing with another hypothesis—that both the Inflationistas and the Deflationistas are right…to a degree. Thus, they are also wrong…to a degree. The prices of a large number of items—oil, gold, raw metals, food—continue to rise. The prices of a large number of other items—houses, high tech items, furniture, department store goods—continue to decline. The key here is that emerging countries, many of which are in the midst of a major battle with speeding economies (and thus, with inflation) are driving up the first set of prices. The second set of prices has no such support and hasn’t found its post-recession legs yet.
But guess what? Housing may soon seem to be the key force in this up-and-down, inflation-vs.-recession economic game. The final stages of its recovery have been very effectively held off by the remnants of the foreclosure fiasco (which are definitely still with us) and the utter confusion among lenders regarding how to qualify buyers who will bring solid profits. It has been—and still is—a mess.
But there may be a light (still rather distant) at the end of this twisting and turning tunnel. No less than the editors of The Economist announced in their most recent newsweekly: “But there are signs this may be the darkest hour just before the dawn. House-ownership is beginning to look more affordable by many measures.”
Now, The Economist isn’t exactly Fast Eddie’s Cut-Rate Economic Forecast Service. It’s the real thing. The magazine notes that “the ratio of house prices to rents has returned to its pre-bubble level”; vacancies among rentals are way down and rents are up; the credit markets have begun to heal themselves, with foreclosures declining (albeit very gradually) and interest rates closing in again on their record lows; and a series of monthly improvements to the number of job formations.
To this, I would add that the worst foreclosure data is weighing heavily on national data. About 24% of recent foreclosures, after all, have been in Florida. It is not that difficult to find areas that have really lightened up, but you have to look past Florida’s figures to find them.
If The Economist is correct—and I’m willing to put my own money on their assertions—then it will still take some time for real estate indicators to look very good. It will take a while for the press to shake its habit of lamenting the slow real estate market, for the public to realize they’d better buy now if they want to catch the best rates, and for those who make these decisions in the corner offices of lending institutions to start designing loans that can attract a much larger share of the creditworthy borrowers out there. But all of this could happen more quickly than seems possible. I for one am ready.
by: Bill Fisher
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