Real Estate & Inflation!
March 15, 2011 by Greg Saunders
Greetings folks, awhile back I wrote a blog that featured John Paulson and his rationale for taking the plunge back into the housing market. Paulson cites inflation as the precipitator for his logic. Well to be honest, most thought he was delusional. But there may be more to this chaotic thinking than we had anticipated. However, I can assure you of one thing….inflation is not the only reason to risk heading back into housing market. Let’s examine this concept further.
Okay, I told you that Paulson is the hedge fund manager who placed negative bets on various mortgage-backed securities during 2007 and 2008. We know further that these securities took a nose dive in value during the 2008 crisis giving the obstreperous Paulson multi-billionaire and celebrity status!
So why would John Paulson flip the script now that the housing market has tanked and advise us to buy real estate? Okay before you go ballistic on me I would think that his opinion at least merits some moderate consideration, right? Oh you are so cynical!
Folks looks what’s going on! China has been slowing selling off its treasuries. Back in the spring of 2009 China held $900 billion in treasuries. Last check China’s treasury holdings fell to about $891 billion. Furthermore, the Federal Reserve is now the largest holder of treasury debt. The Fed under its current policy of Quantitative Easing 2 is buying $600 of treasury debt not only to hold down interest rates but to also cause inflation. As you know it is in their infinite wisdom that inflation will stimulate the economy and create jobs.
So let go back at look at Paulson’s prognostications. He made three financial predictions that are noteworthy. The first was that gold would go through the roof. We could see a once going for $2,400 on its way up to $4,000 an ounce. Second, he said you should get out of bonds while you can. He further suggested that it would be more financially feasible to invest in blue chip stocks with strong dividend yields rather than bonds.
Hmmm….I also just read in Time magazine that famed investor Bill Gross of Pimco recently sold all of the Treasury Bonds in his funds portfolio. It amounted to just a paltry $150 billion worth of our debt. His reason was that the yields were as high as they could go and now would probably fall. Wow, that’s an eye opener! Bond yields and bond prices moving in opposite directions. Nuff said!
Paulson’s third prediction, buy a home…..Now! In fact he stated that if you don’t own a home, buy one; if you own one home, buy another one, and if you own two homes buy a third. Paulson even went so far as to state that we should lend our relatives the money to buy a home too!
Why the heck was this guy thinking? In a word….inflation. Paulson anticipates a resurgent inflation. That’s not the kind of inflation that boosts stock prices and turns mutual fund managers into rock stars, but the kind of inflation that causes the prices of every day goods to skyrocket turning homeowners into investment wizards.