Gold, Toll Bros. (12-08-07)

For the record (an email I sent out before feedblitz and this blog):

 

The IMF is planning on selling a lot of its gold stock and it’s planning on restructuring to recoup some of its revenue shortfalls as of late. That means, all other things being equal, the price of gold should – given the quantity IMF will likely put on the market – fall. The dollar’s value – a proxy for the gold price (the relationship between the two being inversely proportional) – could be stabilizing as Europe and hopefully Asia follows us into a recessionary trend. That is to say, these other economies are [hopefully] not planning a pull-back in free trade and will [hopefully] accept lower returns in exchange for stability and continued growth (albeit diminishing).

        I impute that Hume’s price-specie-flow mechanism will, in the absence of economic populism, restore external balance (our balance of trade deficit with heretofore financially repressive, neomercantilist countries) and in the process, drive US GNP growth. This phenomenon [would] cause, among other things, domestic manufacturing production to explode, thereby pulling the American economy out of economic stagnation.

        The so-called velocity theory of money is effective in the context of economic nationalism such that it predicts that increasing monetary supplies will water down the real value of the existing monetary base, acting like a hidden tax for consumers and investors alike. This spectre of inflation incites market volatility and leads to decreasing marginal returns on capital for corporations, which can spur layoffs and a vicious cycle of decreasing: incomes, investment, growth and consumption in our economy.

       In 1997, we saw the effects of Asian economic nationalism with the currency crisis and the drastic effects it had on the economies of those countries. I think many of us are hoping the Asians learned from their mistake and will not do the same thing again. If these people don’t let their currency revalue at least somewhat and if they don’t allow the value of their external surplus to decrease, we will be facing another currency crisis, but this time it will affect all the underlying bonds – in the world. If bond prices rupture, the cost of borrowing will skyrocket and the financial flows will seize.

The issue that Asians are facing as monetary inflation increases in Anglo-Saxon countries, among others, is a phenomenon economists refer to as diminishing marginal returns. The point at which Asians experience real negative returns [on credit sales, e.g.], there will be an incentive for them to lock in their gains and cut off the supply of investment dollars, which would entail a run on American currency with all of its implications.

Hopefully the Asians can get over their politics of invidious comparison and cooperate even when free trade is not relatively more favourable for them. Unfortunately, given historical trends I doubt this will be the case and we may be on the proverbial knife’s edge but one can always hope.

Either way, I think Toll Brothers might be a good long-term stock due to it’s being replete with cash and its forty year performance which has been relatively good. In 2005 this company roiled the Fortune’s 500 list. There will probably be trouble in homebuilding and in Real Estate more generally in the foreseeable future, but given demographic trends and faith in the US economy over the long haul, land, hence property, is going to become scarcer and more expensive in the future. In thirty years, the population of California doubled. If there is not productivity here in the free market capital of the world – namely, the US – where will it come from? I can easily make a case against Europe or Asia, but that’s fodder for another discussion.

Some economists say that the housing market is at or near a crisis point. Certain indicators predict lousy growth for Real Estate in the future and although that might be a good assessment, I’d say in ten years it won’t make a difference what’s happening now.

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