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THE
ROCKET SCHOOL OF ECONOMICS


The Two Greater Fools Theory.
by Professor von Braun

June 14th, 2005

There is a subtle difference between the stock market bubble, especially the NASDAQ market that peaked in March of 2000, and the current real estate bubble that is being given much press of recent times.

This bubble is occurring not only just in the US, but in other countries such as Australia, New Zealand and the United Kingdom. Low interest rates, silent seconds, interest only loans, no deposit purchases, etc. We hear all about what the buyers are doing and receiving as inducements to purchase a house, anything it seems to keep the 'bubble' going. That is of course the greater fool theory at work with 'agusto'.

But in this wonderful day and age, we hear very little about the other side of the transaction, as in 'who is buying these mortgages?' Banks and other financial institutions are not offering these inducements without the knowledge of the fact that they can be packaged and flipped fairly quickly, which means they have a buyer, a buyer best described as greater fool number two. Perhaps it's the Japanese pension funds looking for a return on their cash. Obviously, without a market for the mortgages, the market would come to a halt very quickly.

We know of course that in the US the mortgage giant is Fannie Mae and Freddie Mac, but they are not responsible for Australia, New Zealand and the United Kingdom real estate markets. So who could be the backstop for those markets?

It's safe to say that both Australia and New Zealand have the same banking system since nearly all bank ownership in both countries is headquartered in Australia. They have not had the benefits enjoyed by the US banking system, in the form of some very aggressive GSE's, swallowing a large share (40%+) of all housing mortgages, with the US taxpayer holding the tab if things go wrong.

So who has been the buyer for packaged mortgage debt out of these three countries? Could it have been the Europeans seeking higher returns on their investments? If this is the case, then the 'NO' vote out of France and Holland may have just thrown a spanner in the works. Certainly the Australian and New Zealand dollars have sold off some in the last week, but the real question is how dependent on Europe are the Aus/NZ banks for packaged mortgage buyers?

Should there be a decline in buyers for these 'deals' then two things will happen, 1) the currencies will weaken as demand for them will erode, and 2) each countries respective real estate markets will begin to weaken, not so much because of a lack of actual house buyers but because the market of the mortgage buyers will dry up.

Time will tell, but I would expect that as the 'discussion' coming out of Europe these days becomes more confusing with talk about countries going back to their 'old' currencies, leading to more confusion as large holders of Euro notes get nervous, we may see a surprise event, as the aforementioned real estate markets begin to unwind.

This also may have another surprise which will be a strengthening US dollar, since there may be no where else for holders of Euro notes to go, except into the dollar. Of course they will have to sell them first, which suggests a declining Euro market. If they don't want US dollars then there is gold as one option, with the Swiss franc being another.

It would be amusing if the Euro, once touted as the alternative to the dollar, has begun a decline that results in the dollar strengthening, as well as putting pressure on the physical market as savvy Europeans decide that owning physical gold may well be a necessary component of an individuals reserves. It would also be interesting if the long awaited collapse in real estate prices began in the South Pacific.


The Prof can be contacted by email at profvonb2@aol.com

Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.

Return to the The Gilded Opinion Index Page

The Rocket School of Economics -- The Lecture Series Index

  • 22 May 2009 -- An Often Overlooked Issue!
  • 28 Mar 2009 -- Problematic Banking Systems!
  • 14 Nov 2008 -- What Exactly is an Asset?
  • 23 Aug 2008 -- Through the Looking Glass?
  • 02 Aug 2008 -- Compounding to the Downside!
  • 26 May 2008 -- Back to Basics Again!
  • 31 Mar 2008 -- The Broken Watch -- Part 2.
  • 27 Mar 2008 -- The Broken Watch -- Part 1.
  • 06 Feb 2008 -- The Financial Equivalent of Faulty Towers.
  • 10 Dec 2007 -- Monetary Systems & Productive Assets.
  • 14 Feb 2007 -- Divorced from Reality
  • 06 Sep 2006 -- Gold, Bankers, the Trade Deficit and Unsettled Transactions
  • 19 Jun 2006 -- When is a Reserve Not a Reserve?
  • 31 May 2006 -- The significance of August 15, 1971.
  • 08 Apr 2006 -- Keep Your Eye on the Ball!
  • 30 Mar 2006 -- What came first?
  • 11 Mar 2006 -- An Unanswered Question.
  • 08 Jan 2006 -- Where have all the projects gone!
  • 11 Dec 2005 -- Gorillas, Rising Gold Prices and Depreciating Paper Currencies!
  • 23 Oct 2005 -- Custodial Risk.
  • 16 Sep 2005 -- An Inherent Flaw.
  • 08 Aug 2005 -- Central Banks and 'Reserves'.
  • 31 Jul 2005 -- Central Bankers, Actors and 'We'.
  • 17 Jul 2005 -- Unintended Consequences! -- Part 3.
  • 07 Jul 2005 -- Unintended Consequences! -- Part 2.
  • 25 Jun 2005 -- Unintended Consequences! -- Part 1.
  • 14 Jun 2005 -- The Two Greater Fools Theory.
  • 03 Jun 2005 -- Real Money, Funny Money and YOU -- Part 4.
  • 30 May 2005 -- Real Money, Funny Money and YOU -- Part 3.
  • 26 May 2005 -- Real Money, Funny Money and YOU -- Part 2.
  • 21 May 2005 -- Real Money, Funny Money and YOU -- Part 1.
  • 09 Nov 2002 -- Carrying a Big Stick.
  • 17 Sep 2002 -- Wishful Thinking!
  • 27 Jul 2002 -- Gold Bugs Beware -- part 2.
  • 10 Jun 2002 -- Gold Bugs Beware!
  • 06 Apr 2002 -- Currencies versus Gold.
  • 26 Jan 2002 -- Bear Market Strategies.
  • 01 Jan 2002 -- 2002 -- A Perspective.
  • 20 Oct 2001 -- The Storm Clouds are Gathering.
  • 30 Sep 2001 -- What to Say?
  • 01 Jul 2001 -- ...Said the Fly to the Spider.
  • 14 Jun 2001 -- Upward and Downward!
  • 28 May 2001 -- Volatility Time, Again!
  • 14 May 2001 -- The Coming Bull Market in Gold Stocks?
  • 24 Feb 2001 -- High Hopes, Wishful Thinking & The Absurd
  • 20 Feb 2001 -- Who Put the Holes in the Swiss Cheese?
  • 22 Jan 2001 -- US Dollar Admits Identity Crisis!
  • 16 Jan 2001 -- Dear George W.
  • 24 Nov 2000 -- The Bubble Has Burst
  • 11 Nov 2000 -- The Media, Bull Markets & the Gold Price
  • 02 Nov 2000 -- Gold Stocks
  • 29 Oct 2000 -- Oh The Tangled Web We Weave ...When We Set Out to Deceive
  • 24 Oct 2000 -- A Mystery!
  • 16 Oct 2000 -- A Peso Here ...and a Few Thousand Pesos There
  • 10 Oct 2000 -- The Unfolding
  • 30 Sep 2000 -- What's Wrong with THIS Picture?
  • 25 Sep 2000 -- Buy Gold Now!!
  • 23 Sep 2000 -- The Times, They Are a' Changing
  • 15 Sep 2000 -- Time WILL Tell!
  • 27 Aug 2000 -- SS "Paper Assets" Begins to Take on Water
  • 06 Aug 2000 -- The Indian Summer
  • 26 Jun 2000 -- A Yellow Brick Wall
  • 22 May 2000 -- The King IS Naked
  • 30 Apr 2000 -- Goodbye Yellow Brick Road
  • 18 Apr 2000 -- Beware the Ides of March, April and May
  • 08 Apr 2000 -- Really, Sir Aldot!
  • 25 Mar 2000 -- Where To From Here?
  • 18 Mar 2000 -- The Gnomes of Zurich
  • 12 Mar 2000 -- The "New" Economy??
  • 06 Mar 2000 -- Two Questions
  • 04 Mar 2000 -- Iceberg Dead Ahead!
  • 28 Feb 2000 -- The Wizard of Oz
  • 06 Feb 2000 -- Here We Go Again!!
  • 15 Jan 2000 -- Comments on the Gold Market
  • 29 Dec 1999 -- No Raw Ingredients Required
  • 28 Dec 1999 -- No Way Out
  • 14 Dec 1999 -- Ho, Ho, Ho!
  • 07 Dec 1999 -- Greenspan's Bubble
  • 03 Dec 1999 -- Early Warning Signs


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