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GEDANKEN,
MATE
Do you know what a gedanken is? It's the German word for thought. "Gedanken experiments" were used by the early framers of relativity theory to help others (and themselves) get over the conceptual difficulties of understanding how the universe really works. I'm not going to bore you with the difference between the special and general theories of relativity, but instead am going to conduct a little financial gedanken to hopefully gain insight into today's markets. As an aside, one of the triumphs of relativity theory was that it undermined the concept of simultaneity, or absolute time. Two observers could look at the same event, see different things at different times, and both be correct. These gedankens were often used to illustrate how the apparent conflicts in observation could be resolved. Copernicus and Kepler had earlier destroyed the notion of absolute position (goodbye earth as center of the universe), and Einstein then eliminated absolute time (no clock is better than any other clock). Social scientists like Margaret Meade extended these concepts to cultural relativity. We look at the world in a certain way, and hence a different culture appears to us as such and such, but how does that other person see the world and hence judge our culture? Both cultures have valid points of view. This development had profound meaning for the Colonial mentality and its assumptions of moral superiority. Not so was an culture inherently superior, it appears. The thing I find most depressing about today's world is how few people seem truly willing to embrace these concepts and "Walk a mile in another's shoes." You would think that in our era of information choices that people would indeed develop a wider understanding and sympathy for others, but this seems not to be the case. Insularity bordering on ignorance seems to rule the day. Even within our society, not many seem to be willing to look at Gay Rights from the perspective of the Gay person. Bubbles For Everyone The idea for this article arose from considering the truth of the oft-stated assertion that governments can create the conditions for asset bubbles, but can not control which ones occur or when. Do you accept that? I don't think it's correct, and I want to offer a little thought experiment on how things may have been different. So, consider my economic gedanken, and at the end I ask you to make your own decisions. Give Me Land, Lots of Land As a kid, I used to love maps. I would often marvel at that of the United States. One thing that impressed me was the amount of land in military reserves they had, particularly in the Western States. These included a lot of obscure scrub lands, but also some pretty choice real estate. An example of the latter is the Presidio in San Francisco, now a park. Let's rewind 10 years and imagine that Bill Clinton has asked his treasury secretary to institute a strong dollar policy by surreptitiously leasing government land through selected "Land Banks" at near giveaway rates (How about .19%, the current one year rate for gold?). The banks would then sell the land into the markets for housing or whatever. They could borrow more land as needed, merely paying the .19% rental rate. What's more, all G7 countries also agreed to do the same thing. A complex of swapping arrangements would be developed at the 1995 G7 meeting to formalize the arrangement. Governments would also heavily advertise the fact that they were selling "excess" land to the point where they needed to make a formal agreement to limit their selling to a few million acres a year, also heavily advertised. When needed, governments agents would also openly muse about selling large portions of their "sterile" land assets in excess of their quotas. Now, imagine the housing market during the past 10 years if land values were stable or decreasing throughout the tech boom and beyond. Imagine if you thought you could get a house for less in a year from now than if you bought it today. Where would be the inflationary expectations today? Probably not real estate. The stock market may have peaked and crashed as before, but another asset class may then have received all that excess liquidity being generated by Eastern and Western banks. Where would all the money go if land prices were perceived to be a poor investment choice? The
housing market would probably be fairly stable, some "smart
money" would be getting in now, and everyone else would assume they
could rent a place and spend their money on consumption because you
could buy a house more cheaply down the road. Besides, who had the 25%
down payment? I wonder if the CPI inflation index would today contain rental equivalents or housing prices? Further suppose that a whole speculative industry had arisen over gold and silver bullion and old coins, as prices streamed across financial tickers whilst analysts described the best undiscovered buys in today's market. "Options on Krugerand futures were stronger by midday..." That sort of thing. Derivatives, insurance, new IPO's, agents dealing with sales and so on. So, let's look at how other things might be today. Reading over all the latest online articles... A spokesman for the Real Estate Anti-Trust Action group (REATA) today claimed that land banks in the Las Vegas area were near exhaustion and predicted a runaway boom in land prices very soon. On Financial Sense Online, experienced coin dealers penned articles complaining about rampant fraud in the evaluation process for rare coins as new players dominated the evaluation and loan fields. "I mean, they don't even consider whether the coin is worn at all. The appraisers will drive up and look at your portfolio and make a few quick check marks on a standard sheet. That's it. People are borrowing against the value of these coins for consumption, and it's clearly a bubble," said one market observer as prices for Denver gold eagles passed through the benchmark $2000 level. "Banks are ballooning their balance sheets to people using these coins as collateral," he continued. "Wall Street launched another gold exchange traded fund (ETF) today." As a note, shares in the new Akansas Gold Fund were quickly snapped up and traded over 12% higher than the spot price before settling back a little at the close. Yesterday, chairman Greenspan alluded to claims that speculators were taking on far too much risk with coins and gold and silver bullion, and that financial problems lay in wait. "Throughout history, people have always relied on precious metals for security and capital appreciation," he observed, "and it is a welcome sign of the increasing sophistication of the investing public, extracting value from the coins and bullion. I don't see a problem." Another REATA spokesman was quoted as saying "Greenspan let the cat out of the bag in 1996 when he said that foreign governments stood ready to lease more land if the price rose. This is proof the government is manipulating the real estate market." He also bitterly commented on the difficulties experienced with getting a land ETF started on the New York Stock Exchange launched, and the problems people had with closing deals on buying land outright. "The market is so thin right now. All the big players have left. Nobody's loaning against land value these days. They're calling ownership of property a barbarous relic of our agrarian past." REATA is also attempting to expose the Land Bank scheme through a lawsuit designed partly to make the government account for all its land assets, which it claims are much lower than reported. "I mean, these land swaps are clearly designed to hide the fact the land has been sold," he said, "and ownership of US land has slowly but inexorably passed into foreign hands. One day, the lid will come off, and people will wake up and find property prices are higher, a lot higher." Back To Reality Ok, so it couldn't happen. Land can't be melted down into indistinguishable blocks which are then invisibly sold, and a Fed spokesman couldn't coyly brush off a coin bubble phenomena by saying "All coin markets are local." A consumption boom could probably not have been maintained to such an extent under such a scenario, either. Realistically, could the government have regulated land prices even if housing markets are indeed all local? To a certain extent, probably yes. The US has large holdings outside Las Vegas for example (where the first A-bombs were tested), but with the influx of people into California, probably not there. The government could, however, present a more believable case that it is not inciting a housing bubble by raising the percentage of down payment required (a.k.a. margin requirements) and lending standards. Make sure people have enough equity and income to ride out any downdrafts in housing prices. It's just common sense. It's also been fun to see what IS real and what ISN'T by reversing the values of overvalued and undervalued assets in the preceding gedanken. It's also clear that central governments probably want one asset class to succeed at the expense of another. The little exercise in relativity of values also allows us to see that both sets of assets are just that, asset classes. Since I brought her name up before, let's end with a great quote from Margaret Meade. ""Never doubt that a small group of thoughtful committed people can change the world: indeed it's the only thing that ever has!"
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