Category Archives: Real Estate

Don’t Look Now

Of course this one is familiar:

But this one is back too:

From zero hedge, of course. Just for the record.

Extreme Crazy

I was going to say Peak Crazy, but we all know things can always get crazier. Some things that spring to mind.

Political craziness: Mob violence on left and right, blatant defiance of federal law by city politicians, attempts to rewrite or at least deny history, demonization of Trump, Putin and anybody associated with them, and so on. Immigration in Europe – it’s that 4.7 kids per woman in Africa that nobody dares to talk about. Not to mention the crazy fat kid.

Fiscal craziness: Federal funding of runaway price increases, notably in university tuition, prescription drugs but also many other subsidized goods and services. Gross under-funding of state and local pension schemes even under ludicrous assumptions about future returns.

Monetary craziness: Central banks threatening to tighten but pumping away, consumer credit at record highs in US and elsewhere (Canada, that’s you I’m talking about with highest household debt in the world), government deficits keep growing. Subprime crdiet still gowing while defaults rise. Most of all, ICOs. People pouring money into blockchain-based tokens. Really?

Market craziness: Housing bubbles in China, Canada, Australia, UK and some US cities. Massive (record) risky speculation in many markets – short vol, long crude for example. Setups (risk parity) similar to portfolio insurance (remember 1987?).

I could go on. But I won’t. I’m just grumbling while I wait.

Same Old

Per Bloomberg, house flippers have pushed the share of sales that are flips, or properties sold twice in 12 months, to its highest level since 2006.

Home flippers, who buy homes as a speculative bet on short-term price appreciation, accounted for 6.1 percent of U.S. home sales in 2016, according to Trulia, which defines a flip as a property sold twice in a 12-month period in arm’s-length transactions. That’s the highest share since 2006, when flips accounted for 7.3 percent of sales.

House prices are, of course, now above the last bubble peak. This is not likely to end any differently than the last time. Thanks, Janet.

Malls Hit The Wall

According to Forbes in 2015, the US leads the world in retail space per capita, with about 25 square feet (roughly 50 square feet, if small shopping centers and independent retailers are added). In contrast, Europe has about 2.5 square feet per capita. Number two is the UK, with about one-sixth the retail space per capita of the US. Now that online shopping is replacing store visits, shopping malls are becoming white elephants.

More mall landlords are choosing to walk away from struggling properties, leaving creditors in the lurch and posing a threat to the values of nearby real estate.

As competition from online shopping batters retailers, some of the largest U.S. landlords are calculating it is more advantageous to hand over ownership to lenders than to attempt to restructure debts on properties with darkening outlooks.

Obviously this is a looming bust for commercial real estate – and of course a wave of defaults on the associated debt.

Going Out On A Limb

I think the end of this bubble is beginning, as yields spike and the dollar soars:

“Our revels now are ended. These our actors,
As I foretold you, were all spirits and
Are melted into air, into thin air:
And, like the baseless fabric of this vision,
The cloud-capp’d towers, the gorgeous palaces,
The solemn temples, the great globe itself,
Yea, all which it inherit, shall dissolve
And, like this insubstantial pageant faded,
Leave not a rack behind. We are such stuff
As dreams are made on, and our little life
Is rounded with a sleep.”

― William Shakespeare, The Tempest

The economy is not strong. There are 100+ million adults not working (“not in the labor force”) out of a total population of 325 million, to say nothing of the myriad of government employees who are employed, but not contributing any value to the economy.

Consumption is being sustained by debt, both private borrowing and government money-printing. By January 2009, the United States had accumulated $10.6 trillion in debt. The gross national debt – just federal government debt – stands at $19.7 trillion as of the end of FY2016. Spending is on a pace to add another $2.4 trillion this fiscal year (2017), surpassing $21 trillion by next September. Krugman applauds, and of course this is Obama, not Trump. Yet.

Debt-funded consumption in excess of income has crowded out savings and therefore investment. As investment has declined, so, logically enough, productivity growth has fallen (see previous post). Simultaneously, government has been growing, making a lethal cocktail for real household disposable incomes, which have been declining for years. Pensioners who think they are in good shape are not noticing that defined-benefit pension funds are already starting to cut benefits and many, especially state and local government funds, are woefully under-funded. Social Security is in negative cash flow, and drawing on the general tax revenue pot to make up the difference. The stock market is ludicrously over-valued and promises zero or negative returns to pension funds for years to come. As Margaret Thatcher notably said “Socialist governments traditionally do make a financial mess. They always run out of other people’s money. It’s quite a characteristic of them.”

Powerful deflationary forces are being unleashed. The world is awash in oil and efforts to keep the price up will eventually fail. OPEC in aggregate will not cut supply because its governments (as well as the non-OPEC ones) depend on the flow of oil money to stay in power. I expect oil to reach the lower $20s if not below. Most of the world is engaged in a race to the bottom, cutting interest rates to devalue their currencies and boost exports. They are therefore exporting deflation to the US. I expect to see CAD in the 0.60s and the EUR in the 0.80s. Consumer price inflation in the US appears comparatively strong due to the inclusion of OER¹ in the CPI, which is not done elsewhere, and due to the uncontrolled rise in healthcare and education prices, funded by government subsidies and debt. These prices end up being a form of taxation by the 0.01%, who are on the receiving end. The protest vote in the US election should be no surprise.

OER, a completely fictional number to start with, is high as a result of low interest rates financing housing bubbles. These will end as badly as the previous lot. I choose not to be a homeowner, largely because I don’t want to face a huge capital loss.

In short, the economy is a Potemkin village. Things are not as they are made out to be. Even a fractional increase in rates may trigger a deflationary crisis, especially considering the shortage of dollar liquidity outside the US.

¹ OER, Owner’s Equivalent Rent, is weighted about 25% of the CPI basket. It is estimated by a telephone survey of selected homeowners, asking them how much they think it would cost to rent their a property like theirs.It has nothing to do with what it actually costs them to own and live in their properties.  I am not kidding. Now do you think CPI means anything?

Ouch

Well the Trump bond slaughter has not been good to the portfolio. However, the strong dollar and the rapidly falling oil price are both powerful deflationary forces. Dr. Copper spiked, but was rapidly crushed today. Foreclosure filings increased 27% MoM in October, the largest increase since the run-up to the last property crisis. All of this bodes well that, once the powers that be feel that they have achieved their goal of getting the unwashed out of bonds and into equities in time for the real slaughter, happy days will be here again. In which light, it is amazing to see that the Russell 2000, an index with an undefined PE – due to aggregate lack of positive E – is the stellar performer. This smacks of a massive degree of (emotional?) retail participation in the Trump stock rally.

So I’m sitting tight.

BTW, my target for oil is $15-20, EUR is $0.80-0.85 and CAD $0.60-0.65.

What Are They Thinking?

Well the market is closing today without substantial change again, having been brought back one more time, most likely by the HFT boyz.

Of course, they have been ably assisted in this mission by the dip buyers, and by the absence of any real selling. I have no idea what anyone sitting on a long position in this market is thinking.

The Fed most likely realizes that it has created a disaster with excessively low rates and is trying to correct the problem. In my opinion, it is likely to raise rates at the next meeting regardless of economic data flow between now and then. Any raise is likely to produce a re-pricing of markets.

Yes,  the economy is rolling over fast.  There’s nothing the Fed can do about that, and it probably knows that. All it can do is try to deflect the blame, which is why it will raise rates regardless of the economic data flow.

Yes, sentiment is bearish. But it has been excessively bullish all the way up the rally and the market went up regardless. Sentiment is over-rated as an indicator in my opinion in a market driven by central banks and algos. This market can go down despite bearish sentiment.

Yes, oil is still going up in price. Even today, and in the face of steadily rising inventories. $50 oil puts many of the shale producers back in business and I’m sure they are selling futures at these prices with both hands. The muppets will eventually figure this out, and stampede.

The bears will soon have their day.

Flippers

Apparently house flipping is at a 10-year high. Well, we know how that ends.

That’s Not A Bubble!

This is a bubble:

Prospective real-estate investors surge to the back of the room, submitting paperwork for offers on one or more units as agents in suits shout and gesture to clients, who anxiously pace the aisles. Three hours later, the 250-unit, C$85 million ($60 million) District Condos project is sold out and 170 people are added to a waiting list.

I thought San Francisco was crazy. Nah, Vancouver makes it look cheap:


Thanks to zero hedge (of course).

Toilet Paper

There’s something special about toilet paper. Perhaps, in addition to the obvious benefits in comfort and hygiene, it has become something of a symbol of civilization. It is widely believed that its inability to deliver adequate quantities of toilet paper triggered the downfall of the Soviet Union. As recently as 2009, the government in Cuba was facing unrest for the same reason. The political upheavals in Venezuela clearly highlight a shortage of toilet paper as a major grievance.

The common element in these situations is not toilet paper, but the government’s belief that it can control the economy to conform to socialist ideals while continuing to grow national wealth, production and employment. The shortage of toilet paper is merely a common, albeit not universal, symptom of the failure of centralized government economic management.

As we come to the end of 2015, we see that this belief in central planning has become widespread despite many failures. Keynesian economists have asserted that they can indeed achieve this nirvana by monetary manipulation, and so elected politicians have turned over the central banks to them. The result has been unprecedented volatility in financial asset prices as the inability to accurately forecast the results of monetary actions leads to wider and wider swings.

Sadly, there is no reason to believe that the Keynesians have learned anything from their failures. John Hussman says:

On the other side of the recklessly speculative advance of recent years is not only the likelihood of brutal market losses, but also tremendous opportunity. I fully expect the S&P 500 to double, and to double again over the coming 10-12 years, and yet I also expect the total return of the S&P 500 over that period to be zero. Both aspects of that expectation are likely because markets move not diagonally but in cycles. How did the S&P 500 trace out a total return of zero between 2000 and the end of 2011? By first losing half its value, then more than doubling, then losing more than half its value, and then doubling again. Across history, extreme valuations have invariably been followed by similar behavior – wide cyclical swings, yet only modest overall returns over the following decade.

Dr. Hussman’s assessment, based on history, is likely to understate the volatility of the outcome as the central banks, led by the Fed, will probably act to amplify the cyclic volatility, rather than dampen it as they should. As far as I can tell, nobody at the Fed has the slightest notion of control system theory. Since it has no reliable economic forecasting mechanism, there is no way for the Fed to look forward. Therefore it can only look backward – the Fed calls this “data-driven.” Control based on such feedback can work, but only when properly designed. The delays in the data and the action of any control inputs the Fed might make are probably too high to make any such control system stable.

The end point must be some sort of global economic revolution as socialism, or at least the form of socialism that requires continuous injections of new money to sustain itself, is finally rejected. Getting to that point will be tough as the beneficiaries of big government and redistribution far outnumber the victims, the workers who actually contribute value to the world’s economies. Navigating this series of economic tempests will be difficult. I remember once buying a copy of “Sail” magazine that purported to provide insight in how to excel in light air. The advice boiled down to “sail fast and avoid the holes.” Right. True, but not helpful. In the same spirit, “buy low and sell high.” Happy New Year.