To all regular and accidental visitors, may you have a happy and healthy new year. A few predictions for 2013:
-Japan will start to combust
-The US will not get its house in order; unemployment will hold around current levels and the Fed will implement additional policy measures that take $1 trillion per year even higher
-The bull market in gold will continue
-The best leveraged trade will be shorting the Yen
Enjoy the ride.
Monday, December 31, 2012
Wednesday, December 26, 2012
Friday, December 21, 2012
For Later
I have moments where I think about my life today as compared to the dreams that I had when I was growing up. Everyone does it, I think. And often the daydreams can contrast sharply with the reality.
I work in the real estate investment business. But if you had asked me 20 years ago what I wanted, I can assure you that real estate would not have been the answer. I had aspirations of living in Hollywood – first it was movies, later it was music. And when I decided to go to law school and become a lawyer, it was with the idea that such profession could help me to get there. And in the few years that I did practice, I was arguably on the fringe of the periphery, but never close enough that it got me juiced to wake up in the morning and go to work. So, I zigged instead of zagged, changing the trajectory of my professional life and opting for something else that piqued my interest.
Still, there are days (and sometimes entire weeks) where I think about that other life. It’s not always clear what triggers these mental exercises, but they do show up unannounced from time to time. Lately has been one of those periods. I offer no explanation for the timing. But where it used to bring me down a bit, it has not become overwhelming in the same way anymore. Maybe I am better able to take solace in knowing that I have made a career for myself that is still interesting and sometimes challenging. And, if my checklist of goals comes to fruition in 2013, in the manner that I think it might, a lot of what the childhood fantasies represented are still on the table.
More than anything, I want a career where I hold some measure of control over my fate, rather than just being a supporting character in someone else’s show – to have a stake in the outcome, a piece of the pie, and to feel invigorated by honoring the entrepreneurial spirit. I’ve done it somewhat already, but there is still work to do. I think there are new opportunities waiting, I just need to pursue them and not give up. As with anyone else who has a dream and a goal.
Maybe the point of this post was to remind myself of those things, to capture the sentiment for moments later when I feel a little less certain. We’ll see what comes to pass in the next calendar year.
I work in the real estate investment business. But if you had asked me 20 years ago what I wanted, I can assure you that real estate would not have been the answer. I had aspirations of living in Hollywood – first it was movies, later it was music. And when I decided to go to law school and become a lawyer, it was with the idea that such profession could help me to get there. And in the few years that I did practice, I was arguably on the fringe of the periphery, but never close enough that it got me juiced to wake up in the morning and go to work. So, I zigged instead of zagged, changing the trajectory of my professional life and opting for something else that piqued my interest.
Still, there are days (and sometimes entire weeks) where I think about that other life. It’s not always clear what triggers these mental exercises, but they do show up unannounced from time to time. Lately has been one of those periods. I offer no explanation for the timing. But where it used to bring me down a bit, it has not become overwhelming in the same way anymore. Maybe I am better able to take solace in knowing that I have made a career for myself that is still interesting and sometimes challenging. And, if my checklist of goals comes to fruition in 2013, in the manner that I think it might, a lot of what the childhood fantasies represented are still on the table.
More than anything, I want a career where I hold some measure of control over my fate, rather than just being a supporting character in someone else’s show – to have a stake in the outcome, a piece of the pie, and to feel invigorated by honoring the entrepreneurial spirit. I’ve done it somewhat already, but there is still work to do. I think there are new opportunities waiting, I just need to pursue them and not give up. As with anyone else who has a dream and a goal.
Maybe the point of this post was to remind myself of those things, to capture the sentiment for moments later when I feel a little less certain. We’ll see what comes to pass in the next calendar year.
Wednesday, December 19, 2012
Mental Notes
With the LDP winning in Japan over the weekend, the next stage in Japan blowing up is likely to begin. The Yen had a big move in the past month and now sits right at the important 84 level, with momentum suggesting that the path of least resistance is higher. But, with a meaningful jump from 78 already in the books, I wouldn’t be shocked if there is a bit of a rest in the price action. My FXY put options still have a month to go, but I’m not banking on making any money there – it was a small speculation to keep me focused.
The other interesting piece, albeit not watershed, has been the rise in JGB yields over the past week – from 70 bps to 77 bps on the 10-year. Still near all-time low levels, but a big move relative to what we’re used to. I’m not rushing to do anything there.
A number of guys that I follow think that Mongolia has bottomed, following a rash of negative news in recent quarters around government backtracking on the Oyu Tolgoi agreement. I hold the same positions that I did before, just at lower price levels, with no plans to tweak exposure.
I like gold and think it will move higher in the first quarter of 2013. While the gold stocks will eventually catch up, the psychology around them continues to be negative, so I only want to play that move through the metal itself. I still hold some LEAP positions for a couple of the miners that expire in January 2014 – and they all doubled or tripled, only to take a round trip back down in the past couple of months. My exposure there also will not change.
The other interesting piece, albeit not watershed, has been the rise in JGB yields over the past week – from 70 bps to 77 bps on the 10-year. Still near all-time low levels, but a big move relative to what we’re used to. I’m not rushing to do anything there.
A number of guys that I follow think that Mongolia has bottomed, following a rash of negative news in recent quarters around government backtracking on the Oyu Tolgoi agreement. I hold the same positions that I did before, just at lower price levels, with no plans to tweak exposure.
I like gold and think it will move higher in the first quarter of 2013. While the gold stocks will eventually catch up, the psychology around them continues to be negative, so I only want to play that move through the metal itself. I still hold some LEAP positions for a couple of the miners that expire in January 2014 – and they all doubled or tripled, only to take a round trip back down in the past couple of months. My exposure there also will not change.
Quote of the Day
Courtesy of the always entertaining Doug Casey:
"Timing is always the hard part - confusing what's inevitable with what's imminent..."
"Timing is always the hard part - confusing what's inevitable with what's imminent..."
Good Insight
I thought this line from Mario Rizzo was well-written:
“Consider that the contemporary federal government – executive and legislature – exists for the purpose of giving favors to various groups in exchange for electoral support.”
Regardless of party, this statement will always hold true. So, which special interest are we serving today?
“Consider that the contemporary federal government – executive and legislature – exists for the purpose of giving favors to various groups in exchange for electoral support.”
Regardless of party, this statement will always hold true. So, which special interest are we serving today?
What's On My Mind - 12.19.12
-Another great video of Kyle Bass. What did he say? History is important because it gives you a larger data set. He thinks the money-printing story plays out to its logical conclusion in the next 2-3 years. As a general rule, the Rubicon is when debt becomes 15 or 20 times government revenue.
-The Yen / JGB idea is getting a lot of air time lately. And the sentiment seems to be fairly one-sided, so be careful. But, the larger trend is now in motion.
-I still think gold is going to make a big move going into the spring. And theMay March 2013 GLD options that I mentioned recently have only gotten cheaper, by more than half. I am very tempted.
-The Yen / JGB idea is getting a lot of air time lately. And the sentiment seems to be fairly one-sided, so be careful. But, the larger trend is now in motion.
-I still think gold is going to make a big move going into the spring. And the
Monday, December 17, 2012
Am I definitionally challenged?
Seems like it might be the case. I decided to google "cup and handle" formations to see what they say about duration given some charts that I pay attention to. And almost all of the hits that I got put the answer at a year or less. Which does not jive with what I think I'm seeing out there. Maybe I have found a niche. Or maybe I'm grasping.
Friday, December 14, 2012
The New Depression
An interesting read from economist Richard Duncan (2012). For the first time, someone offers an explanation, that I can handle, for why Keynesian solutions may be a necessary evil in today’s environment. Duncan is able to flesh out how the global economy has changed, making fiat money the only way to avoid catastrophe. After walking through his theory and exposition, I’ll then point to a couple of issues that I have.
His basic premise is that we no longer live in a capitalist economy, but instead a government-driven one where credit expansion is the key variable to sustain growth. The statistic worth noting is that total U.S. credit hit $1 trillion in 1964 and has grown more than 50 times since then. Not surprisingly, that exponential move coincides with the breakdown of Bretton Woods and the end of the gold standard. Thereafter, the Federal Reserve constantly lowered reserve requirements, which allowed commercial banks to extend more and more credit, with the idea that the Fed could always provide funding to any bank that needed it. (So, in certain respects, this explanation marries the Post-Keynesian theory of endogenous money with the standard understanding of how the Fed’s control of interest rates and creation of new money impacts the velocity of credit.) But, over time, Duncan finds that the return on credit has gotten smaller – that is, the gap between the annual growth rate in credit and that of GDP has widened, where you need more credit issued to generate a dollar of GDP growth.
In more recent times, the other big phenomenon has been the U.S. trade deficit. Back when money was backed by gold, but the U.S. was a big manufacturer and exporter, there was a natural constraint on how much credit could be extended and how much of a budget deficit could be run. If the U.S. borrowed too much, inflation would hit, gold would leave, credit and spending would dial down, a recession would come, and things would be forced to reset. But, with globalization, trade liberalization, and loss of the gold standard, that natural constraint disappeared. Americans could import more without the bottlenecks in labor and industrial production that normally occurred and led to inflation. Americans could buy goods from countries where the cost of labor was far lower, and they could do it all on credit. Simultaneously, these other countries needed to buy dollar-denominated assets with their dollar reserves in order to keep the value of their own currencies lower and export-friendly, and so would fund a large portion of the U.S. budget deficits and drive up the price of U.S. assets generally. The wealth effect that followed from all that liquidity flowing back engendered higher consumption by Americans without the need to save anything first. And as the economy moved away from savings and investment to borrowing and consumption, credit expansion became the singular focus of government, leading to greater distortions and misallocations.
The key point in all of it is that the U.S., as well as the rest of world, has not functioned on laissez-faire principles for a great long time. Much of it can be traced back to military Keynesianism. First to fund WW1, which set the stage for the Roaring 20's and a period of credit expansion that eventually was unsustainable. Then there was the Great Depression, which many believe did not end until the fiscal stimulus of WW2 was introduced. Later, you had the stagflation of the 70's, so it was the Cold War and Reaganomics as solution. In each instance, massive amounts of debt were created to try and right the ship, and the previous distortions and mistakes were papered over – it is no longer capitalism, but “creditism”, driven in large part by the government. Confronted with that, with the scale of debt that now exists, a market-based solution of letting the economy reset would simply be too painful, probably taking democracy and society down with it. To quote: “There is no doubt that the abandonment of commodity money (gold) created distortions that interfered with the self-regulating market economy. The point to grasp, however, is that our global civilization has been built on and around those distortions and that it could very possibly collapse into ruin if those distortions are not perpetuated through further credit expansion…The question is not whether we are going to abandon capitalism and replace it with a different kind of economic system. We did that long ago. The question is: Are we going to allow the economic system now in place to collapse?” (pg. 147) The risk is a horrendous debt deflation spiral, right out of the mind of Irving Fisher.
Thus, Duncan believes that government spending is the only solution out there (since the private sector is not in a position to get the credit wheels going again), recognizing that they need to invest more intelligently, rather than just encouraging the wasteful consumption of the past. His preferred focus is on solar energy – as a way to gain energy independence, to deal with issues of global warming, and to create jobs and get the economy back on a sustainable path. I know far too little to opine on whether that solution is feasible.
With his basic story out of the way, let me start by mentioning that I find his treatment pretty reasonable. Nevertheless, I still have some criticisms. First, he uses Japan as an example of how greater government spending would not necessarily lead to a sovereign debt crisis in the U.S. any time soon. But, he ignores how Japan has (at least, historically) been able to fund huge levels of debt through its citizenry (versus foreign creditors). I think that’s an important distinction. Next, Duncan does not mention how the U.S. Dollar is the reserve currency. He offers no insights into how his understanding would be altered if that status were lost. Again, I think it matters, and would have a negative impact on the ability of the U.S. to borrow more. Lastly, Duncan’s reliance on government spending as solution is contingent on investment that generates an actual return for the U.S. – needless to say, I’m skeptical.
In conclusion, I think the book is well worth picking up. You stand to learn a little and to have some of your priors questioned as well.
His basic premise is that we no longer live in a capitalist economy, but instead a government-driven one where credit expansion is the key variable to sustain growth. The statistic worth noting is that total U.S. credit hit $1 trillion in 1964 and has grown more than 50 times since then. Not surprisingly, that exponential move coincides with the breakdown of Bretton Woods and the end of the gold standard. Thereafter, the Federal Reserve constantly lowered reserve requirements, which allowed commercial banks to extend more and more credit, with the idea that the Fed could always provide funding to any bank that needed it. (So, in certain respects, this explanation marries the Post-Keynesian theory of endogenous money with the standard understanding of how the Fed’s control of interest rates and creation of new money impacts the velocity of credit.) But, over time, Duncan finds that the return on credit has gotten smaller – that is, the gap between the annual growth rate in credit and that of GDP has widened, where you need more credit issued to generate a dollar of GDP growth.
In more recent times, the other big phenomenon has been the U.S. trade deficit. Back when money was backed by gold, but the U.S. was a big manufacturer and exporter, there was a natural constraint on how much credit could be extended and how much of a budget deficit could be run. If the U.S. borrowed too much, inflation would hit, gold would leave, credit and spending would dial down, a recession would come, and things would be forced to reset. But, with globalization, trade liberalization, and loss of the gold standard, that natural constraint disappeared. Americans could import more without the bottlenecks in labor and industrial production that normally occurred and led to inflation. Americans could buy goods from countries where the cost of labor was far lower, and they could do it all on credit. Simultaneously, these other countries needed to buy dollar-denominated assets with their dollar reserves in order to keep the value of their own currencies lower and export-friendly, and so would fund a large portion of the U.S. budget deficits and drive up the price of U.S. assets generally. The wealth effect that followed from all that liquidity flowing back engendered higher consumption by Americans without the need to save anything first. And as the economy moved away from savings and investment to borrowing and consumption, credit expansion became the singular focus of government, leading to greater distortions and misallocations.
The key point in all of it is that the U.S., as well as the rest of world, has not functioned on laissez-faire principles for a great long time. Much of it can be traced back to military Keynesianism. First to fund WW1, which set the stage for the Roaring 20's and a period of credit expansion that eventually was unsustainable. Then there was the Great Depression, which many believe did not end until the fiscal stimulus of WW2 was introduced. Later, you had the stagflation of the 70's, so it was the Cold War and Reaganomics as solution. In each instance, massive amounts of debt were created to try and right the ship, and the previous distortions and mistakes were papered over – it is no longer capitalism, but “creditism”, driven in large part by the government. Confronted with that, with the scale of debt that now exists, a market-based solution of letting the economy reset would simply be too painful, probably taking democracy and society down with it. To quote: “There is no doubt that the abandonment of commodity money (gold) created distortions that interfered with the self-regulating market economy. The point to grasp, however, is that our global civilization has been built on and around those distortions and that it could very possibly collapse into ruin if those distortions are not perpetuated through further credit expansion…The question is not whether we are going to abandon capitalism and replace it with a different kind of economic system. We did that long ago. The question is: Are we going to allow the economic system now in place to collapse?” (pg. 147) The risk is a horrendous debt deflation spiral, right out of the mind of Irving Fisher.
Thus, Duncan believes that government spending is the only solution out there (since the private sector is not in a position to get the credit wheels going again), recognizing that they need to invest more intelligently, rather than just encouraging the wasteful consumption of the past. His preferred focus is on solar energy – as a way to gain energy independence, to deal with issues of global warming, and to create jobs and get the economy back on a sustainable path. I know far too little to opine on whether that solution is feasible.
With his basic story out of the way, let me start by mentioning that I find his treatment pretty reasonable. Nevertheless, I still have some criticisms. First, he uses Japan as an example of how greater government spending would not necessarily lead to a sovereign debt crisis in the U.S. any time soon. But, he ignores how Japan has (at least, historically) been able to fund huge levels of debt through its citizenry (versus foreign creditors). I think that’s an important distinction. Next, Duncan does not mention how the U.S. Dollar is the reserve currency. He offers no insights into how his understanding would be altered if that status were lost. Again, I think it matters, and would have a negative impact on the ability of the U.S. to borrow more. Lastly, Duncan’s reliance on government spending as solution is contingent on investment that generates an actual return for the U.S. – needless to say, I’m skeptical.
In conclusion, I think the book is well worth picking up. You stand to learn a little and to have some of your priors questioned as well.
Thursday, December 13, 2012
Latest from the Guru
Having not written anything in a while on the subject, I will recount a conversation that I had today with the Guru about various things multifamily real estate. The subject that I broached was how to handle a property that is underperforming – for example, one suffering from huge vacancies. Of course, you could be dealing with a macro/market phenomenon of over-supply in the particular area. But, if that’s not the problem…
The answer really depends on what kind of budget you’re working with. If you have some capital to invest, improvements (like a new gym or apartment upgrades) can be the type of thing to re-position the asset and to improve its relative standing. But, what if you have no money in the budget? Well, then, the obvious answer is to start lowering rents. If there’s a mortgage, though, the lender may hold back some proceeds contingent on achieving certain occupancy levels, yet also have covenants in place on how much the rent can actually be lowered to achieve that goal. Which is when you need to get creative – perhaps include electric in the rent. In the end, while there is always a trade-off, sometimes you end up making money and increasing demand by lowering the sticker price.
As a final caveat and consideration, the Guru offered up a story from his long history in the business. When he was more involved in property management, he used to have a map prepared of the various properties to see if vacancies at any of them were clustered. In one instance, there was a property where there was one building with much higher vacancy than the others at the location – a function of being the furthest away on the property from the parking lot. So, without a budget, what did he do? Invested a few thousand bucks in the landscaping for that building to give it a little sizzle – all the vacants were rented within a couple of days.
The answer really depends on what kind of budget you’re working with. If you have some capital to invest, improvements (like a new gym or apartment upgrades) can be the type of thing to re-position the asset and to improve its relative standing. But, what if you have no money in the budget? Well, then, the obvious answer is to start lowering rents. If there’s a mortgage, though, the lender may hold back some proceeds contingent on achieving certain occupancy levels, yet also have covenants in place on how much the rent can actually be lowered to achieve that goal. Which is when you need to get creative – perhaps include electric in the rent. In the end, while there is always a trade-off, sometimes you end up making money and increasing demand by lowering the sticker price.
As a final caveat and consideration, the Guru offered up a story from his long history in the business. When he was more involved in property management, he used to have a map prepared of the various properties to see if vacancies at any of them were clustered. In one instance, there was a property where there was one building with much higher vacancy than the others at the location – a function of being the furthest away on the property from the parking lot. So, without a budget, what did he do? Invested a few thousand bucks in the landscaping for that building to give it a little sizzle – all the vacants were rented within a couple of days.
Yen Update - Part 158
Well, the cup and handle forming on the Japanese Yen chart seems to have completed itself today and begun the next move up, just in time for the election this weekend. Two years in the making.
Tuesday, December 11, 2012
Taxes Are Going Up
When I wrote about the book Priceless by John Goodman, I mentioned that new taxes would be implemented to fund Obama's healthcare law. Now, in the context of the "fiscal cliff", where people act like taxes on higher income individuals may not go up, I would direct them to this recent article in the NY Times, which highlights several ways in which "rich" people will have to pay more regardless of what the pols resolve by year's end.
Higher taxes are not a tragedy in my opinion, but this approach does not leave me very optimistic.
Higher taxes are not a tragedy in my opinion, but this approach does not leave me very optimistic.
Sunday, December 9, 2012
Just a thought...
...but, if most economists didn't see 2008 coming, and see no cause for concern now with respect to current monetary and fiscal policy, then it's probably a safe bet to fade their predictions.
Wednesday, December 5, 2012
A Trade
In light of my previous post, here's what I'm thinking: buy some GLD $180 calls that expire 3/16/13. Right now, you can get them for somewhere around $0.78 or $0.79. And, as I'm on record as saying that gold is ready to make the next big push way before that expiry, it stands to reason that I can make a handsome bounty for very little premium. Or lose all of it.
A Fool's Game
If it hasn't already, I believe that gold will bottom within the next $20 dollars, which would put it around the low $1670s.
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