Lately, in spite of various frustrations, I have been trying to think through where the opportunities will be in real estate. We’ve discussed my Panama Canal thesis before – but, with that one, in a certain sense it depends of global trade increasing and a growing economy. Put differently, the Third Coast will perform relatively better, but relatively is not always absolutely.
Anyway, I tend to focus on macro trends, then trying to translate them down to specific, investable ideas. One area that has my attention is the direction of interest rates. Given that I believe money-printing will result in a more obvious level of inflation (at some point), it stands to reason that rates will rise. And, in doing so, there will be some opportunities in the debt space, suggesting that the term “distressed debt” could even mean something again. And so it is with great interest that I read the following in a recent WSJ piece about Sam Zell:
“Mr. Zell's breakthrough came when he and Merrill Lynch raised a fund to buy distressed assets just ahead of the early-1990s recession. That downturn differed from the latest partly because banks, thrifts and regulators capitulated quickly on pricing troubled assets, allowing investors like Mr. Zell to snap up enormous portfolios of loans and property at super-discounted prices. This time, lenders have been more inclined to hold distressed assets because interest rates are low.”
If low rates are what is holding this all together (we knew that), then there will be a play at some point. “When?” is the great question of our time.
Monday, September 30, 2013
Thursday, September 26, 2013
Reading a Theme
I finished a couple of books where Asia played a prominent role.
The first is How Asia Works by Joe Studwell (2013) – the subtitle is Success and Failure in the World’s Most Dynamic Region. The main point is to understand how the drivers that allow an emerging economy to grow are not governed by the same principles of a free market and efficiency that guide the developed world. And in making that argument, the author compares the countries of Northeast Asia (which have thrived) with those of Southeast Asia (which have struggled), beating the drum on the idea that government intervention is an important catalyst in the earliest stages.
The first part of the development story revolves around government intervention into agriculture, which is the base industry in many of these countries filled with farmers in the countryside. Rather than allowing large landlords to take hold, the countries of the northeast often implemented very focused and aggressive land redistribution policies that put everyone to work and minimized the risk of food shortages. In the southeast, while the governments came up with many such plans, execution was far different, where often the landlord and tenant would negotiate directly often resulting in unfair terms, to the extent that land reform was followed through on at all. The result is to maximize yield at the expense of any per capita metrics. But, it also allowed for wealth to build across the nation.
The second phase is manufacturing. It comes after returns from agriculture have begun to taper and the citizenry has built up some capacity to become consumers. At the same time, the government has to direct entrepreneurs towards large manufacturing that can be globally competitive – through subsidies and protectionism. The focus is to develop export discipline. It means many firms getting the support initially and engendering competition, making mistakes along the way and losing some money as part of the learning curve, but then having government weed out the losers (versus picking the winners). In that way, Studwell argues, government is channeling talent towards a certain end without taking over completely.
The final piece relates to finance and keeping it regulated long enough so that it serves the goals of the first two phases. Basically, capital controls and subsidies. If deregulated too soon, the money all too often goes towards real estate development and stock speculation, which means hot money that can leave the country very quickly and does nothing to enhance the agricultural and manufacturing elements. And where the finance system is not put towards these ends, companies end up having to rely on retained earnings, thereby never really having the capacity to risk and experiment on technology and advancement. Or so the story goes. The counterpoint is put forth by the so-called “Washington Consensus”, which tries to push a free market, rational market approach – Southeast Asia providing evidence of how it does not work for an economy in its formative stages.
Studwell’s thesis is interesting, even if filled with Keynesian undertones along the way. Still, he recognizes that a managed economy can only go so far before it has to relent to a free market, deregulated environment. The trick is in identifying when to make that adjustment.
The second book is a novel entitled How to Get Filthy Rich in Rising Asia by Mohsin Hamid (2013). It tracks the life of an anonymous protagonist in an unnamed country, starting with his youth as a peasant in the countryside, to his education at university in the city, through his first jobs in sales, to becoming incredibly wealthy in the bottled water business, only to have it all stolen, and then detailing the mundane final years of his life. It is equal parts interesting and depressing, and probably accurately describes much about life in emerging Asia.
The first is How Asia Works by Joe Studwell (2013) – the subtitle is Success and Failure in the World’s Most Dynamic Region. The main point is to understand how the drivers that allow an emerging economy to grow are not governed by the same principles of a free market and efficiency that guide the developed world. And in making that argument, the author compares the countries of Northeast Asia (which have thrived) with those of Southeast Asia (which have struggled), beating the drum on the idea that government intervention is an important catalyst in the earliest stages.
The first part of the development story revolves around government intervention into agriculture, which is the base industry in many of these countries filled with farmers in the countryside. Rather than allowing large landlords to take hold, the countries of the northeast often implemented very focused and aggressive land redistribution policies that put everyone to work and minimized the risk of food shortages. In the southeast, while the governments came up with many such plans, execution was far different, where often the landlord and tenant would negotiate directly often resulting in unfair terms, to the extent that land reform was followed through on at all. The result is to maximize yield at the expense of any per capita metrics. But, it also allowed for wealth to build across the nation.
The second phase is manufacturing. It comes after returns from agriculture have begun to taper and the citizenry has built up some capacity to become consumers. At the same time, the government has to direct entrepreneurs towards large manufacturing that can be globally competitive – through subsidies and protectionism. The focus is to develop export discipline. It means many firms getting the support initially and engendering competition, making mistakes along the way and losing some money as part of the learning curve, but then having government weed out the losers (versus picking the winners). In that way, Studwell argues, government is channeling talent towards a certain end without taking over completely.
The final piece relates to finance and keeping it regulated long enough so that it serves the goals of the first two phases. Basically, capital controls and subsidies. If deregulated too soon, the money all too often goes towards real estate development and stock speculation, which means hot money that can leave the country very quickly and does nothing to enhance the agricultural and manufacturing elements. And where the finance system is not put towards these ends, companies end up having to rely on retained earnings, thereby never really having the capacity to risk and experiment on technology and advancement. Or so the story goes. The counterpoint is put forth by the so-called “Washington Consensus”, which tries to push a free market, rational market approach – Southeast Asia providing evidence of how it does not work for an economy in its formative stages.
Studwell’s thesis is interesting, even if filled with Keynesian undertones along the way. Still, he recognizes that a managed economy can only go so far before it has to relent to a free market, deregulated environment. The trick is in identifying when to make that adjustment.
The second book is a novel entitled How to Get Filthy Rich in Rising Asia by Mohsin Hamid (2013). It tracks the life of an anonymous protagonist in an unnamed country, starting with his youth as a peasant in the countryside, to his education at university in the city, through his first jobs in sales, to becoming incredibly wealthy in the bottled water business, only to have it all stolen, and then detailing the mundane final years of his life. It is equal parts interesting and depressing, and probably accurately describes much about life in emerging Asia.
Thursday, September 19, 2013
Headed Towards Intrinsic Value
Interesting day in currency land. Not surprisingly, the dollar has collapsed, breaking through important support levels. But the Yen is very weak also. Maybe people are switching horses and moving from the juiced Nikkei back to the S&P, since Bernanke is promising even more liquidity than expected. Or maybe people are pricing in a counter-move by Abe and Kuroda, since we are in the middle of a currency war. Or maybe there is a bit of news today that I missed. Regardless, the story ends the same.
Tuesday, September 17, 2013
Tea Leaves
Like the moth attracted to a flame. When it comes to gold, and trying to read the chart, I can’t help myself – even though every time I offer an opinion lately, I get burnt. Be that as it may, and in spite of a just posted comment where I throw my hands in the air about what’s coming, I am going to read the squiggles.
Below you’ll find two charts: (1) gold priced in US Dollars and (2) gold priced in Japanese Yen. In both, it appears that gold is at important levels.
First up, dollars. At a bit over $1,300 per ounce, the bulls would like to see it hold, otherwise we’re probably headed back to the late-June lows. On the other hand, if it does hold, you might notice the downward sloping line that I drew in that traces back to the dump in April. Again, if the price holds, you see what could arguably be described as an inverse head-and-shoulders, which is suggestive of higher prices.
Now for the Yen. It is a bit more constructive, and I have drawn three lines that are relevant. The first captures a recent peak in early September and then heads sideways to late May. If price were to hold, you have a cup-and-handle set-up in the making. Which leads to my other doodles. The price of gold is currently hitting the intersection of two supportive trend lines. One that is moving northeast from late-June and the other which runs sideways from early-April. Since gold is not operating below these support lines (as is the case with the USD chart), it makes a stronger case for bullish price action from here.
Which leads to my pairs trade idea. Buy gold, short Yen using GLD calls and FXY puts. A thought, not a suggestion or advice.
Below you’ll find two charts: (1) gold priced in US Dollars and (2) gold priced in Japanese Yen. In both, it appears that gold is at important levels.
First up, dollars. At a bit over $1,300 per ounce, the bulls would like to see it hold, otherwise we’re probably headed back to the late-June lows. On the other hand, if it does hold, you might notice the downward sloping line that I drew in that traces back to the dump in April. Again, if the price holds, you see what could arguably be described as an inverse head-and-shoulders, which is suggestive of higher prices.
Now for the Yen. It is a bit more constructive, and I have drawn three lines that are relevant. The first captures a recent peak in early September and then heads sideways to late May. If price were to hold, you have a cup-and-handle set-up in the making. Which leads to my other doodles. The price of gold is currently hitting the intersection of two supportive trend lines. One that is moving northeast from late-June and the other which runs sideways from early-April. Since gold is not operating below these support lines (as is the case with the USD chart), it makes a stronger case for bullish price action from here.
Which leads to my pairs trade idea. Buy gold, short Yen using GLD calls and FXY puts. A thought, not a suggestion or advice.
The "Non-Event"
Tomorrow the world finds out whether the Fed will begin to taper its QE program, currently at $85 billion per month in Treasury and MBS purchases. As we’ve discussed before, given the lower-than-expected budget deficit this year (in many ways attributable to non-recurring tax receipts from Fannie and Freddie, and capital gains from those that wanted to lock in lower rates), the taper was bound to happen – at least temporarily – since there would not have been enough “safe assets” to go around for all Tier 1 collateral needs if $85 billion stayed at $85 billion. At the same time, the Fed – and, specifically, Bernanke as he readies to leave the scene – wants to make a token gesture towards the notion that these programs are without end.
All of which is to say, I think the move will be small and eventually undone. With Janet Yellen anticipated to take over next year, there is no reason to believe that the Fed will turn hawkish – moreover, the budget deficit is not set to continue shrinking and the economy (and job growth) is anemic. What that means for any particular asset class in the near-term, your guess is as good as mine. Over a longer time horizon, though, I think the consequences are inevitable.
So, in the spirit of making a prediction, look for a $15 billion taper concentrated on the Treasury allocation.
All of which is to say, I think the move will be small and eventually undone. With Janet Yellen anticipated to take over next year, there is no reason to believe that the Fed will turn hawkish – moreover, the budget deficit is not set to continue shrinking and the economy (and job growth) is anemic. What that means for any particular asset class in the near-term, your guess is as good as mine. Over a longer time horizon, though, I think the consequences are inevitable.
So, in the spirit of making a prediction, look for a $15 billion taper concentrated on the Treasury allocation.
Monday, September 16, 2013
Dog Indeed
Stock market is up a lot. Bond yields have dropped a lot. Basically every asset class is flying after Summers withdrew himself from consideration for the next Fed head. Except gold. And that makes me nervous.
Friday, September 13, 2013
NYC Housing
Perhaps out of boredom, I decided to research the particulars of rent control and rent stabilization in New York City. I am in no way representing accuracy – and please don’t ever use a blog (especially this one) as a legal reference tool – but these are the basics:
“Rent Control” units represent only about 2% of the total housing stock. It applies to apartments that were constructed prior to 1971, and the tenant has to be living there without interruption since July, 1971. It covers the stories that you hear about elderly folks paying $40 a month for something that could be updated and sold for $10 million. They can be passed down within a family from generation to generation. Once that chain is broken though, rent control disappears. But, breaking that chain can be pretty difficult.
“Rent Stabilization” is far more prevalent and impacts over 1 million apartments in the City (but not co-ops or condos). It applies to buildings with 6 or more units. If you’re a landlord and you make improvements, you can only realize a rent increase that captures 1/60 of your cost. But, once the apartment hits $2,500 per month (based on annual increases subject to regulated guidelines) it becomes deregulated upon vacancy – or, once it hits $2,500 per month and household income is in excess of $200,000 for two consecutive calendar years, it can become deregulated even without vacancy.
Those threshold numbers are based on recent increases – in other words, the politicos are not looking to end the program. And, during the recent election season, the sense one might have gotten is that the candidates would like to make the laws more stringent and onerous. Shocking.
“Rent Control” units represent only about 2% of the total housing stock. It applies to apartments that were constructed prior to 1971, and the tenant has to be living there without interruption since July, 1971. It covers the stories that you hear about elderly folks paying $40 a month for something that could be updated and sold for $10 million. They can be passed down within a family from generation to generation. Once that chain is broken though, rent control disappears. But, breaking that chain can be pretty difficult.
“Rent Stabilization” is far more prevalent and impacts over 1 million apartments in the City (but not co-ops or condos). It applies to buildings with 6 or more units. If you’re a landlord and you make improvements, you can only realize a rent increase that captures 1/60 of your cost. But, once the apartment hits $2,500 per month (based on annual increases subject to regulated guidelines) it becomes deregulated upon vacancy – or, once it hits $2,500 per month and household income is in excess of $200,000 for two consecutive calendar years, it can become deregulated even without vacancy.
Those threshold numbers are based on recent increases – in other words, the politicos are not looking to end the program. And, during the recent election season, the sense one might have gotten is that the candidates would like to make the laws more stringent and onerous. Shocking.
Putin's Play
Another day, another interesting piece from Stratfor on the Syria situation, focusing this time on what Russia is actually trying to accomplish. Missed in all the brouhaha, Putin this week announced budget cuts in response to signs of a weakening domestic economy. So, it would seem, separate from Russia’s hollow attempts to seem like a rival and challenger to the United States (which in reality they are not – economically, militarily or politically), his noise about Syria and writing an op-ed in the NY Times is also a show for his domestic audience to distract from the more pressing problems at home. Therefore, consistent with my thesis about what drives politicians to act, EVERYTHING is about economics.
Wednesday, September 11, 2013
Whatever's On My Mind
A few things bouncing around my head:
-The website Stratfor has put out some good material recently about the Syria situation. From the U.S. perspective, Obama is playing with a weak hand. He doesn’t have public support, nor does he have any sort of international coalition. Yet he is forced to do something because of the “Red Line” comment. The Russians are trying to look like global leaders here, but we already see them pushing back on a fairly straightforward idea that any agreement has to keep the threat of attack in play, to make sure that everyone plays by the rules. So, let’s not put them on any sort of pedestal yet. But, forget all of that for a moment – the notion of having Syria turn over all its chemical weapons is not such a slam dunk easy outcome as it is. The country is engaged in an active civil war. The weapons are thought to be spread around the country in 50 different locations, some in spots that are very hot right now – and it’s not exactly like the war is going to end just because Assad decides to give up his sarin gas. All of which means someone is going to have send troops into a war zone in order to deal with the collection. And for Obama, since U.S. troops will probably get the assignment, that’s a better outcome that lobbing a few missiles? I’m still where I started with this – there were 100,000 deaths that came before the chemical attack. You either got involved 99,999 deaths ago or never. I vote never.
-I have been revisiting, at least in my mind, why I am critical of Keynesian economics. And what I thought about in my most recent version of this exercise is that it is an ideology that requires the majority to be asleep at the wheel (on second thought, maybe I’m not giving them enough credit). Back in the early 2000s, when there was a recession that followed the tech bubble, there were some acolytes of Keynes calling for the Federal Reserve to engender a housing bubble. What that really meant was lowering rates and getting people to take on more debt. Great recipe. And now these same folks have the audacity to argue that lower rates don’t cause bubbles. Sigh. No one ever wants to clean up the mess.
-I keep reading articles about public pension shortfalls. It started with Detroit, but it will not end there. It looks like the bond vigilantes have started to gang up on Puerto Rico. Where there is smoke, there is often fire.
-As for the taper, I do believe there will some token gesture made by Bernanke and team next week. Something to the tune of $10 or $15 billion per month. All so Bernanke can look like he left the job trying to keep the animal spirits in check. But, we already know that the economy is not in great shape. Each monthly jobs report, the housing data, and the rest of the menagerie of economic data points tells us that. So, at some point after the taper, and probably not too long either, the un-taper will be here.
-The possible trades that I am keeping my eyes on: gold, Yen, Aussie Dollar, and 10-year treasury.
-The website Stratfor has put out some good material recently about the Syria situation. From the U.S. perspective, Obama is playing with a weak hand. He doesn’t have public support, nor does he have any sort of international coalition. Yet he is forced to do something because of the “Red Line” comment. The Russians are trying to look like global leaders here, but we already see them pushing back on a fairly straightforward idea that any agreement has to keep the threat of attack in play, to make sure that everyone plays by the rules. So, let’s not put them on any sort of pedestal yet. But, forget all of that for a moment – the notion of having Syria turn over all its chemical weapons is not such a slam dunk easy outcome as it is. The country is engaged in an active civil war. The weapons are thought to be spread around the country in 50 different locations, some in spots that are very hot right now – and it’s not exactly like the war is going to end just because Assad decides to give up his sarin gas. All of which means someone is going to have send troops into a war zone in order to deal with the collection. And for Obama, since U.S. troops will probably get the assignment, that’s a better outcome that lobbing a few missiles? I’m still where I started with this – there were 100,000 deaths that came before the chemical attack. You either got involved 99,999 deaths ago or never. I vote never.
-I have been revisiting, at least in my mind, why I am critical of Keynesian economics. And what I thought about in my most recent version of this exercise is that it is an ideology that requires the majority to be asleep at the wheel (on second thought, maybe I’m not giving them enough credit). Back in the early 2000s, when there was a recession that followed the tech bubble, there were some acolytes of Keynes calling for the Federal Reserve to engender a housing bubble. What that really meant was lowering rates and getting people to take on more debt. Great recipe. And now these same folks have the audacity to argue that lower rates don’t cause bubbles. Sigh. No one ever wants to clean up the mess.
-I keep reading articles about public pension shortfalls. It started with Detroit, but it will not end there. It looks like the bond vigilantes have started to gang up on Puerto Rico. Where there is smoke, there is often fire.
-As for the taper, I do believe there will some token gesture made by Bernanke and team next week. Something to the tune of $10 or $15 billion per month. All so Bernanke can look like he left the job trying to keep the animal spirits in check. But, we already know that the economy is not in great shape. Each monthly jobs report, the housing data, and the rest of the menagerie of economic data points tells us that. So, at some point after the taper, and probably not too long either, the un-taper will be here.
-The possible trades that I am keeping my eyes on: gold, Yen, Aussie Dollar, and 10-year treasury.
Monday, September 9, 2013
On the other hand...
After my somewhat bearish post earlier today on housing, I figured that the economist in me should come out. So I quote Chris Mayer, who captures a sentiment that I share very well:
“The consensus is that higher rates are bad for real estate. They raise borrowing costs, for sure, and the idea is this will push prices lower. And it may happen that way. On the other hand, higher rates deter new construction and raise the replacement costs of real estate assets. Growing rents can also blunt the effect of higher rates. So it's not a given that higher rates equal lower real estate prices long term.”
“The consensus is that higher rates are bad for real estate. They raise borrowing costs, for sure, and the idea is this will push prices lower. And it may happen that way. On the other hand, higher rates deter new construction and raise the replacement costs of real estate assets. Growing rents can also blunt the effect of higher rates. So it's not a given that higher rates equal lower real estate prices long term.”
Housing
Over the weekend, Mark Hanson came out with his updated views on housing. Obviously, he talks about “housing” as if it is one monolith, yet there is always nuance depending on the market. Nevertheless, I think his overall bearish tone holds merit.
His basic view is that the recent spike in rates is like other moments over the past half dozen years when leverage and stimulus were withdrawn – when high leverage programs disappeared in 2007/2008 and when the Homebuyer Tax Credit wound down in 2010. In the aftermath, there was a crash and a double dip, respectively. Currently, the surge in rates has immediately reduced “purchasing power” by 15% to 20%. The manner in which those low rates allowed housing to become a speculative market again has been ignored by those (the majority) that want to believe in a durable recovery. When you couple those rates with government and big banks trying to suppress supply, through the avoidance of foreclosures, one can imagine why it will take people by surprise again when/if housing stumbles.
His takeaway is that we are likely to see the convergence of “panic sellers” due to higher rates, fewer organic buyers because of lower affordability, and the all-cash PE element continuing to back out of the market.
His basic view is that the recent spike in rates is like other moments over the past half dozen years when leverage and stimulus were withdrawn – when high leverage programs disappeared in 2007/2008 and when the Homebuyer Tax Credit wound down in 2010. In the aftermath, there was a crash and a double dip, respectively. Currently, the surge in rates has immediately reduced “purchasing power” by 15% to 20%. The manner in which those low rates allowed housing to become a speculative market again has been ignored by those (the majority) that want to believe in a durable recovery. When you couple those rates with government and big banks trying to suppress supply, through the avoidance of foreclosures, one can imagine why it will take people by surprise again when/if housing stumbles.
His takeaway is that we are likely to see the convergence of “panic sellers” due to higher rates, fewer organic buyers because of lower affordability, and the all-cash PE element continuing to back out of the market.
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