Tuesday, August 9, 2011
Sanity Check
The Fed indicated today that it was likely to keep rates at an exceptionally low level until at least mid-2013. The market listened and did Ben's bidding. My take: the economy is teetering and recession is likely. In other words, whatever your strategy was yesterday, I don't think anything that happened today (between the market shooting up and the Fed announcement) should cause it to change.
Monday, August 8, 2011
Parlor Tricks and Market Crashes
A lot has happened since the last time we "spoke".
An entirely predictable debt deal was reached at the last moment and (surprise, surprise) it had nothing resembling teeth. To put it into perspective, it reduces the deficit by $2 trillion over the next decade, or so the story goes. But, what that really means is that instead of a national debt of (likely) close to $30 trillion by that point, it will instead only be $28 trillion. Victory for the good guys!!! Now, if only there was any suggestion that the economy had high prospects for recovery and we could expect actual growth to resemble anything that remotely matches the growth rate of debt.
But, even with that lame-o deal, the plot only thickens. Because, this past Friday, in a totally telegraphed move, S&P downgraded the U.S. from AAA to AA+. In fairness, and Alan Greenspan even commented on it over the weekend, the threat of actual default doesn't exist simply because the U.S. can always print money to pay off its creditors -- there is no principal risk. But, again, that's not the point. The issue at stake is whether the world is slowly starting to get it. There are no free lunches and prosperity won't be found through the printing press.
In other news, gold is surging, commensurate with an asset and form of money that has been around for thousands of years and is no one else's liability. This move is extreme, but it is also appropriate. And, from the sounds of talking heads, it is viewed with skepticism -- all positives. Is a correction likely? My attitude has always been that nothing goes up in a straight line. But, the trend most definitely remains your friend.
On a related note, I also think the season has come for me to add to some of the precious metal stocks that I like. Not that they can't be taken down with the rest of the market, but eventually the worm will turn. And I want to be at the party.
An entirely predictable debt deal was reached at the last moment and (surprise, surprise) it had nothing resembling teeth. To put it into perspective, it reduces the deficit by $2 trillion over the next decade, or so the story goes. But, what that really means is that instead of a national debt of (likely) close to $30 trillion by that point, it will instead only be $28 trillion. Victory for the good guys!!! Now, if only there was any suggestion that the economy had high prospects for recovery and we could expect actual growth to resemble anything that remotely matches the growth rate of debt.
But, even with that lame-o deal, the plot only thickens. Because, this past Friday, in a totally telegraphed move, S&P downgraded the U.S. from AAA to AA+. In fairness, and Alan Greenspan even commented on it over the weekend, the threat of actual default doesn't exist simply because the U.S. can always print money to pay off its creditors -- there is no principal risk. But, again, that's not the point. The issue at stake is whether the world is slowly starting to get it. There are no free lunches and prosperity won't be found through the printing press.
In other news, gold is surging, commensurate with an asset and form of money that has been around for thousands of years and is no one else's liability. This move is extreme, but it is also appropriate. And, from the sounds of talking heads, it is viewed with skepticism -- all positives. Is a correction likely? My attitude has always been that nothing goes up in a straight line. But, the trend most definitely remains your friend.
On a related note, I also think the season has come for me to add to some of the precious metal stocks that I like. Not that they can't be taken down with the rest of the market, but eventually the worm will turn. And I want to be at the party.
Wednesday, July 13, 2011
Bad Medicine
Recently I spent a bit of time reading about economic theory. While I find the actions of government and the Federal Reserve fairly predictable, I still wanted to see the logic behind their choices, to contemplate the underpinnings for blatantly misguided policy. Accordingly, I endeavored to catch up on some books that were collecting dust on my book shelf. Here's what I gleamed...
The architect of today's bad policy is John Maynard Keynes (although one could argue that there is a hint of mercantilism present as well). His 1936 treatise, The General Theory of Employment, Interest and Money, is the playbook we've seen implemented on a global scale. And while there are plenty who subscribe to his theories like religion, I think he misses the boat, particularly on the importance of price discovery. When bad decisions are made, there should be consequences, not do-overs.
In his writings, Keynes argues a few major points: interest rates are always too high when left to their own devices; money printing should be used to manipulate those rates down (ideally to zero); such new money created by the government is real savings; the goal should be to maintain the quasi-boom permanently; and, the part I'll focus on most, it is the intervention of government that lead us out of crisis times -- all told, the argument for a "free lunch". My goal is not to write a lengthy rebuttal, but to highlight in quick terms why these beliefs are utterly destined to fail.
Through the tech and housing bubbles, interest rates were kept too low for too long -- the pricing mechanism was not allowed to work. With low interest rates, investment was made based on the notion that savings existed (i.e., what low interest rates should normally indicate), and businesses and assets that were not necessarily driven by actual consumer preference were priced up (you can make the case that regulators were asleep at the wheel, but that's not the original sin in my opinion). Nevertheless, at least initially, the government generates the desired result, as many take part in the speculative ride, driving prices even higher. The trigger that ultimately will cause it all to implode cannot necessarily be identified or timed in advance, except to say that we know a boom premised on malinvestment, where the proper analysis of incentives and pricing are missing, is destined to end in a bust. It's happened twice within a decade.
In the aftermath of both, the goal has been to re-inflate asset prices, following the prescription laid out by Keynes. He believed that the downward trajectory, the slump, would simply feed on itself and lead to a permanently depressed state. The answer was to get the money presses going to lower interest rates and encourage spending over savings. And when individuals weren't ready to spend, government should fill that void. Not surprisingly, then, you saw TARP and stimulus and QE1 and QE2 and jobs programs and...well, you get the point.
But, guess what, it turns out the cause of the boom doesn't solve the bust -- unemployment has gone up, not down (and the always intellectually honest Keynesians are conveniently saying the extent of spending and money printing simply wasn't large enough up front). Sure, the stock market rallied, but there is a difference between paper assets getting bid up and actual productivity that leads to growth. Add to that we saw inflation in commodities -- there's nothing better for a family on a budget. All told, it is enough to confirm that the Keynes position falls flat (note: there are plenty of folks out there who have written about the problems with Keynesian positions point-by-point, I prefer to deal with the most obvious issue). If it isn't clear, government doesn't function with any constraints. Some might argue that that reality is, in fact, why it is best positioned to save us all. But, implicitly, it means they have no great concern for profit and loss, which means their choices are not going to be as precise and efficient. Be honest, these are the same folks who already created a bubble in late 90s, only to deal with it by creating another bubble right afterwards. So, why are they going to get it right this time?
The key point is that government interference only exacerbates the problems. If the market is allowed to function, there is pain, but there is also genuine healing as stronger hands are able to emerge. Government tries to pick winners and does a bad job -- their analysis is flawed and incomplete.
So, having already gone on longer than I intended, I will end by noting that there is plenty more to be said and that my exposition only touched the surface. The logical conclusion, however, is that the foundation of the government approach is terribly dangerous.
The architect of today's bad policy is John Maynard Keynes (although one could argue that there is a hint of mercantilism present as well). His 1936 treatise, The General Theory of Employment, Interest and Money, is the playbook we've seen implemented on a global scale. And while there are plenty who subscribe to his theories like religion, I think he misses the boat, particularly on the importance of price discovery. When bad decisions are made, there should be consequences, not do-overs.
In his writings, Keynes argues a few major points: interest rates are always too high when left to their own devices; money printing should be used to manipulate those rates down (ideally to zero); such new money created by the government is real savings; the goal should be to maintain the quasi-boom permanently; and, the part I'll focus on most, it is the intervention of government that lead us out of crisis times -- all told, the argument for a "free lunch". My goal is not to write a lengthy rebuttal, but to highlight in quick terms why these beliefs are utterly destined to fail.
Through the tech and housing bubbles, interest rates were kept too low for too long -- the pricing mechanism was not allowed to work. With low interest rates, investment was made based on the notion that savings existed (i.e., what low interest rates should normally indicate), and businesses and assets that were not necessarily driven by actual consumer preference were priced up (you can make the case that regulators were asleep at the wheel, but that's not the original sin in my opinion). Nevertheless, at least initially, the government generates the desired result, as many take part in the speculative ride, driving prices even higher. The trigger that ultimately will cause it all to implode cannot necessarily be identified or timed in advance, except to say that we know a boom premised on malinvestment, where the proper analysis of incentives and pricing are missing, is destined to end in a bust. It's happened twice within a decade.
In the aftermath of both, the goal has been to re-inflate asset prices, following the prescription laid out by Keynes. He believed that the downward trajectory, the slump, would simply feed on itself and lead to a permanently depressed state. The answer was to get the money presses going to lower interest rates and encourage spending over savings. And when individuals weren't ready to spend, government should fill that void. Not surprisingly, then, you saw TARP and stimulus and QE1 and QE2 and jobs programs and...well, you get the point.
But, guess what, it turns out the cause of the boom doesn't solve the bust -- unemployment has gone up, not down (and the always intellectually honest Keynesians are conveniently saying the extent of spending and money printing simply wasn't large enough up front). Sure, the stock market rallied, but there is a difference between paper assets getting bid up and actual productivity that leads to growth. Add to that we saw inflation in commodities -- there's nothing better for a family on a budget. All told, it is enough to confirm that the Keynes position falls flat (note: there are plenty of folks out there who have written about the problems with Keynesian positions point-by-point, I prefer to deal with the most obvious issue). If it isn't clear, government doesn't function with any constraints. Some might argue that that reality is, in fact, why it is best positioned to save us all. But, implicitly, it means they have no great concern for profit and loss, which means their choices are not going to be as precise and efficient. Be honest, these are the same folks who already created a bubble in late 90s, only to deal with it by creating another bubble right afterwards. So, why are they going to get it right this time?
The key point is that government interference only exacerbates the problems. If the market is allowed to function, there is pain, but there is also genuine healing as stronger hands are able to emerge. Government tries to pick winners and does a bad job -- their analysis is flawed and incomplete.
So, having already gone on longer than I intended, I will end by noting that there is plenty more to be said and that my exposition only touched the surface. The logical conclusion, however, is that the foundation of the government approach is terribly dangerous.
Friday, June 17, 2011
New Thoughts...Same as the Old Thoughts
In breaking my run of over three months without a new post, something that I read today was inspiration enough to buck that trend. Apparently, Bill Gross (of Pimco fame) posted on twitter that we should expect an emphasis from the Fed next week that rates will stay where they are for an extended period (shocking, I know), but that there might also be some sort of indication that the Fed intends to cap rates on certain maturities of Treasuries. In other words, they will go out into the market and buy certain bonds at a certain level to ensure that rates on them do not move up. So, for all those who said QE was done, welcome to the new QE.
That is assuming of course that someone as well positioned and connected as Mr. Gross knows what he's talking about...
In other news, gold has become range-bound, living up to seasonal expectations. I intend to capitalize on better prices for certain related ideas as we move towards the humid July/August period. Nevertheless, the key point to be made is that gold is staying the course overall.
That is assuming of course that someone as well positioned and connected as Mr. Gross knows what he's talking about...
In other news, gold has become range-bound, living up to seasonal expectations. I intend to capitalize on better prices for certain related ideas as we move towards the humid July/August period. Nevertheless, the key point to be made is that gold is staying the course overall.
Sunday, February 27, 2011
Checking In
A couple of things to discuss:
-Start with the Carmelo trade. When you consider that this league is driven by superstars and you need more than one on your team to have a chance to win, the move was a no-brainer. That's the objective analysis. Emotionally, the guys who were dealt were all players that I liked. When I consider how many players I didn't like on the Knicks over the past decade, this season was very refreshing to have a fun team with players who I enjoyed watching. So, it's sad to see them go. Nevertheless, this team is positioned to be a great team eventually. They are not there yet, and some pieces are still needed, buy they'll get there.
-The multifamily space is a little confused. The biggest players are selling in secondary and tertiary markets, to focus on the core institutional strongholds. But, they are listing those assets at absurd prices. Moreover, financing has become a tremendous stumbling block to getting deals across the finish line. The rise in interest rates has been significant from that standpoint, even though rates are still relatively low. I think there are more problems ahead.
-Finally, I came across this interview with Jim Rickards on King World News. There are parts where it seems a little conspiracy theorist -- still, I think the first two-thirds do a good job of describing the problems and why more debt monetization is in store:
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/2/26_Jim_Rickards.html
-Start with the Carmelo trade. When you consider that this league is driven by superstars and you need more than one on your team to have a chance to win, the move was a no-brainer. That's the objective analysis. Emotionally, the guys who were dealt were all players that I liked. When I consider how many players I didn't like on the Knicks over the past decade, this season was very refreshing to have a fun team with players who I enjoyed watching. So, it's sad to see them go. Nevertheless, this team is positioned to be a great team eventually. They are not there yet, and some pieces are still needed, buy they'll get there.
-The multifamily space is a little confused. The biggest players are selling in secondary and tertiary markets, to focus on the core institutional strongholds. But, they are listing those assets at absurd prices. Moreover, financing has become a tremendous stumbling block to getting deals across the finish line. The rise in interest rates has been significant from that standpoint, even though rates are still relatively low. I think there are more problems ahead.
-Finally, I came across this interview with Jim Rickards on King World News. There are parts where it seems a little conspiracy theorist -- still, I think the first two-thirds do a good job of describing the problems and why more debt monetization is in store:
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/2/26_Jim_Rickards.html
Sunday, January 30, 2011
I'd Rather Be Lucky than Smart
I wanted to talk a little bit about gold. I live in New York, I work in and around Wall Street, and generally I don't think I interact with dolts on a regular basis (with some blatant exceptions). It is within that context that I typically encounter a general disdain for the yellow metal. When it was going up into the end of year, there was skepticism - as it has been correcting over the past little while, the reaction seems to be that the secular run is over. I mention this non-scientific survey only as a suggestion that the notion of gold in a bubble is absurd. To paraphrase David Rosenberg, the positive momentum in the economy is all premised on government medicine. And the folks at the Fed know it. The idea that their intervention will end anytime soon is simply naive. Money printing and stimulus will stay the theme of the day. The trend, for gold bulls, remains your friend - even if people like Paul Krugman consider "gold buggism" an unsophisticated response to what's going on. I'll take gold to his keynesianism any day of the week.
As for commercial real estate, I am incredibly surprised by how many owner/operators I encounter or hear about who seem unprepared for the trend of rising interest rates. On multiple occasions, deals have fallen through because of financing issues with the 10-year rising over 100 bps (and given some absurd pricing, probably to the great fortune of those buyers). Most, I guess, think cap rates are going lower. Most, I think, don't understand the dynamics of money printing and its implications for a sub-6 or sub-5 cap rate on pricing.
They say the art of economics has a blind spot for inflation. It would appear that is true across all industries.
As for commercial real estate, I am incredibly surprised by how many owner/operators I encounter or hear about who seem unprepared for the trend of rising interest rates. On multiple occasions, deals have fallen through because of financing issues with the 10-year rising over 100 bps (and given some absurd pricing, probably to the great fortune of those buyers). Most, I guess, think cap rates are going lower. Most, I think, don't understand the dynamics of money printing and its implications for a sub-6 or sub-5 cap rate on pricing.
They say the art of economics has a blind spot for inflation. It would appear that is true across all industries.
Wednesday, December 8, 2010
Frothy With a Chance of Rain
As I mentioned last time, I have become involved again in the world of real estate investing. In particular, I have gotten into the acquisitions arena focused on multifamily (which I deem the best of the food groups). My travels, in that respect, have taken me across this great country to look at deals. And, if anything has become clear to me so far, it's that whatever lessons should have been learned in 2008 either went unnoticed or are already forgotten.
To wit, I have seen bidding on assets in secondary and tertiary markets like the prize was a core property in New York or D.C. -- quite literally cap rates with a 4-handle in Florida, and not even on the east coast. Granted, I know the argument goes that on a long enough time horizon, real estate will ultimately return to its former status as a hard asset that can survive the seasons. But, that will require us to complete a deleveraging cycle that I think was simply put on hold. It will be tough, though, because real estate has become an institutionalized game -- no longer a domain dominated by individuals who actually manage the stuff themselves. Rather, we see mega-funds who have the capital to pretend that liability pressure is just a frame of mind rather than an actual concern. The upshot: I see the speculative juices flowing, which tells me that easy money is doing what it always does. And, in the end, this period of investing probably won't end well for a lot of folks.
As a final note, wanted to recap the Knicks season so far. 13-9, having won 10 of 11, and 9-4 on the road. The schedule is about to get more difficult, but you can't expect to beat the good teams if you can't beat the bad ones first. Stoudemire is living up to his contract, Felton is a legit NBA point guard who is making his case to be an all star, and Landry Fields continues to impress. For good measure, throw in Wilson Chandler, who has shown incredible versatility. All in all, I'm enjoying the season. Just wish I still had season tickets...
To wit, I have seen bidding on assets in secondary and tertiary markets like the prize was a core property in New York or D.C. -- quite literally cap rates with a 4-handle in Florida, and not even on the east coast. Granted, I know the argument goes that on a long enough time horizon, real estate will ultimately return to its former status as a hard asset that can survive the seasons. But, that will require us to complete a deleveraging cycle that I think was simply put on hold. It will be tough, though, because real estate has become an institutionalized game -- no longer a domain dominated by individuals who actually manage the stuff themselves. Rather, we see mega-funds who have the capital to pretend that liability pressure is just a frame of mind rather than an actual concern. The upshot: I see the speculative juices flowing, which tells me that easy money is doing what it always does. And, in the end, this period of investing probably won't end well for a lot of folks.
As a final note, wanted to recap the Knicks season so far. 13-9, having won 10 of 11, and 9-4 on the road. The schedule is about to get more difficult, but you can't expect to beat the good teams if you can't beat the bad ones first. Stoudemire is living up to his contract, Felton is a legit NBA point guard who is making his case to be an all star, and Landry Fields continues to impress. For good measure, throw in Wilson Chandler, who has shown incredible versatility. All in all, I'm enjoying the season. Just wish I still had season tickets...
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