I have been busy lately with some new endeavours - going back to my roots in real estate. Focused on the multifamily space, and seeing behavior that smells a little speculative. Depending on the market that you're looking at, seeing trades in the sub-5 cap rate stratosphere. Definitely aggressive. Will try to keep this site going as I get more involved with it and pass along any interesting anecdotes and data points that I come across.
On another note, basketball is back. My Knicks are 1-1, but have looked good even in defeat. Played Boston tough in their house. I really liked the 5 that they had on the court at the end of the game: Amar'e, Chandler, Felton, Douglas and Fields. Gallinari has been a no-show so far this year. Chandler looks like he is set to have a breakout year (hope they get his extension signed) and Fields is shaping up to be a real steal as a second rounder. In any event, I think this season is going to be a lot more interesting if you're a fan.
Friday, October 29, 2010
Wednesday, September 15, 2010
Nothing In Particular...But More Of The Same
I haven't had much to say lately, hence the lack of posts. But, today, I break that trend and return triumphantly to harp on my "we will not see deflation" viewpoint.
Not too much has changed in the past couple of weeks. Maybe more people are better discounting the rosy spin on CNBC and the like, recognizing that this recession probably hasn't ended. And, with that, a growing fear of deflation is taking hold. It could've been argued earlier this year that the consensus view was that inflation would win out, and very quickly. Hence, many an analyst who thought the 10-year would be closer to 5% right now than 2%. And with the evolution of that view, a greater sense these days that fixed income is the right place to be.
I hesitate to tell you that treasuries saw their final shining moment when the 10-year dipped below 2.5%. And I also won't argue that income doesn't have its rightful place in a portfolio. Still, I think it's time to be very careful with bond investments. While I could see a bond market that experiences another rally during 2010, I feel confident that over time, someone who buys US sovereign debt at these levels will regret it. Yes, wages are compressing for many, the employment picture is tough, so income should be sought in some manner. I would just avoid Uncle Sam's promises as part of that approach.
The point to remember is that the government favors inflation to deflation, and will do all in its power to ensure the former. It will print, stimulate, quantitatively ease, and whatever else is out there to achieve its goal. So, indeed, while in the natural state of things deflation should be reality given what we've experienced, it's chances of actually happening are slim to none.
Not too much has changed in the past couple of weeks. Maybe more people are better discounting the rosy spin on CNBC and the like, recognizing that this recession probably hasn't ended. And, with that, a growing fear of deflation is taking hold. It could've been argued earlier this year that the consensus view was that inflation would win out, and very quickly. Hence, many an analyst who thought the 10-year would be closer to 5% right now than 2%. And with the evolution of that view, a greater sense these days that fixed income is the right place to be.
I hesitate to tell you that treasuries saw their final shining moment when the 10-year dipped below 2.5%. And I also won't argue that income doesn't have its rightful place in a portfolio. Still, I think it's time to be very careful with bond investments. While I could see a bond market that experiences another rally during 2010, I feel confident that over time, someone who buys US sovereign debt at these levels will regret it. Yes, wages are compressing for many, the employment picture is tough, so income should be sought in some manner. I would just avoid Uncle Sam's promises as part of that approach.
The point to remember is that the government favors inflation to deflation, and will do all in its power to ensure the former. It will print, stimulate, quantitatively ease, and whatever else is out there to achieve its goal. So, indeed, while in the natural state of things deflation should be reality given what we've experienced, it's chances of actually happening are slim to none.
Thursday, August 26, 2010
Buy High, Sell Low
Bonds have been getting a lot of attention lately. With more inflows to fixed income funds, and yields on treasuries that only seem to go in one direction, discussion of whether a bubble exists has taken center stage. I, myself, used the term bubble in my last post - in retrospect, I was being too cavalier with the written word. To clarify, I continue to believe that bonds (especially, US treasuries) are a bad investment. Eventually, they will have their day of reckoning. But, while use of the term "bubble" conjures up certain images of investor behavior, it was not quite what I was driving at. Simply, I was trying to draw a bad parallel to real estate, where euphoria trumped reason. In the case of bonds, it is fear that's driving the investment, and the mistaken calculation that deflation is the likely outcome. But, unlike real estate. and as David Rosenberg pointed out today in his missive, it is not a levered trade and sentiment is not at irrationaly exuberant levels. Nevertheless, bubble or probably not, I hold fast to my position that bonds stink.
Saturday, August 14, 2010
There is a Trend Developing...
I recently came across an article on Seeking Alpha entitled "U.S. Dollar and Long Bonds: Gotta Own Them". The author, eloquently I might add, renders the same talking points that we hear about a lot these days -- deflation is the trend. Debt destruction will continue on, rendering the Fed's attempts at generating inflation moot (at least for a while), and the U.S. is turning into Japan.
Let's cut through it and get to the point. While I could agree that the day of reckoning for bonds may not be imminent, and the game could go on for a while, why bother trying to time it so right? For 3% dividends? I am hard-pressed to see how the cost of living in the United States has gone down. And certainly not enough to suggest that the coupon you're getting with Treasuries (unless it's off of a whole lot of money) will foot the bill. At the same time, there is competitive devaluation going on globally right now, allowing you to look at an increasing U.S. Dollar Index and to draw the totally wrong conclusion about what it means with respect to the actual value of dollars in your pocket.
In the U.S., Europe, and Japan, growth is stagnating. But I also believe that there are countries in this world that played the game much smarter than we did, that have banking systems and economies that were not totally built on paper promises since proven worthless. They will grow, their currencies will prove more reliable, and they will end up pricing out their counterparts in the more "staid" and "mature" regions of the world. It won't be an easy process, but it will happen.
So, when I look at the investment universe right now, I think you own bonds for the capital appreciation component more than for the yield. And, that's why I think the bubble is forming. And even if it doesn't burst tomorrow, I don't want to be left holding the bag when it does.
Let's cut through it and get to the point. While I could agree that the day of reckoning for bonds may not be imminent, and the game could go on for a while, why bother trying to time it so right? For 3% dividends? I am hard-pressed to see how the cost of living in the United States has gone down. And certainly not enough to suggest that the coupon you're getting with Treasuries (unless it's off of a whole lot of money) will foot the bill. At the same time, there is competitive devaluation going on globally right now, allowing you to look at an increasing U.S. Dollar Index and to draw the totally wrong conclusion about what it means with respect to the actual value of dollars in your pocket.
In the U.S., Europe, and Japan, growth is stagnating. But I also believe that there are countries in this world that played the game much smarter than we did, that have banking systems and economies that were not totally built on paper promises since proven worthless. They will grow, their currencies will prove more reliable, and they will end up pricing out their counterparts in the more "staid" and "mature" regions of the world. It won't be an easy process, but it will happen.
So, when I look at the investment universe right now, I think you own bonds for the capital appreciation component more than for the yield. And, that's why I think the bubble is forming. And even if it doesn't burst tomorrow, I don't want to be left holding the bag when it does.
Friday, August 6, 2010
The "Measure" of Inflation
I'll make this post a quick one, but I wanted to add a little color to my last installment. Specifically, my criticisms of CPI as a methodology for measuring inflation.
The most oft-stated rebuke is that it excludes food and energy prices from its calculation, due to their volatility. For a host of reasons, I think it's ludicrous. But, it is what it is.
The part that warrants some explanation is the hedonic model, which from my view receives less attention and is probably not as well understood. The gist is as follows: product XYZ costs $100 today. A year from now it costs $103. Intuitively, one would think that the price increase was 3%. In fact, according to CPI, that's not necessarily the case. Rather, the BLS, through the use of some sort of voodoo, err, regression analysis, makes a determination about how much of that $3 increase can be attributed to an improvement/change in product quality - oh, I don't know, say $2. Therefore, on a CPI basis, the rate of inflation would be something more like 1% - even though it still cost the consumer 3 more bucks.
In the end, I think it's clear that the hedonic model could potentially be manipulated or simply wrong, rendering CPI a fiction. And ultimately making the debate about inflation v. deflation, premised on CPI, a fool's game.
The most oft-stated rebuke is that it excludes food and energy prices from its calculation, due to their volatility. For a host of reasons, I think it's ludicrous. But, it is what it is.
The part that warrants some explanation is the hedonic model, which from my view receives less attention and is probably not as well understood. The gist is as follows: product XYZ costs $100 today. A year from now it costs $103. Intuitively, one would think that the price increase was 3%. In fact, according to CPI, that's not necessarily the case. Rather, the BLS, through the use of some sort of voodoo, err, regression analysis, makes a determination about how much of that $3 increase can be attributed to an improvement/change in product quality - oh, I don't know, say $2. Therefore, on a CPI basis, the rate of inflation would be something more like 1% - even though it still cost the consumer 3 more bucks.
In the end, I think it's clear that the hedonic model could potentially be manipulated or simply wrong, rendering CPI a fiction. And ultimately making the debate about inflation v. deflation, premised on CPI, a fool's game.
Wednesday, July 28, 2010
"Forget it, he's rolling."
I had the opportunity recently to exchange emails with one of the more grounded economists around. He is a regular on business television, and one of the few who saw the problems of the past decade coming. Currently, he also happens to fall in the camp of the disinflationists/deflationists.
My question to him was why (for so many), inflation implies economic growth, while deflation need imply slowdown. (Actually, I think I know the answer to the second half of the query, but more I was curious why inflation must mean more robust recovery.) The answer I got was that it's hard to raise prices when demand is weak and running below aggregate supply. Pretty straightforward. Add to that, it seems that most people rely on CPI as the basis for determining whether inflation exists. CPI is running very low these days (and the economy just so happened to hit a few speed bumps lately, calling into question the recovery that gets touted all the time). Case closed, I guess.
But, as others have aptly and eloquently pointed out before, CPI is a massively manipulated number. The two main problems: hedonics and the exclusion of food and energy prices from its calculation. A lot of folks, including the above-referenced economist (who I have tremendous respect for), see CPI as the canary in the coal mine. As long as it goes down, we should expect deflation generally, and lower treasury yields specifically.
Nevertheless, I operate with a different mind set. I think we could have inflation in the midst of a sputtering economy. I think interest rates are destined to rise (just don't ask me when exactly). And when they do, life for most average Americans will get that much tougher. If inflation is really about demand, couldn't we have a scenario where the price of food and energy go up painfully, since those are two key inputs of daily life that we can't go without (all while CPI happily continues along). I know people like to dismiss grocery store inflation like it's some sort of joke, but how isn't it relevant to the conversation? Still, getting past that point for a minute, my instinct is that the agonies of inflation won't be experienced simply at the corner deli.
I read a great interview recently with Terry Coxon (of Casey Research) in which he articulated a fundamental premise: increasing the money supply eventually leads to inflation. That's just the way it works. I guess it doesn't have to, but it's the inevitable consequence of relying on the Federal Reserve. (The next time they catch a bubble before it forms, it will be a first.) To expect them to know when to sop up liquidity is an exercise in futility. Practically, when you have irresponsible monetary (and fiscal) policy, the easy money that results is going to go somewhere. We already saw its impact on the real estate market, and before that how it effected the tech sector. We have an election coming up this Fall, and if you don't think the Fed (with a little tap on the shoulder and encouragement from Barry, Tim, Nancy, etc.) is going to accommodate, you're not paying attention. Money printing, QE2, whatever you want to call it, it's coming. And it will lead to more bubbles and bigger problems down the road.
And not to go off on a tangent, but what of gold? Isn't that a canary? If we are to believe that deflation is the trend, why is gold in the midst of a convincing secular bull market (one that everyone likes to dismiss as a bubble, by the way - I think that's called irony).
So, given that it's now become too late to tell this story quickly, here's where the rubber meets the road. I think that where we are seeing the most obvious inflation is in the US Treasury market (ahh, now I get the reference to Animal House). We are seeing a steady and increasing march towards the fixed income market, in particular to the promises of Uncle Sam. And like real estate, where cap rates became silly, treasury rates are headed towards numbers that cause a head scratch. And when the unwind comes, it won't be because the economy has gotten back on its feet, it will be because the U.S. is like every other country that has been irresponsible with its spending. In the end, buyers of its debt are going to demand to be compensated. And we'll be able to look around and enjoy 10%+ unemployment all at the same time.
And with that, who did I borrow this soap box from again...
My question to him was why (for so many), inflation implies economic growth, while deflation need imply slowdown. (Actually, I think I know the answer to the second half of the query, but more I was curious why inflation must mean more robust recovery.) The answer I got was that it's hard to raise prices when demand is weak and running below aggregate supply. Pretty straightforward. Add to that, it seems that most people rely on CPI as the basis for determining whether inflation exists. CPI is running very low these days (and the economy just so happened to hit a few speed bumps lately, calling into question the recovery that gets touted all the time). Case closed, I guess.
But, as others have aptly and eloquently pointed out before, CPI is a massively manipulated number. The two main problems: hedonics and the exclusion of food and energy prices from its calculation. A lot of folks, including the above-referenced economist (who I have tremendous respect for), see CPI as the canary in the coal mine. As long as it goes down, we should expect deflation generally, and lower treasury yields specifically.
Nevertheless, I operate with a different mind set. I think we could have inflation in the midst of a sputtering economy. I think interest rates are destined to rise (just don't ask me when exactly). And when they do, life for most average Americans will get that much tougher. If inflation is really about demand, couldn't we have a scenario where the price of food and energy go up painfully, since those are two key inputs of daily life that we can't go without (all while CPI happily continues along). I know people like to dismiss grocery store inflation like it's some sort of joke, but how isn't it relevant to the conversation? Still, getting past that point for a minute, my instinct is that the agonies of inflation won't be experienced simply at the corner deli.
I read a great interview recently with Terry Coxon (of Casey Research) in which he articulated a fundamental premise: increasing the money supply eventually leads to inflation. That's just the way it works. I guess it doesn't have to, but it's the inevitable consequence of relying on the Federal Reserve. (The next time they catch a bubble before it forms, it will be a first.) To expect them to know when to sop up liquidity is an exercise in futility. Practically, when you have irresponsible monetary (and fiscal) policy, the easy money that results is going to go somewhere. We already saw its impact on the real estate market, and before that how it effected the tech sector. We have an election coming up this Fall, and if you don't think the Fed (with a little tap on the shoulder and encouragement from Barry, Tim, Nancy, etc.) is going to accommodate, you're not paying attention. Money printing, QE2, whatever you want to call it, it's coming. And it will lead to more bubbles and bigger problems down the road.
And not to go off on a tangent, but what of gold? Isn't that a canary? If we are to believe that deflation is the trend, why is gold in the midst of a convincing secular bull market (one that everyone likes to dismiss as a bubble, by the way - I think that's called irony).
So, given that it's now become too late to tell this story quickly, here's where the rubber meets the road. I think that where we are seeing the most obvious inflation is in the US Treasury market (ahh, now I get the reference to Animal House). We are seeing a steady and increasing march towards the fixed income market, in particular to the promises of Uncle Sam. And like real estate, where cap rates became silly, treasury rates are headed towards numbers that cause a head scratch. And when the unwind comes, it won't be because the economy has gotten back on its feet, it will be because the U.S. is like every other country that has been irresponsible with its spending. In the end, buyers of its debt are going to demand to be compensated. And we'll be able to look around and enjoy 10%+ unemployment all at the same time.
And with that, who did I borrow this soap box from again...
Monday, July 26, 2010
Something other than gold
Thus far, the sum and substance of my investing ideas on this blog is the belief that gold and related stocks are the way to position one's portfolio going forward. As I have written, moneyprinting is the dominant theme, which means a true currency, outside the grips of central bankers, is the easiest and most obvious way to preserve wealth.
Nevertheless, there is one company out there that I happen to be a fan of: Microsoft. I think they are positioned to do very well over the next year or two, and I have taken a position through LEAPS, specifically the Jan 2012 30s. The company had very strong earnings last week, beating on both the top and bottom line, and is poised to continue on that path.
With the LEAPS, my gut tells me I have a double or triple in store. Granted, it is always a risk to use options, as they can expire worthless and you lose out on any dividends. Still, I think the LEAPS are pretty cheap right now and probably represent the stop loss I would consider if I owned the stock outright.
Nevertheless, there is one company out there that I happen to be a fan of: Microsoft. I think they are positioned to do very well over the next year or two, and I have taken a position through LEAPS, specifically the Jan 2012 30s. The company had very strong earnings last week, beating on both the top and bottom line, and is poised to continue on that path.
With the LEAPS, my gut tells me I have a double or triple in store. Granted, it is always a risk to use options, as they can expire worthless and you lose out on any dividends. Still, I think the LEAPS are pretty cheap right now and probably represent the stop loss I would consider if I owned the stock outright.
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