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.

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...

Hightop Time

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.

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.

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.

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.

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.